Capital Market and
Hybrid Insurance Methods for the Transfer of Catastrophic Risk
1. Opening
Remarks
Our discussion will flow from the nature of
disasters and their historical and potential impact on organizations (severity,
timeliness, business effects). The program shall start with a dialogue
regarding the historical ways that insurers have protected themselves against
cat cover (through reinsurance, and more recently hedges such as Cat Bonds), and
explain the nature of the alternatives.
Then we will provide an overview of non-traditional alternatives to the current
market for private companies. We will finish up with a review of the methods to
compare “Program Cost” vs. “Value Provided” for each
of the different risk-bearing financial instruments.
2. Why
Cat Bonds Have Been Purchased Alice
Gannon
What is a CAT Bond, and why/how do they make sense
for USAA and other insurers?
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Why USAA pursued catastrophe bond-backed
reinsurance
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How catastrophe bond-backed reinsurance works
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Why investors buy cat bonds
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Advantages and disadvantages of cat bonds from the
insurer perspective
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Cat bond market activity to date
3. Alternative
Solutions Available Mike Leybov
The
property catastrophe securitization market offers a viable alternative to
traditional insurance and reinsurance. Its major advantages are credit quality
of the recoverable and speed of claim settlement. For corporate buyers, there
is a significant need for alternative capacity for losses related to natural
catastrophes in areas such as contingent business interruption.
The use
of capital market instruments was impeded by the high fixed expense of
securitization, which in turn made securitizations with small size impossible.
Recent developments in the insurance-related risk transfer market make possible
private transactions between buyers of protection and risk takers. Such private
placements are able to combine the advantages of insurance with many of the
benefits of risk-linked securities.
4. Comparing
Apples and
CAT bonds
and private placements, as described by Alice and Mike, are viable alternatives
to conventional insurance and reinsurance for “certain organizations” that have
“certain risk profiles” and “certain financial preferences.” Why would you
choose CAT bonds if the cost is higher than that of conventional insurance or
reinsurance?
Allen
Monroe focuses on what are the most appropriate criteria which pertain to “YOUR
organization,” and what decision framework and tools are commonly used to make
such “apples-to-oranges” decisions.