Future for insurance risk securitizations immense

A recently released Swiss Re Sigma report titled “Capital Market Innovation in the Insurance Industry” suggests that the value of alternative risk securitization solutions will increase tenfold by 2010. The report notes that approximately US$12.6 billion has been funneled into capital market insurance vehicles since 1996 – with catastrophe bonds accounting for nearly half of this value.

The rise of the cat bond and other alternative risk transfer mechanisms in North America was sparked by a reduction in reinsurance capacity following Hurricane Andrew and the Northridge earthquake of the early 1990s, the Sigma report observes. “In reaction to this [reinsurance] rate spike [following these mega cat losses], insurers began developing a new class of financial instruments that transfer insurance risk to capital markets.”

Globally, the value of cat bond issues currently stands at around US$1 billion a year, with this volume expected to rise by US$10 billion annually by 2010. However, Swiss Re believes that the greatest growth opportunity in the alternative risk securitization market lies in non-catastrophic risks such as life and auto insurance.

The Sigma report suggests the current environment influencing the reinsurance and primary insurance sectors, combined with new technology innovations, will continue to enhance the attraction of alternative risk securitization products. Other factors include tax costs associated with traditional insurance covers, as well as regulatory restrictions. With reinsurance rates once again firming, Swiss Re expects renewed attention to be drawn to insurance securitization issues. “The rebound in reinsurance rates in 2001 bodes well for increasing issuance of insurance securitizations.”