International Association of Insurance Supervisors (IAIS) published its report on ‘Developments in (Re)Insurance Securitization’ on 26th August, 2009. The report recognizes insurance securitisation as a significant complement to traditional reinsurance: the market, though small, is growing at a discernible pace.
Insurance securitisation is used by property and casualty companies for seeking reinsurance capacity, and life insurance companies for seeking regulatory capital by embedded value encashment, or extreme mortality risk transfer.
The aggregate market for insurance linked securities (ILS) peaked up in 2007 with an issuance of $ 15.5 billion, including $ 7.6 billion of life, and 7.9 billion of non-life issuance. The market in 2008 was quite slow – due to a global retraction of investors from anything that was new or complex. 2009 so far has seen only some extent of activity. Volume is not the only indicator of the maturity of the market – there are several other parameters noted in the Report – including width of sponsors, nature of perils covered, maturity of transactions, and so on.
The Report notes the regulatory developments in various jurisdictions too – including laws related to special purpose reinsurance vehicles, subordination of investors’ claims to the cedants, and so on.
The Report notes examples of ILS that have gone under stress over time. The first bond that suffered losses was Georgetown Re in 1996 and the report studies the performance of various other bonds like Kamp Re and Avalon Re affected by 2005 USA hurricane season, Newton Re, Orkney Re and others affected by the current financial crisis. There are 4 transactions that were stressed due to the bankruptcy of Lehman as a counterparty.
The IAIS Standards and Guidance paper on reinsurance is to include the guidance on insurance securitization as well and is expected to be finalized in 2011.
Report says that the insurance securitization market remains largely untested but shall grow in the times to come, taking cues from the report the market is all geared up to tap the resources that went undermined so far.
[Reported by: Vinod Kothari]
Link: See the full text of the report here
Link: See our risksec page
Workshops: Vinod Kothari offers workshops on insurance securitization. For sample course outline of a workshop offered in Milan recently, see here