Term
| 5 types of Risk Linked Securities |
|
Definition
1)Cat Bonds
2)Sidecars
3)Cat - E - Puts
4)Cat Risk Swaps
5)Industry Loss Warranties |
|
|
Term
|
Definition
|
|
Term
|
Definition
1)Indemnity Trigger - Payouts based on actual insurer losses (moral hazard)
2) Index trigger - based on index of industry triggers (basis risk)
3) Hybrid Triggers - blend of multiple triggers |
|
|
Term
|
Definition
1) Industry Loss Indices- estimated losses to industry
2) Modeled Loss Indices - parameters run through cat model, create specific insurer or industry losses
3) Parametric indices - specificed physical measures of an event, e.g. Category 5 Hurricane |
|
|
Term
| 2 reasons higher layers are often uninsured |
|
Definition
1) Credit risk of reinsurer is major concern in large events (not an issue for a fully collaterized cat bond)
2)Highest layers have highest reinsurer profit margin cat bonds are uncorrelated with other investors
*other advantage is cat bonds can be multiyear |
|
|
Term
|
Definition
| Special purpose vehicles formed by insurer or reinsurers to create additional capacity. usually single reinsurer |
|
|
Term
|
Definition
1)transactions are off-balance sheet;improve leverage
2)formed quickly minimal doc/administrive costs |
|
|
Term
| Catastophic Equity Puts (Cat-E-Puts) |
|
Definition
| Insurere purchases the Put from the write and then can issue preferred stock to the writer at a specified price on the event occurrence |
|
|
Term
(2) Advantages (2) Disadvantages
Cat-E-Puts |
|
Definition
Ad
1)Insurer will be able to raise equity after a catastrophe
2)Lower transaction price than CAT Bonds, no SPR required
dis
1)not collateralized, exposed to credit risk
2)if preferred stock is issued, value of existing shares will be diluted. |
|
|
Term
|
Definition
| swap between two (re)insurers which have different types of catastrophic risk. For example, Japanese quake for Florida hurricane. |
|
|
Term
| Cat Risk Swap (2) advantages (3) disadvantages |
|
Definition
1) the (re)insurer reduces core risk, achieves diversification
2) lower transaction costs than some other approaches
disadvantages
1) difficult to create a swap that achieves parity
2) can create more basis risk than other contracts
3) Not prefunded |
|
|
Term
| Industry Loss Warranties, triggers and payments |
|
Definition
1)retention trigger - based on actual incurred loss of insurere
2)Warranty trigger - based on industry loss index
Payments:
1)Binary trigger: full payment is made once both triggers are satisfied
2)pro rata trigger - payoff depends on magnitude by which loss exceeds the warranty |
|
|
Term
| Industry Loss Warranties, triggers and payments |
|
Definition
1)retention trigger - based on actual incurred loss of insurere
2)Warranty trigger - based on industry loss index
Payments:
1)Binary trigger: full payment is made once both triggers are satisfied
2)pro rata trigger - payoff depends on magnitude by which loss exceeds the warranty |
|
|
Term
| 3 impediments to growth of market |
|
Definition
1)Regulatory issues
2)Accounting issues
3)Tax issues - no taxes in offshore jurisdiction |
|
|
Term
Regulatory/Accounting Issues
(is this reinsurance?) |
|
Definition
Advantages to offshore - lower transactions and expertise in issuing and settling securities
2 ways to address concerns -base the payment on narrowly defined area
or dual trigger contracts |
|
|
