Investing in Insurance Risk

Author: Alex Krutov
Publisher: Risk Books
ISBN: 9781904339564
Published In: June 2010
Format: Paperback
Jurisdiction: International ? Disclaimer:
Countri(es) stated herein are used as reference only

Out of stock

Description
Contents
Author

Details

The rapid growth of the market for insurance-linked securities has highlighted the need for information on the types of these securities and the issues involved in their structuring, pricing, trading, and managing on a portfolio basis.

Insurance-linked securities and certain reinsurance instruments provide the ability to invest in insurance directly, as opposed to investing in equities or debt issued by insurance and reinsurance companies. The “pure” insurance risk component of these investments can range from that of property catastrophe to longevity, all of which provide limited correlation with the investment performance of traditional asset types.

Securitisation of insurance risk has also become an important tool for risk and capital management that can be utilised by insurance companies alongside the more traditional approaches. It offers insurance and reinsurance companies additional flexibility at a time when the landscape keeps changing and the ability to respond to changes quickly is a critical source of competitive advantage.

Investing in Insurance Risk by Alex Krutov looks at all of the issues involved in investing in insurance risk and insurance securitisation. It examines the various types of insurance-linked securities now available to investors, along with techniques for their analysis. In addition, the book explains the considerations insurance companies face in transferring insurance risk to the capital markets.

The book is somewhat provocatively titled Investing in Insurance Risk to emphasize that investing always involves the potential of both return and risk. This is particularly clear in a field such as insurance-linked securities, where risk transfer?rather than simply raising capital?is often the primary driver for issuing these securities. The ability to analyze the risk-return profile of these investments is essential for both issuing and investing in them.

The book is designed to serve as a valuable resource to those active in the insurance-linked securities marketplace, while also aiding basic understanding of the topics for those new to the field. The author offers a clear practitioner’s perspective as opposed to an academic one; this hands-on approach is particularly important in a market that is new and still evolving.
PART I: INTRODUCTION TO INVESTING IN INSURANCE RISK

