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Essays and Commentaries
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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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Arbor I-Xth Series - Still a Win-Win? |
September 1, 2005
By: Morton Lane, PhD
On
Aug. 19, Swiss Re announced the tenth issue in its Arbor I series.
Interest is currently being solicited and the contract will settle on
Sept. 15, 2005. Strictly, “being solicited” is inaccurate.
Technically, and more accurately, the window is open for investors to
express any interest they have at the offered price. Swiss Re is
agnostic about whether they would want more or less at that price. It
has happened before that Swiss Re has announced a price and received no
bids (Sakura in its sixth take down in September 2004). It may happen
again given that hurricane Katrina may spook investors. However, one
question we raise here is whether Arbor I is a fair deal at the current
price. Given the time of writing it is reasonable to ask the question
in two parts. First was the pre-Katrina price reasonable? Second, how
does Katrina affect the evaluation now (Sept 1)?
To read the full version of this article with graphs:
Download the PDF Here
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A Look at Avalon Re and ILS Pricing at Mid-Year |
September 1, 2005
By: Morton N. Lane, PhD
In
Arthurian legend Avalon was the island paradise in the western seas to
which King Arthur went at his death. In naming its inaugural insurance
linked security (ILS) Avalon, Oil Casualty Insurance Ltd. (OCIL) may
have been trying to invoke the calming effect of a (risk-free?)
paradise reached with this instrument, or it may have been alluding to
(shareholders in) western seas. Then again it may have just been a
colorful first letter of the alphabet for what will be a series of such
ILS. Whatever its descriptive intention, however, Avalon has
transported the world of ILS to a new insurance arena, namely the
securitization of liability risk. Heretofore, ILS have been dominated
by catastrophe bonds, or at the very least short-tailed risk. Avalon
has changed that. It has opened the door to a wider class of
securitization of insurance risk – general liability.
To read the full version of this article with graphs:
Download the PDF Here
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August 15, 2004
By: Morton Lane, Ph.D.
Aviation
insurers are often asked to provide limits of liability to insureds (a)
that are large and (b) whose exposures are difficult to assess. This
is particularly true of providers of coverage for product manufacturers
and other products liability. The question arises, for several
insureds with little or no loss experience, how should such coverage be
priced? In particular, is there some minimum price of limit?
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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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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