Swiss Re’s new study – sigma 3/2001 “Capital Market Innovation in the Insurance Industry” examines the history and the future of the transfer of insurance risks to the capital markets (ART’s), and concludes that “these securities have vast potential.”
Approximately $12.6 billion worth of securities have been issued since 1996 says the report. About half of these were catastrophe bonds – securtization products for specific property/casualty risks.
The market for cat bonds has grown to around $1 billion a year, and Swiss Re expects it to increase to $10 billion by the year 2010. The report sees an even greater untapped potential for securitizations in non-catastrophic risks, particularly life and automobile insurance.
The securitization market evolved from the big increases in reinsurance rates following the devastation of hurricane Andrew and the Northridge earthquake. The ability to transfer risks from reinsurers to the capital markets hugely expands the pool of capital available to cover losses.
“Because global capital markets are so vast – publicly traded stocks and bonds have a total value of more than USD 50 trillion – they offer a promising means of funding protection for even the largest potential catastrophes,” said the report.
Sigma 3/2001 is well timed. It notes that lower reinsurance rates in the late 90’s significantly slowed the growth in ART’s, as they’re more complicated and expensive to create, but now that rates are hardening, it expects to see faster growth in securitizations, and new innovations in risk management products.
A copy of the report can be downloaded from the Swiss Re website at : http://www.swissre.com; or by e-mail at: firstname.lastname@example.org; or by contacting Laura Frick in their New York office – tel: 1 212 31751 35; fax:1 212 317 54 55.
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