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An Optionable Note
April 15, 1999, The Reliance III Case Study

Morton Lane, Ph.D.

At the beginning of 1998, Reliance National purchased an option from investors to issue a pre-specified insurance-linked note, at Reliance’s sole discretion, anytime during 1998, 1999 or 2000.  It was the first “Optionable Note” in the growing market of insurance-linked securitizations.  Two other optionable securities have been issued subsequently:  (1) by Aon on behalf of Yasuda Fire and Marine (where the option was embedded in a bond); (2) by Goldman Sachs on behalf of Allianz, which used a structure very similar to that of the Reliance optionable transaction.  It is likely that such structures will be even more popular in the future.

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Risk Cubes or Price, Risk and Ratings (Part II)
March 15, 1999. Also published in The Journal of Risk Finance, Vol.1, No. 1, Fall 1999.


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 consequence, traditional capital market risk measures – expected loss, probability of default and the standard deviation of return outcomes – 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 invest-ments.

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What the World Bank Should Do About Catastrophic Risk

What should The World Bank do about it?  A Personal View, January 15, 1999. Based on a presentation to The World Bank Disaster Funding Seminar, "Financial Management of High Severity Risk in Developing Countries", September 22, 1998, Washington D.C.

By Morton Lane

Today’s seminar has shown that “insurance risk management is not just your father’s homeowners policy” (to poorly paraphrase the Oldsmobile slogan of some years ago).  The preceding speakers have expertly demonstrated that: (a) traditional insurance and reinsurance against catastrophes has grown dramatically in the developed world; (b) that both risk-transfer and funded cover mechanisms are available for catastrophe protection; (c) that there has been a convergence between financial and insurance markets instruments; (d) that large institutions are protecting themselves against catastrophes by issuing catastrophe bonds and derivatives as well as buying traditional reinsurance; and (e) finally, that these new forms of protection use “index” or “parametric” measures as well as indemnity losses, thereby expanding their usefulness to developing areas.  All in all, some huge changes are rippling through the staid world of insurance, and the World Bank is to be congratulated for organizing so timely a seminar for its self-education.

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