What a difference a year can makeÃ¢â‚¬ ¦The catastrophe bond market, described as mainstream rather than alternative after a record-setting year in 2007, saw a sharp fall in issuance both in terms of risk capital and number of transactions in 2008. Guy CarpenterÃ¢â‚¬â„¢s latest review of the market reveals that cat bond issuance volume fell 62 percent to $2.7 billion in 2008, from just under $7 billion in 2007 as a soft reinsurance market and the global financial crisis took their toll. Just 13 transactions were completed during the year, compared to 27 in 2007. At year-end 2008, total cat bond risk capital outstanding was $11.8 billion, a 14.5 percent decline from $13.8 billion in 2007. But a slow issuance year in 2008 masks a story of resilience and risk management flexibility, according to Guy Carpenter. For example, in terms of issuance volume it found that 2008 was the marketÃ¢â‚¬â„¢s third most active year since catastrophe bonds were introduced in 1997. Check out further I.I.I. information on alternative risk-financing options.Ã‚
Alternative risk financing and risk transfer has proven increasingly attractive to our industry over the years. Insurers and reinsurers have looked to the capital markets more and more to diversify their risks and expand capacity. So it’s not surprising that Allianz, Deloitte, State Farm, Swiss Re and Zurich Financial Services are among the co-sponsors of a new report published today by the World Economic Forum, titled Convergence of Insurance and Capital Markets. The report explores the growth of the market for insurance linked securities (ILS) and highlights potential next steps needed to continue its development and to further encourage investors’ strong appetite for catastrophe bonds and other forms of ILS products.
According to the report, the ILS market has seen strong growth since its inception in the mid 1990s. Issuance of ILS totaled $14.4 billion in 2007, up 40 percent from $10.3 billion in 2006. At the end of 2007, the notional value of outstanding ILS stood at $39 billion, a 50 percent increase from $26 billion at the end of 2006. Certain experts predict robust growth over the next several years. The report also notes that to accelerate the convergence of insurance with the capital markets, risk instruments must be made simpler and more attractive, and a wider investor audience must be courted. Check out background I.I.I. information on Captives and Other Risk Financing Options.Ã‚ Ã‚ Ã‚
Medical malpractice continues to be the dominant line of business for U.S. captives. The performance of this line therefore can have a significant impact on the overall captive insurance market. A new report by ratings agency A.M. Best notes that medical malpractice net premiums written fell 26 percent in 2007, leading to a 15 percent drop in net premiums written for a composite of 177 captive insurance companies. However, captives overall benefited from favorable underwriting trends. Solid underwriting results in medical malpractice helped the captive compositeÃ¢â‚¬â„¢s loss ratio to improve substantially in 2007 to 61.9, for example. Looking ahead, A.M. Best predicts that in spite of the soft market, the outlook for the captive industry is stable. Captive formations continue even as the commercial market softens and new domiciles have entered the market. A key advantage for captive insurers is also their ability to compete not just on price, but on customized services for their insureds. Check out I.I.I. updates on captives andÃ‚ other riskÃ‚ financing options and on medical malpractice.Ã‚
Captives owned by American firms are the most significant contributors to the overall growth of the global captive insurance market. According to a new benchmarking report from Marsh, approximately 75 percent of captives originate from six countries, with U.S. owned captives representing 53 percent. Whereas Bermuda was once the default choice for North American corporations, Marsh notes that many companies are now selecting onshore U.S. domiciles. Over 25 states have put in place some form of captive legislation. With this in mind itÃ¢â‚¬â„¢s no surprise that within the survey sample group there is a significant concentration of risk in the U.S. However, in Europe, Middle East and Africa and Asia Pacific regions over 65 percent of the exposure is written on a European or global basis. Marsh says this divergence perhaps reflects the fact that much of the new captive growth in the U.S. has been driven by firms with domestically focused risk financing issues, e.g. Gulf coast exposed property. Check out further I.I.I. info on captive insurers.Ã‚
Those of you in the alternative risk transfer business may be interested in todayÃ¢â‚¬â„¢s item. Two prominent captive insurance associations have teamed up to form a coalition to battle a proposed Internal Revenue Service (IRS) rule change that would significantly alter the landscape for captive insurers in the U.S.Ã‚ Issued September 28, the proposed IRS regulation would eliminate the right of U.S.-sponsored captives to claim reserve deductions against their domestic tax for future claims and losses on consolidated, or related, business. Instead, they would only be allowed to claim deductions when claims are actually paid. The change would essentially result in treating the transaction as non-insurance for tax purposes. We donÃ¢â‚¬â„¢t need to remind you that captive insurers are the oldest form of alternative risk transfer vehicle, dating back to the 1950s. Use of captives by corporations has grown exponentially during the last 30 years in the U.S. In 2006, the U.S. was the largest captive domicileÃ¢â‚¬“ with 1,251 licensed captives Ã¢â‚¬“ followed by Bermuda with 989. If the IRS proposal goes ahead, it seems likely that it would drive more business offshore. The Coalition for Fairness to Captive Insurers (CFCI) has been formed by the Captive Insurance Companies Association (CICA) and the Vermont Captive Insurance Association (VCIA). Those interested in joining the coalition should contact either association. Check out further I.I.I. information on captive insurers.
Two reports published yesterday by ratings agency A.M. Best on U.S. captives and risk retention groups (RRGs) point to continuing growth in these alternative market mechanisms, even amid soft market conditions. A number of trends are highlighted, but one interestingÃ‚ nugget is that medical malpractice accounts for a significant portion of business for both captives and risk retention groups. According to the reports, medical malpractice continues to be the dominant line of business for domestic captives (close to 40 percent), while medical malpractice (claims made) accounted for 43 percent of RRG business in 2006. Which leads us to conclude that despite greater stability in the price of medical malpractice insurance and some improvement in the tort environment, doctors are not looking to return to the traditional market in a hurry. Check out I.I.I. updates on captives and alternative risk transfer mechanisms and on medical malpractice online.
For traditional insurers looking to recapture some of the business lost to the alternative market, specifically the captive market, all bets are off. Or at least the going may be getting tougher. Despite increased competition and soft pricing, growth in captive insurers remains strong, and a new study from Aon indicates there is room for further growth Ã¢â‚¬“ substantial growth at that. According to Aon, contrary to popular belief, over half (53 percent) of the worldÃ¢â‚¬â„¢s top 1500 companies (G1500) do not currently own a captive. Regionally there is considerable room for captive growth. Even in a mature market like the U.S., captive ownership by G1500 companies is at just 42 percent. In markets like Asia that traditionally have not been extensive captive users, the percentages are lower. Only 14 percent of Japanese G1500 companies have a captive for example. Captives are the oldest form of alternative risk transfer vehicle, dating back to the 1950s. Direct access to reinsurance markets, tailored coverage, and greater control over claims are just some of the reasons why corporations form captives. Cost or lack of coverage in the traditional market is another. Check out I.I.I. info on captives and alternative risk transfer mechanisms online.
Alternative Risk Transfer (ART) market mechanisms cover 30 percent of the U.S. commercial insurance market, yet general understanding of them is limited. For anyone grappling with the concept, an I.I.I.-penned chapter in the recently published Handbook of International Insurance hopefully will shed some light. The chapter “An Overview of the Alternative Risk Transfer Market” explains that the concept of ART defies a precise definition in part because the broad range of risk products that can be defined as ART has expanded over time as product innovation continues. The chapter covers the major categories of ART solutions commonly found in the market today, including captives, self-insurance, risk retention groups, finite risk (re)insurance, catastrophe bonds and government programs. I.I.I. also has additional information on captives and other risk-financing options available online.