1. Risk linked securities
    • enable ins risk to be transferred to capital mkt
    • provides ins w additional capacity
    • cat that are large for insr are small for mkt
    • incl cat bonds, sidecards, cat-e-puts, cat risks swap, ILW
  2. CAT Bonds
    • most common type of risk linked security
    • insr creates SPReinsr to shield investors from bus risk
    • fixed inv return swapped for floating to immunize against int rate risk
    • bds have call option triggered by CAT (1) indemnity trigger based on insr actual loss, (2) index trigger = ind loss, modeled loss, parametric index (physical measure) (3) hybrid
    • investors prefer industry loss index trigger, insr indemnity
    • covers high layer that involve reinsr cr risk and high reins profit margin.
    • Sold in multiyear format
  3. Sidecars
    • SPV formed by (re)insr to provide add'l capacity
    • (+) usually off balance sheet
    • (+) can be formed quicly at low documentation cost
  4. Cat-e-puts
    • put option giving insr right to issue preferred stock when cat
    • (+) raise funds quicly
    • (+) lower trans cost than cat bonds (no SPR)
    • (-) not collateralized -> cr risk
    • (-) value of existing share diluted by pref stock
  5. CAT risk swaps
    • (+) reduce core risk & achieve diversification
    • (+) low trans cost
    • (-) difficult to achieve parity
    • (-) can create more exp to basis risk
    • (-) not prefunded
  6. Industry Loss Warranties (ILW)
    • (+) considered as reins by regulators
    • (+) dual trigger: retention (insr loss) & warranty (ind loss)
    • 2 categories of pmt: binary trigger (both), pro rata trigger (based on magnitude by which loss > warranty)
  7. Factors allegedly impeding growth of CAT bds mkt
    • regulatory: cat bds issued offshore (low trans cost, well performing jurisdictions)
    • accounting: uncertain treatment due to basis risk (narrow geog area, dual trigger)
    • tax issues: no particular tx impacting cat bds
Card Set
CAT Bond and Other Risk Linked Securities