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Complete Listing of Publications With Most Recent Article First
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Review of Trends in Insurance Securitization |
April 30, 2004
Presented at the 2004 Enterprise Risk Management
Symposium sponsored by the Casualty Actuarial Society, the Society of
Actuaries and Georgia State University.
By: Morton Lane, President and Roger Beckwith, Vice President
Lane Financial LLC
The
last twelve months have been something of a breakout year for insurance
securitization. By our estimate $1.9 billion of securities were issued
between 4/2003 and 3/2003 (our usual measuring interval). This
represents a 50% increase over the previously most active year to date
(1999). Sixteen securities, as defined herein, constitute the record
issuance. But, as always, such measurements are subject to
specification definition. During this period at least three other
securities were issued that have not been included in this report,
principally because of a lack of readily available data. Had they been
included the issuance level would have been an additional $900 million.
To read the full version of this article with graphs:
 Download the PDF Here
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The Viability and Likely Pricing of "Cat Bonds" for Developing Countries |
February 14, 2004 (Revised March 31, 2004)
Excerpt from Catastrophe
Risk and Reinsurance: A Country Risk Management Perspective, Eugene N.
Gurenko (ed.) 2004 (London: Risk Books)
By Morton N. Lane, Ph.D.
An
inordinately large number of natural catastrophes occur in the
developing world. That is, they occur in those areas least likely to
be able to handle the disaster’s human and economic consequences and
quickly return to functioning societies. In the developed world, when
disasters hit, governments respond with aid but a large measure of
restitution is provided by private insurance markets. In the
developing world, the usual sources of help are international
reconstruction agencies like the World Bank and IMF, donor governments
and charities. The insurance markets provide very little help.
To read the full version of this article with graphs:
Download the PDF Here
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Rationale and Results with the LFC CAT Bond Pricing Model |
December 31, 2003
Published in Insurance and the State of the ART in
Cat Bond Pricing, Etudes et Dossiers No. 278, Working Paper Series of
The Geneva Association, January 2004
By Morton N. Lane, Ph.D.
Cat
bond pricing presents theorists with both an opportunity and a
challenge. The opportunity is that for the first time ever, investors
have been presented with explicit probability statistics about the
likelihood of full repayment at maturity. They receive these
probability estimates at the time of issue. Other fixed income
securities may allude to likely default statistics, via a letter
rating, but none, prior to the advent of cat bonds, did this with
precision. Indeed, the rating agencies themselves used different
metrics to arrive at their letter ratings, therefore representing
different things. In spite of this, the traded market often uses the
letter ratings interchangeably as surrogate ranges of default
probability. The opportunity then is to observe transaction prices and
examine them relative to precise statistics provided at issue.
To read the full version of this article with graphs:
Download the PDF Here
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USAA and the Magnificent Seven |
August 31,2003.
By Morton N. Lane, Ph.D.
In
1997 USAA – assisted by its investment bankers, Goldman Sachs, Merrill
Lynch and Lehman Bros - stunned the nascent world of insurance
securitization with it’s sponsorship of Residential Re and a near-$500
million securities issue. Since that date USAA has sponsored a new
security every year, including this year’s Residential Re 2003 Ltd [Res
Re 2003] bringing its total issues to seven – the magnificent seven.
To read the full version of this article with graphs:
Download the PDF Here
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Arbitrage Algebra and the Price of Multi-Peril ILS |
July 4, 2003.
By Morton N. Lane, Ph.D.
INTRODUCTION
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 Manage¬ment LLC managing a fund
specializing in investing in cat bonds and other exotica. However,
this paper 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.
To read the full version of this article with graphs:
Download the PDF Here
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Review of Trends in Insurance Securitization |
April 25, 2003
By Morton N. Lane, Ph.D. and Roger G. Beckwith
INTRODUCTION
The
year, 2002, was a record for insur¬ance 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 twelve months
in between 1st Quarter ends. Never¬theless, like Marsh we believe that
the most recent twelve months repre¬sent something of an up-tick in
activity. Like the margin by which the Marsh record was set, the
magnitude of the up-tick 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 paper
records the trends that have occurred during our last twelve months and
the messages they contain for that brighter securitization future that
surely lies ahead.
