Convergence of Insurance and Financial Markets: Hybrid and Securitized Risk‐Transfer Solutions

Abstract

One of the most significant economic developments of the past decade has been the convergence of the financial services industry, particularly the capital markets and (re)insurance sectors. Convergence has been driven by the increase in the frequency and severity of catastrophic risk, market inefficiencies created by (re)insurance underwriting cycles, advances in computing and communications technologies, the emergence of enterprise risk management, and other factors. These developments have led to the development of hybrid insurance/financial instruments that blend elements of financial contracts with traditional reinsurance as well as new financial instruments patterned on asset-backed securities, futures, and options that provide direct access to capital markets. This article provides a survey and overview of the hybrid and pure financial markets instruments and provides new information on the pricing and returns on contracts such as industry loss warranties and Cat bonds. Copyright (c) The Journal of Risk and Insurance, 2009.

African Stock Market Performance Dynamics: A Multidimensional Convergence Assessment

“…Section 3.2 above on the literature of financial market convergence and African business has already substantially covered reforms that are necessary to improve cross-border flow of investment and hence, ease the doing of business in the continent. It could also be worthwhile to consider the drivers of financial market convergence suggested by Cummins & Weiss (2009). Firstly, development of holistic or enterprise-wide risk management (ERM), whereby traditionally separated functions such as the management of insurable risks, commodity risks, currency risks, interest rate risks and other risks begin to merge under a single risk-management umbrella.…”

Reinsurance or securitization: The case of natural catastrophe risk

“…and more diversified. The financial markets' cost of capital is low for two reasons: (i) margin requirements in financial markets differ from equity investments in reinsurance companies in not involving the agency problems that raise the cost of external capital 3 ; (ii) natural catastrophe risk has had low correlation with aggregate wealth (Cummins and Weiss, 2009).…”

“…Because financial markets can draw on a larger, more liquid and more diversified pool of capital than the equity of reinsurance companies, they should have a strong advantage over reinsurance in financing catastrophe risk (Durbin, 2001). Cummins and Weiss (2009) document the growing use of securitization in financial markets to transfer catastrophe risk. They provide evidence of market takeoff, especially as regards catastrophe bonds.…”

An Industrial Organization Theory of Risk Sharing

“…6 structure, we can assume that governments have the worst underwriting ability because they are not in the business of selling insurance (see Lewis and Murdock, 1996). 4 A similar argument can be made about insurance-linked securities (see Albertini andBarrieu, 2009, andWeiss, 2009 would be so), they must be designed to be as efficient as possible. The model we develop in this paper addresses exactly the situation of a public policymaker who seeks to structure the insurance/reinsurance market to minimize the total cost of insuring a catastrophic loss.…”

“…We acknowledge that there are many types of financial products that can replicate reinsurance. Albertini and Barrieu (2009) and Cummins and Weiss (2009) provide examples of insurance-linked securities and financial instruments that can adequately replace, in some instances, an excess-of-loss or a proportional reinsurance contract.…”