Insurance-Linked Securities Report 2008 - Aon

More documents

Recommendations

Info

Insurance-Linked Securities 2008 20 Reinsurers comprise 21 percent of the investor community today, and play an interesting role in the market. In addition to sponsoring transactions, some reinsurers also manage funds that invest in securities originated by themselves or by other sponsors. They may also accept risks either through reinsurance or investing in the ILS market. As an expert participant in the risk management and trading markets, reinsurers constantly strive to balance their risk portfolio. At the same time, they use their expertise in the market to maximize returns by buying and selling risk. Hedge funds and mutual funds, at 7 and 3 percent of the market, respectively, are similar to cat funds in specifically dedicating capital to catastrophe risk investments. Of course, hedge funds and mutual funds also participate in other markets, including equity and debt instruments. Although focused on managing risk and achieving diversification, these funds are primarily interested in meeting a high return threshold. In the current market, this causes some hedge funds to reserve capital for the future when returns may be higher. Despite the relatively few categories of catastrophe bond investors, no single group exerts disproportionate influence over the price or success of a particular transaction. At current volume levels, the market has proven efficient, at least from a theoretical perspective. This efficiency can be attributed to sponsors having alternative structures with which to manage risk and access capital, and investors having alternative uses of capital that offer different risk/return profiles. These alternatives can include traditional reinsurance and industry loss warranties (ILWs). A Geographic Overview INVESTOR BY COUNTRY US Bermuda UK Switzerland France Canada Australia Germany Italy 12% 12% 2% 4% 19% 1% 1%
The ILS Market: Beyond Cat Bonds Aside from catastrophe bonds, the ILS market includes other instruments that appeal to specific investors. ILWs and private collateralized reinsurance layers, for example, appeal to hedge funds, cat funds and reinsurers. These investors use ILWs on a smaller scale—typically $10 billion to $25 billion—both purchasing coverage and selling positions for risk management purposes. These instruments offer returns that are driven by typical market forces and can diversify an existing portfolio. Sidecars and other newly formed reinsurance companies are of interest to private equity investors as well as hedge funds, offering them the opportunity to participate in the insurance and risk-transfer markets. Naturally, they are most popular when the cost of risk (i.e., insurance) is highest. Finally, a relatively new method of participating in the ILS market has evolved from the derivatives market. In swap, option, and futures forms, synthetic risk-transfer instruments are evolving to use standardized documentation and, in some cases, can be traded among market participants. Participants to date include hedge funds as well as reinsurers that buy and sell derivatives as part of a risk management strategy. Speculators with an interest in taking certain risk positions for a potential return also participate in this market. The use of derivatives in the ILS market will increase as participants gain knowledge and comfort with the structures. The resulting increase in liquidity should accelerate derivatives’ growth as well. Correlation And Credit Markets As they build portfolios to achieve the greatest return for a given level of risk, investors seek assets with low correlation to other investments. As discussed in the first section of this report, it is important to emphasize the lack of correlation between insurance-linked securities and other fixed income investments. The benefit of this low correlation has been underscored during the recent credit crisis. If You Don’t Like The Weather… Aon Capital Markets The impressive growth of the ILS market has relied in part on the sophisticated analysis that illuminates risk and rewards for market participants. ILS investors and sponsors have benefited from increasingly sophisticated analytics, using them to develop structures, gain understanding, and make well-reasoned investment and risk management decisions. That said, as the traditional insurance market has demonstrated, demand for risk transfer tends to have a direct relationship with the frequency of perils that define each instrument. The market’s response to future catastrophes will continue to influence ILS supply and demand. 21
Page 1 and 2: Insurance-Linked Securities 2008 In
Page 3 and 4: Foreword I am pleased to present th
Page 5 and 6: $ MM Aon Capital Markets Review of
Page 7 and 8: While transaction volumes have fall
Page 9 and 10: CATASTROPHE BOND ISSUANCE BY LOSS T
Page 11 and 12: New Insight into Catastrophe Bond M
Page 13 and 14: AON CAT BOND INDICES BY SECTOR (Yea
Page 15 and 16: Indemnity Triggers Reach New Height
Page 17 and 18: • Longer recovery. Since indemnit
Page 19: The Buy Side A review of the ILS in
Page 23 and 24: Just-in-Case Capital As a prearrang
Page 25 and 26: Aon Capital Markets • Repurchase
Page 27 and 28: Continued Innovation Options and fu
Page 29 and 30: Aon Capital Markets CME Group devel
Page 31 and 32: Aon Capital Markets Despite some gr
Page 33 and 34: Appendix I Catastrophe bond issuanc
Page 35 and 36: CATASTROPHE BOND ISSUANCE BY YEAR (
Page 37 and 38: CATASTROPHE BOND ISSUANCE BY TRIGGE
Page 39 and 40: Appendix II ILS market transaction
Page 41 and 42: SUMMARY OF CATASTROPHE BONDS - 1997
Page 49 and 50: SUMMARY OF SIDECAR ISSUANCE Aon Cap
Page 52: 200 E. Randolph Street, Chicago, Il

Insurance-Linked Securities Report 2008 - Aon

Create successful ePaper yourself

Delete template?

Save as template?