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‚
After all the hearings that have taken place up and down the country on coastal property insurance, legislation introduced in the House earlier this week that would expand the coverage options for commercial property insurance has been welcomed by the Risk and Insurance Management Society (RIMS). HR 5792, known as the “Increasing Insurance Coverage Options for Consumers”, would allow Risk Retention Groups (RRGs) and Risk Purchasing Groups (RPGs) to write property coverage. The issue is likely to be a topic of discussion at the upcoming 2008 RIMS annual conference in San Diego April 27 to May 1. For further information on RRGs and RPGs, check out the I.I.I. issues update on captives and other risk-financing options.
Speaking of capital markets solutions as an alternativeÃ¢â‚¬ ¦Mainstream, rather than alternative is how the catastrophe bond market can now be described, according to Guy Carpenter. Its sixth annual review of the market reveals a phenomenal level of transaction activity in 2007, even as rates softened for traditional reinsurance capacity. At year-end, cat bond risk capital outstanding reached $13.8 billion, a 63 percent increase over 2006Ã¢â‚¬â„¢s record-setting year-end total of $8.5 billion. Cat bond risk principal now accounts for 12 percent of property limits in the U.S., and 8 percent on a worldwide basis. A couple of other highlights: publicly disclosed cat bond issuances totaled $7 billion in 2007, a 49 percent increase over the record $4.7 billion in 2006; some 27 transactions were completed in 2007, up from 20 in 2006 and nearly tripling the 10 placed in 2005. Check out further I.I.I. facts.Ã‚
A happy development for the domestic captive insurance industry today, with the news that the Internal Revenue Service (IRS) has dropped a proposed regulation that likely would have driven more business offshore. Issued September 28, 2007, the proposed IRS regulation would have eliminated 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 (see our November 14, 2007 posting). Apparently the IRS decided to withdraw the planned rule change after considering all the written comments received. The Coalition for Fairness to Captive Insurers has welcomed the move, saying it removes the uncertainty that has hung over the captive industry since the IRS regulation was proposed last fall. Check out National UnderwriterÃ¢â‚¬â„¢s February 20 online article by Caroline McDonald for more information on the decision. As many of you know, 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 domicile Ã¢â‚¬“ with 1,251 licensed captives Ã¢â‚¬“ followed by Bermuda with 989. Check out further I.I.I. info on captive insurers.Ã‚
A new report on global risks from the World Economic Forum (WEF) highlights the growing role the financial markets are playing in the transfer of risk. For example, the WEF notes that the market in insurance-linked securities is broadening from natural catastrophe bonds to credit securitizations and mortality bonds. Besides insurance-linked securities, it points out that a wide variety of derivatives and other financial instruments are now being used to transfer insurance risks.Ã‚
Just how financial innovations could reshape the future of the insurance industry is the timely topic of a discussion being held tomorrow evening in New York City. Organized by the Columbia Business School Alumni Club of New York (CBSAC/NY), the panel will feature experts from Swiss Re, Zurich, Deloitte and UBS. The event will take place from 6-8pm at the UJA Federation of New York, 130 East 59th Street, 7th floor conference center. For further information, contact Sepp Ruchti at email@example.com
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.
Yesterday we cited projections of increasing catastrophe losses in years to come along the Atlantic and Gulf Coasts, so today we turn our attention to the topic of how to finance catastrophic risk. Historically the capacity to finance such risk was limited to the traditional re/insurance markets, or to self-insurance and pooling. Now insurers can diversify their risk and expand the availability of insurance in cat-prone areas by tapping into the capital markets. An article by Michael Lewis in the New York Times magazine on Sunday August 26 focuses on this very topic and describes one well-known capital markets solution: catastrophe bonds. Catastrophe bonds developed in the wake of mega-cats Hurricanes Andrew and Iniki in 1992 and the Northridge earthquake in 1994. Since then, cat bonds have been used to cover a wide variety of exposures, with earthquakes (both U.S. and Japan) and U.S. hurricanes accounting for the majority of bond issues. Without question, the market for natural catastrophe bonds is growing. Guy Carpenter reports that annual issuance of cat bonds reached a record $4.69 billion in 2006, up 136 percent from $1.99 billion in 2005. The number of transactions completed also doubled to 20 in 2006, from 10 in 2005. However, despite recent gains, over the longer-term the dollar value and number of catastrophe securitization transactions is still modest in relation to global reinsurance capacity. Between 1997 and 2006, 89 catastrophe bondsÃ‚ were completed, representing $15.35 billion in catastrophe bond issuance, relative to $330 billion in global reinsurance capacity. What do you think? Check out further I.I.I. info on reinsurance and alternative risk financing options.