Pandemic Risk and Capital Markets

Reports on the H1N1 virus continuing to cause illness, hospitalizations and deaths in the U.S. during the normally flu-free summer months and newly issued vaccination guidelines from the Centers for Disease Control and Prevention (CDC) are raising concerns on pandemic risk. This may prove an area of future growth for the capital markets as life insurers increasingly look to alternative risk financing as a way to raise additional capital and transfer pandemic risk. For example a new report from Swiss Re suggests that securitizations of extreme mortality risk will continue to expand as more large global life insurers and reinsurers adopt these tools to hedge exposure to pandemic risk. Swiss Re notes that the combined volume of extreme mortality bonds issued so far is $2.2 billion, a miniscule amount compared to the face amount of mortality risk insured globally. “It is difficult to estimate precisely the market potential for this type of securitization because it refers only to extreme mortality, but it will likely fall in the range of $5-20 billion by 2019,† Swiss Re says. Mortality securitizations are simpler than other life securitizations and investors are more comfortable with the underlying insurance risk, it adds. Check out I.I.I. information on alternative risk financing options.

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