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Essays and Commentaries
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Genuine Alpha, Perfect Security – Reaffirming ILS Rationales |
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January, 2009
By: Morton N. Lane, President
“Alpha” is the holy grail of the conservative investor. Alpha expresses that part of an investment’s return that is not related to general market returns. Thus an investment that does not fall when the Dow falls (and vice versa) is said to have high alpha. It would be a valuable diversifying asset to reduce portfolio volatility. Regrettably, such investments (or asset classes) are hard to find. Insurance Linked Securities (ILS) are, however, thought to be one such class. This chapter surveys the ILS market, its history and the claim that it provides genuine alpha.
To read the full version of this article with graphs:
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Catastrophe Risk Pricing: An Empirical Analysis |
Septemper 6, 2008
By: Morton N. Lane, Olivier Mahul
To read the full version of this article with graphs:
Download the PDF Here
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November 24, 2008
By: Morton N. Lane
To read the full version of this article with graphs:
Download the PDF Here
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Revealing Reinsurer’s Risk Preferences |
June 1, 2007
By: Morton N. Lane, President
The objective of this paper1 is to examine the risk preferences of property catastrophe reinsurers. It is an empirical exercise and is focused on catastrophe reinsurance, particularly of the Bermuda companies. It is also a speculative paper. It is not clear whether trying to infer risk preferences from operating results is even possible, especially when such results have very short histories, in most cases of less than ten years2.
To read the full version of this article with graphs:
Download the PDF Here
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Recapitalizing Reinsurers - A Never Ending Story? |
January 31, 2007
By: Morton N. Lane, President
The
early weeks of 2007 present a study in contrasts for both the property
catastrophe reinsurance and insurance industries. The reinsurance
industry has experienced a flood of new capital (of which more below)
and has seen premiums turn lower from their June 2006 peak. In
contrast, the insurance industry is galvanized by the actions of
regulators, particularly in Florida, who have essentially mandated
lower premiums for their citizen home-owners and decided to provide
reinsurance capital via the enforced subsidy of their taxpayers. The
reinsurance industry is largely unregulated, largely off-shore and
driven by competitive market forces; the insurance industry is heavily
regulated (by States) and appears to be largely driven by domestic
State politics. In Florida the regulators want to extend the
reinsurance that is provided at fixed prices from Citizens (their
assessment and public backed insurer of last resort). Question is,
which solution is likely to lead to lower prices over time (if they
indeed should be lower) and which provides the healthier source of
reinsurance capital? The answer seems self evident to us, and part of
the reason for that is the track record of the reinsurance industry
during the last 15 months. The amount of capital raised and the
innovation that has been displayed is impressive. The purpose of this
paper1 is to review and record that story.
To read the full version of this article with graphs:
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January 31, 2007
By: Morton N. Lane, President
Sometimesit happens that one word so captures the zeitgeist that it isimmediately adopted into the language as if it were always present. Soit was with the word “sidecar” at the beginning of 2006 in the languageof the reinsurance world. In the scramble to replace capital lost inthe Katrina, Rita and Wilma (KRW) hurricanes of 2005 a variety of newmechanisms was being utilized; sidecars was one of them. It was notexactly a new mechanism; by our count in the preceding ten yearsbetween $2 and $3 billion of capital had been raised by a mechanismthat would now be called a sidecar. Those forerunners were called by avariety of names, but generically could be called capped quota shares.Since re-branding, the same vehicles have raised some $6.5 billion innew capital in a period of 15 months, see Figure 1. The purpose of thisnote is to record that dramatic development and to lay out an “issuesset” for issuers and investors in these vehicles.
To read the full version of this article with graphs:
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Over the Top, But Not Off the Boil |
November 20, 2006
By: Morton N. Lane, President
Inour April 2006 review of insurance securitization “How High is Up?” weoffered a view of an index of reinsurance price shifts over time. Thatperspective allowed us to observe that premiums were at historic highsand close to their tops. If anything, we were premature in thatassessment. The months immediately after our paper saw a frenzy ofpre-storm season activity which resulted in peak prices in June andJuly of this year.
The question now at hand, however, is what prices to expect in the January 2007 renewals?
Theindustry traditionally gauges renewal prices at its annual gatheringsin Monte Carlo, Baden Baden and the PCI Conference, and this year’sverdict seems to be that this will be a “hard” renewal, i.e., priceswill remain high. However, that has to be qualified. It certainly willbe hard compared to last January, but how hard will it be compared tothe mid-year activity? There the answer is more vague. Consensusappears to be that prices will not be quite as high as mid-year butwill remain strong – over the top, but not off the boil, so to speak.
To read the full version of this article with graphs:
Download the PDF Here
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What Katrina hath Wrought |
January 6, 2006
By: Morton N. Lane, President
Itis now more than four months since those three wicked witches of thewest, Katrina, Rita, and Wilma, devastated the Gulf of Mexico and itssurrounding coast line. Collectively, according to Property ClaimsService (Nov. 28), these storms caused over $50 billion dollars worthof insured loss and multiples of that in non-insured losses. And, justas the physical landscape has changed but is slowly recovering, thefinancial landscape in the world of insurance has shifted and is beingrepaired. Insured losses have rippled and are rippling through theprimary insurance market, the reinsurance market, the retrocessionalmarket and the hybrid market (i.e., cat bonds, insurance-linkedsecurities, industry loss warranties and the like). Keeping track ofthese changes is not easy, but it is important. Predicting the shapeof things to come as a result of change is, hopefully, easier thanforecasting a storm track, but the consequences for participants in anyof these markets can be just as severe.
To read the full version of this article with graphs:
Download the PDF Here |
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Unlovely Rita's Market Meter |
September 24, 2005
By: Morton N. Lane, President
Thefollowing tables update the exhibits from last week’s note “Respondingto Katrina” in light of the potential impact of hurricane Rita on theTexas – Louisiana coast. The message of the markets as of Fridayevening, when exact landfall and strength was unknown, is contained inthese updated tables.
To read the full version of this article with graphs:
Download the PDF Here |
September 16, 2005
By: Morton N. Lane, President
As
of this writing it has been two and one half weeks since Katrina first
made landfall (in Florida) and two weeks since Louisiana and New
Orleans suffered their landfall and subsequent devastation. And, as of
yet, no one has a definitive estimate of the insured losses that will
be suffered by the insurance and reinsurance industry as a result of
Katrina. The now most widely quoted estimate is by Risk Management
Services (RMS) who released an estimate to their clients on Friday,
September 9th that the total industry losses would be between $40
billion and $60 billion. Shockingly high, but it is not exactly
precise.
To read the full version of this article with graphs:
Download the PDF Here
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