Structured Products II: Insurance-Linked Products and Hybrid Securities

Abstract

Many structured products are relatively new and their participation in institutional portfolios is expected to continue to grow in the future. The first part of the chapter explores insurance-linked securities (ILS), a relatively new asset class, where we discuss catastrophe bonds and longevity risk related products.

The second part of the chapter discusses ways to invest in insurance risk. The important concept of mortality risk is analyzed, and the mechanics and investment attributes of life insurance settlements are discussed.

Finally, the third part of the chapter covers mezzanine finance products. Here we discuss the following investment vehicles available to access mezzanine finance: subordinated debt with step-up rates, subordinated debt with PIK interest, subordinated debt with profit participation, subordinated debt with warrants, and convertible loans. We also comment on the use of these hybrid securities in project finance.

Keywords: Insurance-linked securities, insurance risk, catastrophe bonds, longevity risk related products, insurance risk, mortality risk, subordinated debt with step-up rates, subordinated debt with PIK interest, subordinated debt with profit participation, subordinated debt with warrants, convertible loans

JEL Classification: G10, G12, G13