|
Arbitraging Insurance Risks v1 |
December 22, 1998
On
July 16, 1997, Swiss Re Financial Products, in cooperation with Credit
Suisse First Boston completed a bond offering of $137 million in
California Earthquake Bonds. The total amount of insurance risk
transferred in the bond was $112.2 million. The size of the bond made
it the second largest insurance securitization of the seven completed
prior to that date. Previous issues sponsored by Goldman Sachs, Credit
Suisse, and Citibank, had been based on a book of underwritings of
particular ceding insurers, namely St. Paul Re, USAA, Winterthur and
Hannover Re. The Swiss Re California Earthquake Bond in contrast was
similar to the previous issues sponsored by both Sedgwick Lane
Financial (for Reliance) and AIG, namely it was based on index of
insured losses. As such, it was the largest indexed insurance-linked
note.
To read the full version of this article with graphs:
 Download the PDF Here
|
|
Arbitraging Insurance Risk v2 |
July 18, 1997. Also published in Global Reinsurance, Vol. 6, Issue 4, Monte Carlo 1997.
Investors
who intended to purchase the recently issued United Services Automobile
Association (USAA) Insurance-Linked Note needed to satisfy themselves
that the pricing of this novel security was appropriate. The
investment bankers involved in the transaction (Goldman Sachs, Merrill
Lynch and Lehman Brothers) needed to assure investors that the price
was fair, or even superior. Among the reassurances given were that (a)
USAA itself would share in at least 20 percent of the subject risk
alongside the investor, (b) an independent auditor would assess the
claims, (c) an independent index (a meteorological trigger of storm
categories) would be required, (d) a third-party risk-assessment firm
(Applied Insurance Research) would provide estimates of the probability
of such storms and their likely effect on USAA’s book of business, (e)
a note rating would be provided by the recognized independent rating
agencies for certain of the securities, and (f) finally, and perhaps
most comforting, that reinsurers themselves (experts on the pricing of
such risks) were buying the notes for their own portfolio. Evidently,
all of these efforts worked. The note (issued June 16) was the largest
Insured-Linked Note issued to date and was oversubscribed by a factor
of nearly 2.5:1.0.
To read the full version of this article with graphs:
Download the PDF Here
|
|
A New Wall and LaSalle Street Cocktail (With a Slice of Lime Street) |
July 15, 1997. Also published in CFR Magazine, July-Aug. 1997 and The Risk Financier, November 1997
What
a difference a year makes! Last November CFO Magazine published a
headline in its Newswatch column, “Disaster Bonds are a Catastrophe”
(CFO November 1996). The headline summed up a common sentiment at the
time: that the nascent effort to securitize insurance risk, once
promised to be the next great wave of the future, was running out of
gas. It was indeed their winter of discontent.
To read the full version of this article with graphs:
Download the PDF Here
|
June 30, 1997.
Insurance
companies writing property covers in the US often find themselves with
concentration of risks in catastrophe-prone areas. They “hedge” such
risks by buying reinsurance. Even the reinsurers themselves “hedge” by
buying retrocessional covers. Now, with the PCS Option contract at the
Chicago Board of Trade “synthetic” insurers (i.e., traders who write
call options or call spreads) can protect against regional exposures by
“hedging” or buying back regional contracts.
To read the full version of this article with graphs:
Download the PDF Here
|
|
