|
 |
 |
 |
2003
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
|
USAA and the Magnificent Seven |
August 31,2003.
By Morton N. Lane, Ph.D.
In
1997 USAA – assisted by its investment bankers, Goldman Sachs, Merrill
Lynch and Lehman Bros - stunned the nascent world of insurance
securitization with it’s sponsorship of Residential Re and a near-$500
million securities issue. Since that date USAA has sponsored a new
security every year, including this year’s Residential Re 2003 Ltd [Res
Re 2003] bringing its total issues to seven – the magnificent seven.
To read the full version of this article with graphs:
Download the PDF Here
|
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
|
Review of Trends in Insurance Securitization |
April 25, 2003
By Morton N. Lane, Ph.D. and Roger G. Beckwith
INTRODUCTION The
year, 2002, was a record for insur¬ance securitization. It’s
official. According to Marsh and McLennan $1.22 billion bonds were
issued in 2002 versus $1.136 billion in 2000. Our own readings of
history are slightly off calendar, usually measuring the twelve months
in between 1st Quarter ends. Never¬theless, like Marsh we believe that
the most recent twelve months repre¬sent something of an up-tick in
activity. Like the margin by which the Marsh record was set, the
magnitude of the up-tick is small, tiny in fact, but potentially a
significant harbinger of directional change. In truth, these are
crumbs of comfort for those toiling in the vineyards of insurance
securitization. The harvest from a great deal of intellectual and
financial investment still eludes us. Notwithstanding, this paper
records the trends that have occurred during our last twelve months and
the messages they contain for that brighter securitization future that
surely lies ahead. Two significant events occurred during 2002/3.
Vivendi issued a cat bond protecting their own (insurable) exposure to
earthquake, by bypassing the insurance market. This disintermediation
of the insurance market is only the second issuance directly by an
insured. The second significant event was the introduction by Swiss Re
of a shelf registration that allows open ended issuance of insurance
linked securities up to a fixed amount for a fixed period of time. The
essential feature of this arrangement is that it saves on issuance
costs, which have been one of the bad raps on securitization.
To read the full version of this article with graphs:
Download the PDF Here
|
Pricing Issues in Aviation Insurance and Reinsurance |
April 16, 2003.
By Morton N. Lane, Ph.D.
INTRODUCTION Airlines
are in the business of transporting passengers or freight from origin
to destination as efficiently as possible. They do this with mixed
financial success. However, they do it with remarkable physical
success. The accident rate for airline travel is lower than for any
other mode of transportation, and it continues to decline.
Nevertheless, when accidents do happen they can cause considerable
financial, as well as emotional, distress. Airlines choose to avoid
the financial distress by purchasing insurance against
loss-through-accident. Aviation insurers accommodate the desire of
airlines to get rid of loss-due-to-accident by assuming all such
losses. The remarkable thing is that the insurers have provided this
cover on a ground-up basis for each and every loss, i.e., on an
unlimited basis. The question such large and unlimited cover provokes
is, how should it be priced?
To read the full version of this article with graphs:
Download th PDF Here |
|
|