According to Swiss Re’s new sigma study, “the role of indices in transferring insurance risks to the capital markets”, both (re)insurers and investors benefit when clearly defined and regularly updated indices are used in insurance-linked securities (ILS) and other risk-transfer instruments.”
Swiss Re added that “these instruments provide (re)insurers with an additional capital management tool, while investors gain access to an attractive, diversifying asset class.
“Insurance-linked securities (ILS) and related instruments can be used to transfer insurance risks to the capital markets. These include securitizations, industry loss warranties (ILWs), and a variety of derivative contracts. These products are mainly used to transfer peak natural catastrophe risks and weather-related risks.”
The most commonplace ILS types are catastrophe or “cat” bonds and weather derivatives. They can be traded on public exchanges or privately. “The markets for other products – such as mortality and longevity swaps – are still in an earlier stage of development,” Swiss Re added.
The reinsurer also indicated that “cat bonds have weathered the financial crisis well. Their use grew rapidly between 2005 and 2007, but slowed down in 2008 due to the financial markets crisis. “However, Swiss Re said, “interest in cat bonds has recovered recently. In the first half of 2009, Swiss Re Capital Markets underwrote 4 cat bonds with a total notional amount of $585 million.”
Martin Bisping, head of Non-life Risk Transformation at Swiss Re, added: “During the first seven months of this year, 11 cat bonds with a total notional amount of $1.8 billion were issued. Trading volumes of cat bonds have held up even during a time when liquidity in other market segments dried up.”
Swiss Re is also confident that there are strong growth prospects in ILS and related instruments. The report notes that “despite the potential of ILS, the share of insurance risks transferred to the capital markets represents just a small share of overall (re)insurance capacity. To date, the volume of outstanding cat bonds is $14 billion. Together with an estimated market volume of roughly $10 billion for ILWs and cat derivatives, this amounts to $24 billion or 12 percent of the aggregate global cat reinsurance capacity.”
Bisping noted: “This share may well expand in the future, boosted by recent efforts to reach a higher degree of product standardization, as well as by the creation of new indices, such as the European market loss index by PERILS.”
According to the sigma study, significant untapped opportunities also exist for mortality and longevity index-linked risk transfer, supported by increasing pandemic concerns and the savings and retirement needs of an ageing global population.
The full report and additional information is available on Swiss Re’s web site at: www.swissre.com.
Source: Swiss Re
Topics Catastrophe Reinsurance
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