Innovations in Insurance Markets: Hybrid and Securitized Risk Transfer Solutions

Abstract

One of the most significant economic developments of the past decade has been the development of innovative risk-financing techniques in the insurance industry. Innovation has been driven by the increase in the frequency and severity of catastrophic losses, capital management needs in the life insurance industry, market inefficiencies created by (re)insurance underwriting cycles and regulation, advances in computing and communications technologies, and other factors. These developments have led to the development of hybrid insurance/financial instruments that blend elements of financial contracts with traditional reinsurance as well as new financial instruments patterned on asset backed securities, futures, and options that provide direct access to capital markets. This paper provides a survey and overview of the hybrid and pure financial markets instruments, emphasizing CAT bonds but also covering futures, options, industry loss warranties, and sidecars. The paper also covers life insurance securitizations executed to provide capital release, respond to reserve regulations, and hedge mortality and longevity risk.

Keywords: Insurance, reinsurance, securitization, cat bonds, industry loss warranties, sidecars

JEL Classification: G21, G22