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.
To read the full version of this article with graphs:
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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.
INTRODUCTION
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.
To read the full version of this article with graphs:
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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.
To read the full version of this article with graphs:
Download the PDF Here
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