1 Investing in Insurance Risk

Investing in risk

Insurance risk

Insurance markets

Securities issued by insurance companies

Insurance-linked securities

Investing in insurance risk

2 Insurance-Linked Securities

Insurance-linked securities defined

Types of insurance-linked securities

Yield and diversification offered by insurance-linked securities

Market dynamics

PART II: INVESTING IN AND MODELLING SECURITIES LINKED TO PROPERTY AND CASUALTY RISK

3 Property Catastrophe Bonds

Securitisation of property insurance risk

Motivation for transferring natural catastrophe risk to the capital markets

Historical perspective

Risk transfer in insurance

Catastrophe bond structure

Default triggers

Number and types of perils

Term

Quantitative analysis

Investment performance of cat bonds

Market stability and growth

More on the sponsor and investor perspectives

Modelling property catastrophe insurance risk

Cat bonds: trends and expectations

4 Modelling Catastrophe Risk

The challenge of modelling catastrophe events

Importance of catastrophe modelling to investors

Modelling catastrophe insurance risk of insurance-linked securities

The science of catastrophes

Earthquake frequency and severity

Earthquake location

More on earthquake modelling

Tsunamis

Hurricanes

Historical frequency of hurricanes threatening the US

Seasonality of the hurricane risk in insurance-linked securities

Landfall frequency in peak regions

Hurricane frequency effects over various time horizons

Investor views on macro-scale frequency effects

Evolution of investor views on catastrophe modelling

Elements of hurricane modelling

Damage modelling

Financial loss modelling

Catastrophe model structure

Modelling terrorism risk

Modelling pandemic flu risk

Practical modelling of catastrophe risk

Data quality

Investor and catastrophe modelling

Catastrophe bond remodelling

Hurricane forecasting

Climate change

Sponsor perspective on modelling

Modelling as a source of competitive advantage to investors

Modelling as a source of competitive disadvantage to investors

Trends and expectations

5 Catastrophe Derivatives and ILWs

Index-linked contracts

Role of an index

Catastrophe derivatives defined

Industry loss warranties defined

Market size

Key indexes

Modelling industry losses

The ILW market

ISDA US wind swap confirmation template

IFEX catastrophe derivatives

CME hurricane derivatives

Eurex hurricane futures

More unusual products

Comments on pricing

Credit risk

Basis risk

The use of transformers

Investor universe

Mortality and longevity derivatives

Investor and hedger perspectives

Trends and expectations

6 Reinsurance Sidecars and Securitised Reinsurance

Securitisation of reinsurance

Reinsurance sidecars

Sidecar structure

Investor perspective

Sponsor perspective

Sidecar types

Investor universe

Considerations in investment analysis

Trends and expectations

7 Credit Risk in Catastrophe Bonds and Other ILS

Credit risk

Credit risk and ILS

Traditional solutions

The need for new solutions

Solutions to credit risk issues in insurance-linked securities

Triparty repo arrangement

Customised puttable notes

Use of US Treasury money market funds as collateral

Collateral options in collateralised reinsurance

Trends and expectations

8 Weather Derivatives

The broader definition of insurance-linked securities

Weather derivatives defined

Heating and cooling degree days

Other types of weather derivatives

Payout on standard options

Exchange-traded weather derivatives

Pricing models for weather derivatives

Practical challenges in pricing

Investing in weather derivatives

Emissions trading

Trends and expectations

PART III: SECURITIES LINKED TO VALUE-IN-FORCE MONETISATION AND FUNDING REGULATORY RESERVES

9 Funding Excess Insurance Reserves

Excess insurance reserves

Some examples

“Excess” reserves

Funding solutions

Embedded-value and value-in-force securitisation

Market fluidity

RBC requirements leading to “unnecessary” capital strain

Regulation XXX reserve funding

Letter-of-credit facility for funding regulation XXX reserves

Securitisation of Regulation XXX reserves

Other solutions

Additional considerations for investors

Funding AXXX reserves

Loss portfolio transfer

Conclusion

10 Embedded-Value Securitisation

Rationale for embedded-value securitisations

Embedded value and value-in-force defined

Direct monetisation versus true securitisation

Closed block

Investor perspective

Specific structures

Modelling

Stress scenarios

Ratings of EV securitisations

Examples of EV securitisation

Gracechurch/Barclays EV securitisation

Trends and expectations

PART IV: INVESTING IN AND MODELLING SECURITIES LINKED TO MORTALITY AND LONGEVITY RISK

11 Securitisation of Extreme-Mortality Risk

The risk of extreme mortality

Securitisation of extreme-mortality risk

The groundbreaking Vita securitisation

Other securitisations of extreme-mortality risk

Basis risk

Credit enhancement

Investor types

Extreme-mortality risk quantification and pricing

Current modelling approaches

Mortality derivatives

Additional considerations for investors

Extreme mortality securitisation: trends and expectations

12 Life Insurance Settlements

Insurance policy as a tradable asset

Life settlements

Life settlement securitisations

Legal and ethical issues

Market participants

Current and future market size

Regulatory issues

The link between investor risk and consumer protection

Tax issues

Insurable interest

Investor- or stranger-originated life insurance policies

Contestability

Trust structures and investor due diligence

The use of not-for-profit organisations in life settlements

Investor perspective

Insurance industry perspective

Risks to insurers

Conclusion

13 Mortality and Longevity Models in Insurance-Linked Securities

Mortality and longevity

Mortality rates

Mortality tables

Population mortality tables

Mortality dynamics

Select and ultimate tables

Credibility theory approach

Longevity improvements

Lee–Carter and related methods

Markov process of mortality and morbidity

Direct age transform mortality modelling

Mortality and longevity shocks

Conclusion

14 Valuation of Life Settlements and Other Mortality-Linked Securities

Modelling investment performance of life settlements

Life expectancy

Methodology changes in the calculation of life expectancy

Underwriting concepts

Debits

Choice of mortality table

2008 valuation basic table

Relative risk ratios

Underwriting for older ages

Choosing the LE

LE shopping

Assumed premiums

Being paid for the risk

Conclusion

15 Longevity Risk Transfer and Longevity-Linked Securities

Longevity risk

Need to transfer longevity risk

Longevity improvements

Natural hedges

Primary mechanisms of longevity risk transfer

Longevity swaps

Mortality forwards and survivor forwards

Longevity bonds

More on other solutions for longevity risk management in a DB pension fund

Indexes of longevity

Investors in longevity

Market developments

Extension risk in traded policies

Trends and expectations

PART V: MANAGING PORTFOLIOS OF INSURANCE RISK

16 Managing Portfolios of Catastrophe Risk

Portfolio construction

Exotic beta

How catastrophe risk is different

Measures of return and risk

Managing a portfolio of cat risk by a (re)insurance company

Managing a portfolio of catastrophe insurance-linked securities

Types of instrument

Portfolio constraints

Standard tools and the modelling of individual securities

Portfolio optimisation

Pitfalls of standard optimisation techniques

Remodelling and portfolio optimisation

Sensitivity analysis and scenario testing

Additional considerations

Performance measurement

Conclusion

17 Managing Portfolios of Multiple Types of ILS

Types of insurance-linked securities

Rationale for combining different types of ILS in the same portfolio

Correlation among different types of ILS

Tenor and liquidity

Portfolio optimisation

The argument against combining ILS of multiple types in the same portfolio

Portfolio valuation issues

Performance measurement

Investment management policy

Risk management

Conclusion

18 Conclusion
Alex Krutov

Alex Krutov is Managing Director of Century Atlantic Capital Management, where he developed an investment strategy across all types of insurance-linked securities (ILS) and collateralized reinsurance, as well as portfolio optimization and risk management techniques for ILS and reinsurance. Prior to joining the firm, he was President of Navigation Advisors LLC, a New York management-consulting firm focused on the insurance industry, capital markets, and general management. Prior to founding Navigation Advisors, Alex Krutov was employed in a variety of roles, including officer-level positions, at companies such as Transatlantic Reinsurance Company, American International Group, Reliance Group, UBS Warburg, and AXA Financial.

Alex Krutov’s primary expertise and experience involve the products that bridge the gap between (re)insurance and capital markets. He has strong expertise in insurance securitisation, alternative risk transfer, reinsurance and insurance underwriting, portfolio issues in investing in insurance-linked securities, risk analysis, pricing of catastrophe (re)insurance risk, and general management.

Alex Krutov is a member of the American Academy of Actuaries, the Casualty Actuarial Society, and the Society of Actuaries. He chairs the Risk-Based Capital Committee of the American Academy of Actuaries. In addition to his actuarial credentials, Alex Krutov holds an MBA in Management and Finance from the Columbia University Graduate School of Business. He also holds an MS in Physics.