Tag Archives: ART

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.

Captive Insurance Gathering

This week marks the Vermont Captive Insurance Association’s 24th Annual Conference where the economic downturn is likely to be the focus of discussions. Recent research from ratings agency A.M. Best noted that U.S. captive insurers’ net income declined by around 66 percent in 2008 for a composite of 186 captive companies. This reflects realized losses of $1.2 billion for the year, a large percentage of which resulted from one company’s investment losses. On the bright side, net underwriting income actually increased over the prior year – evidence of the captive industry’s typical underwriting discipline and its inclination not to rely on investment income, according to A.M. Best. Captive formations continue amid a softening commercial insurance market, but new captive domiciles are finding it challenging to establish a presence. A.M. Best reports that the outlook for the captive industry is stable as participants exercise their financial flexibility in a softening market. Check out I.I.I. information on captive and other risk financing options.

Catastrophe Bond Activity Update

Despite a decline in the number of issuances the catastrophe bond market continues to advance helped by continued stabilization in the global financial markets, according to the latest review of the market from Guy Carpenter. It reveals that six catastrophe bond transactions were completed in the second quarter of 2009, down 25 percent from eight transactions in the second quarter of 2008, while risk principal issued was $808 million, off 54 percent from $1.75 billion issued during the year earlier period. This brings the tally for the first half of 2009 to nine catastrophe bonds issued, accounting for aggregate risk capital of $1.38 billion. Two quarters into 2009, total cat bond risk capital outstanding fell 7 percent to $11.2 billion, the second consecutive quarter in which total risk capital outstanding declined. However, Guy Carpenter says several factors may converge to make conditions more favorable to cat bond sponsors for the rest of the year, assuming no major catastrophes, including an improvement in broader capital market conditions as the general economy stabilizes and distance from last year’s financial crisis increases, and increased risk capacity as a result of reduction or restructuring in some traditional reinsurance programs. Check out further I.I.I. information on alternative risk-financing options.