Two significant events occurred during 2002/3.
Vivendi issued a cat bond protecting their own (insurable) exposure to
earthquake, by bypassing the insurance market. This disintermediation
of the insurance market is only the second issuance directly by an
insured. The second significant event was the introduction by Swiss Re
of a shelf registration that allows open ended issuance of insurance
linked securities up to a fixed amount for a fixed period of time. The
essential feature of this arrangement is that it saves on issuance
costs, which have been one of the bad raps on securitization.
To read the full version of this article with graphs:
Download the PDF Here
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Pricing Issues in Aviation Insurance and Reinsurance |
April 16, 2003.
By Morton N. Lane, Ph.D.
INTRODUCTION
Airlines
are in the business of transporting passengers or freight from origin
to destination as efficiently as possible. They do this with mixed
financial success. However, they do it with remarkable physical
success. The accident rate for airline travel is lower than for any
other mode of transportation, and it continues to decline.
Nevertheless, when accidents do happen they can cause considerable
financial, as well as emotional, distress. Airlines choose to avoid
the financial distress by purchasing insurance against
loss-through-accident. Aviation insurers accommodate the desire of
airlines to get rid of loss-due-to-accident by assuming all such
losses. The remarkable thing is that the insurers have provided this
cover on a ground-up basis for each and every loss, i.e., on an
unlimited basis. The question such large and unlimited cover provokes
is, how should it be priced?
To read the full version of this article with graphs:
Download th PDF Here
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Alternative Risk Strategies |
Edited by Morton Lane, Risk Books, London 2002.
To read the full version of this article with graphs:
Download the PDF Here
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Alternative Capital Sources |
December 15, 2002,
Excerpt from Rational Reinsurance Buying, Nick Golden, ed. Risk Books 2002
By Morton N. Lane, Ph.D.
INTRODUCTION
The above
definition of “capital” captures two things; first, the essential
meaning of capital as the resource necessary for production of wealth
and, second, the fact that capital can mean many things to many
people. On the other hand, one thing that may be missing is any
reference to the relation between risk and capital. The definition was
written before the modern capital market theories were expounded, yet
it does capture the essentials —present value of income, etc.—before
the significant contributions of Black, Scholes, Merton and other
modern finance theorists formalized the concepts. The theories
contributed by these Nobel Laureates added to our general understanding
of capital markets, and the insights allowed a proliferation of new,
innovative instruments by which capital can be accessed and managed.
Swaps, options, futures, collateralized debt obligations (CDOs),
converts, caps, floors, collars, Remics, collateralized mortgage
obligations (CMOs) and derivatives of all kinds are all aids in the use
of capital to produce wealth.
To read the full version of this article with graphs:
Download the PDF Here
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An Analyst's View of the Aviation Insurance Industry |
September 1, 2002
By Morton N. Lane, Ph.D.
INTRODUCTION
The
events of September 11, 2001 generated devastating monetary losses for
the aviation insurance industry. Figure 1 shows the true extent of
that loss. Minor as these monetary losses are com¬pared the personal
trauma suffered by individuals, families and America as a whole, they
have produced their own trauma-induced monetary responses. Future
aviation insurance prices have risen dramatically, easily doubling and
in some cases quintupling. Exclu¬sions have been added to policies and
certain cover¬ages have been specifically withdrawn from the market.
More interestingly, having survived and put in place temporary
solutions to enable the market to move forward, the industry through
this conference and numerous internal reviews has begun to ask itself
how it should charge for its services, whether it has sufficient
capital and if past pricing practices should be perpetuated.
To read the full version of this article with graphs:
Download the PDF Here
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