MORTON N. LANE and ROGER G. BECKWITH
The year 2002 was a record for insurance securitization. It's official. According to Marsh and McLennan $1.22 billion bonds were issued in 2002 versus $1.136 billion in 2000. Our…
Abstract
The year 2002 was a record for insurance securitization. It's official. According to Marsh and McLennan $1.22 billion bonds were issued in 2002 versus $1.136 billion in 2000. Our own readings of history are slightly off calendar, usually measuring the 12 months in between first quarter ends. Nevertheless, like Marsh we believe that the most recent 12 months represent something of an uptick in activity. Like the margin by which the Marsh record was set, the magnitude of the uptick is small, tiny in fact, but potentially a significant harbinger of directional change. In truth, these are crumbs of comfort for those toiling in the vineyards of insurance securitization. The harvest from a great deal of intellectual and financial investment still eludes us. Notwithstanding, this article records the trends that have occurred during our last 12 months and the messages they contain for that brighter securitization future that surely lies ahead.
At this year's third annual Bond Market Association Risk‐Linked Securities Conference, John Seo gave an excellent address entitled “Risk Management Tools for Investors.” The more…
Abstract
At this year's third annual Bond Market Association Risk‐Linked Securities Conference, John Seo gave an excellent address entitled “Risk Management Tools for Investors.” The more colorful subtitle was along the lines of “evaluating multi‐peril bonds and avoiding the Bermuda rectangle.” Yes, rectangle. We will leave the Bermuda angle (rect‐ or tri‐) for John to explain and he can be found (together with his brother Nelson) at Fermat Capital Management LLC managing a fund specializing in investing in cat bonds and other exotica. However, this article takes advantage of his basic plea (simplification) to further explore a favorite topic of ours—how should cat bonds be priced? In particular, to explore the vexing question of multi‐peril bonds compared to single peril bonds. Our approach is to explore “arbitrage‐equivalent” pricing in which covers can be either bought or sold. We do not yet know how to determine how the absolute level of cat bond prices should be set—although we expect it must be driven by two old friends (a.k.a. supply and demand)—but the Seo simplification allows greater insights into relative prices of single vs. multi‐peril bonds even in our arbitrage context. We begin with a reprise of John's examples (see Exhibit 1).
In the convergence between the capital markets and reinsurance markets, the prime mover of insurance risk into capital markets have been investment banks. Also, among the most…
Abstract
In the convergence between the capital markets and reinsurance markets, the prime mover of insurance risk into capital markets have been investment banks. Also, among the most active leveraged underwriters of capital market credit risk are reinsurers, as opposed to hedge funds or banks. A key example of the institutional consequences of “convergence,” in particular of product design are Collateralized Debt Obligations (CDOs). CDOs combine a managed portfolio of bonds or loans with a hierarchy of claims or priority of loss payments (typical of insurance structures). Early buyers of CDOs were typically high‐yield bond portfolio managers. More recently, reinsurers have come to appreciate the “insurance nature” of these CDO structures, and multiline reinsurers have begun to support CDOs via financial guarantees.
In the insurance‐linked securities (ILS) market, where trends in underlying (reinsurance) prices are hard for outsiders to discern, secondary market prices could provide valuable…
Abstract
In the insurance‐linked securities (ILS) market, where trends in underlying (reinsurance) prices are hard for outsiders to discern, secondary market prices could provide valuable investor information. So far, the market has provided little price information aside from new issue prices. The author provides his views on what behavior might be expected in a robust ILS secondary market, what information might be obtained, and how value changes might be measured and interpreted.
MORTON N. LANE and OLEG Y. MOVCHAN
Risk is difficult to measure — so difficult that no single measure seems robust enough for all circumstances. This is especially true of measuring the risk contained in…
Abstract
Risk is difficult to measure — so difficult that no single measure seems robust enough for all circumstances. This is especially true of measuring the risk contained in insurance‐linked securities. Insurance risk is usually asymmetrically skewed. As a conse‐quence, traditional capital market risk measures — expected loss, probability of default, and the standard deviation of return out‐comes — are less than perfect to the insurance task. Without a good risk measure, it is impossible to compare the risk‐adjusted pricing of insurance‐linked notes on a consistent basis. It is impossible to tell which securities are cheap and which are expensive. It is impossible to decide on their value relative to more traditional investments.
This article aims to examine the risk inherent in the insurance of the aviation industry, to take an outsider's look at those risks and to develop certain “capital market” pricing…
Abstract
Purpose
This article aims to examine the risk inherent in the insurance of the aviation industry, to take an outsider's look at those risks and to develop certain “capital market” pricing rules.
Design/methodology/approach
The aviation industry presents a classic low‐frequency/high‐limit insurance problem. Pricing such exposures is difficult because of the high degree of uncertainty involved. After a review of the considerations that an insurance underwriter traditionally brings to the problem, the author applies a simple pricing rule incorporating current thinking on risk evaluation.
Findings
The results of the author's approach are compared with the results of traditional pricing rules, generating interesting insights. The application of the new methodology to the analysis of current pricing and of alternative proposals is suggested.
Originality/value
The article will be of value to those interested in the aviation industry and in the pricing of insurance and reinsurance.
Details
Keywords
The article aims to develop pricing rules to be implemented in the face of conflicting risks and difficulties inherent in the insurance of the aviation industry.
Abstract
Purpose
The article aims to develop pricing rules to be implemented in the face of conflicting risks and difficulties inherent in the insurance of the aviation industry.
Design/methodology/approach
The author discusses the difficult considerations faced by underwriters in the insurance industry.
Originality/value
The article is of interest to all those involved in the complicated issue of aviation insurance.
Details
Keywords
Aarhus Kommunes Biblioteker (Teknisk Bibliotek), Ingerslevs Plads 7, Aarhus, Denmark. Representative: V. NEDERGAARD PEDERSEN (Librarian).