Swiss Re’s new sigma study – Securitizations,” also called “insurance linked securities (ILS),” notes that they “provide insurers with a financing vehicle and a means of transferring risks to the capital market,” increase industry capacity, improve insurers’ return on equity, and reduce the volatility of earnings. They also offer investors an attractive rate of return, and the costs of setting them up “are coming down as the market grows rapidly.”
ILS volume has grown “three-fold over the last five years,” Swiss Re found, “and is now close to $23 billion. Of this, two-thirds or $15 billion are life bonds, and the remaining $8 billion non-life.” The study discusses both “life” bonds and “cat bonds.”
It notes that most catastrophe or “cat bonds” transfer P/C insurers’ peak risks from wind and earthquake to the capital markets. “They complement, and in some cases substitute for, other risk and capital management tools. Cat bonds represent about 85 percent of the current outstanding volume of non-life bonds. The remaining 15 percent is split between liability, credit, auto, and other miscellaneous risks.”
The study also indicates that “cat bonds yield a higher return than corporate bonds with the same rating, yet show less year-over-year volatility. The investor base for cat bonds has been expanding: in addition to insurance and reinsurance companies, more dedicated cat funds, hedge funds and traditional money managers are buying them.”
The full report and analysis is available on the Company’s Web site at: www.swissre.com.
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