Publicação
Analysis of the market for insurance-linked bonds from an investors perspective
| Resumo: | Born in a situation of low reinsurance capacity after big catastrophes in the 90s, catastrophe bonds, also known by the name cat bonds, evolved quickly to a well-established niche investment product with a market volume of $ 15 bn outstanding bonds in 2010. This work addresses important facts about investing in cat bonds. I start by explaining why cat bonds have become so important for the whole (re)insurance industry and the complex structure of catastrophe bonds, with emphasis on the triggers. To see how the industry evaluates risks in this area I analyze the rating process of two rating companies. Furthermore I outline shortcomings in this process such as the principal-agent conflicts. I then analyze the factors that determine the spreads and the yields of catastrophe bonds. Spreads are primarily based on the modeled expected loss of a bond, but also the reinsurance cycle, type of peril and type of trigger play a role for determining the spread of an insurance-linked bond. The analyzes of the historical correlation between cat bonds and traditional assets, shows that this asset class offers diversification benefits for investors since it has low correlation with stocks, investment grade bonds and high-yield bonds. The recent earthquake in Japan is studied to measure the impact of a catastrophe on the market index. Although cat bonds have traditionally been acquired by institutional investors, it is then analyzed how the product has expanded for retail investors. Several investment firms appeared in the market and specialized only on investing in Insurance-Linked Securities. Through these specialized funds, also retail investors get the opportunity to invest in cat bonds and obtain diversification benefits. Finally, I conclude with the current state of the market for catastrophe bonds. There are high barriers to entry for retail investors. Cat bonds are difficult to evaluate due to its complex structure and risks. Valuation requires expertise on the field of the reinsurance business as well as quantitative techniques. Solvency II and recent events in 2011 are expected to give the market a further boost, since cat bonds play a vital role nowadays in the risk management of governments, insurance and reinsurance companies. |
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| Autores principais: | Waldmüller, Bernhard |
| Assunto: | Alternative risk transfer Insurance-linked securities Catastrophe bonds Securitization |
| Ano: | 2011 |
| País: | Portugal |
| Tipo de documento: | dissertação de mestrado |
| Tipo de acesso: | acesso restrito |
| Instituição associada: | ISCTE |
| Idioma: | inglês |
| Origem: | Repositório ISCTE |
| Resumo: | Born in a situation of low reinsurance capacity after big catastrophes in the 90s, catastrophe bonds, also known by the name cat bonds, evolved quickly to a well-established niche investment product with a market volume of $ 15 bn outstanding bonds in 2010. This work addresses important facts about investing in cat bonds. I start by explaining why cat bonds have become so important for the whole (re)insurance industry and the complex structure of catastrophe bonds, with emphasis on the triggers. To see how the industry evaluates risks in this area I analyze the rating process of two rating companies. Furthermore I outline shortcomings in this process such as the principal-agent conflicts. I then analyze the factors that determine the spreads and the yields of catastrophe bonds. Spreads are primarily based on the modeled expected loss of a bond, but also the reinsurance cycle, type of peril and type of trigger play a role for determining the spread of an insurance-linked bond. The analyzes of the historical correlation between cat bonds and traditional assets, shows that this asset class offers diversification benefits for investors since it has low correlation with stocks, investment grade bonds and high-yield bonds. The recent earthquake in Japan is studied to measure the impact of a catastrophe on the market index. Although cat bonds have traditionally been acquired by institutional investors, it is then analyzed how the product has expanded for retail investors. Several investment firms appeared in the market and specialized only on investing in Insurance-Linked Securities. Through these specialized funds, also retail investors get the opportunity to invest in cat bonds and obtain diversification benefits. Finally, I conclude with the current state of the market for catastrophe bonds. There are high barriers to entry for retail investors. Cat bonds are difficult to evaluate due to its complex structure and risks. Valuation requires expertise on the field of the reinsurance business as well as quantitative techniques. Solvency II and recent events in 2011 are expected to give the market a further boost, since cat bonds play a vital role nowadays in the risk management of governments, insurance and reinsurance companies. |
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