Table Of ContentInsurance-linked investments have proved Key chapters focus on: A Alternative
resilient to the effects of the financial crisis. • Issuance and investment lte
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• Developments in insurance-linked products n
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Indicative of their low correlation with wider • Risk management tiv
financial risk mid- and post-crisis, investments • Portfolio optimisation e
in the (re)insurance market have multiplied and, • Structural considerations for insurance- (r (re)insurance
in tandem with this increased attention, the linked securities e
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Edited by Morton Lane, a leading industry r
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Morton Lane’s new book, Alternative expert who has been involved in the n
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(Re)insurance Strategies, captures the elements (re)insurance market for over 20 years, e
of (re)insurance that make it distinct to other Alternative (Re)insurance Strategies captures the S Strategies
capital markets. It shows how participants can decade-long transformation and expansion of tra
give their product, be that a CWIL or sidecar, the insurance-linked investment and catastrophe te
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its ‘edge’. The book encompasses the new bond market, as well as looking forward to the ie
products, attitudes and frameworks that have emerging trends and future direction of the s
been developed over the past decade, including market.
2nd Edition
side pockets, fronting and collateralised
reinsurance. This book is a focused review of the insurance
securitisation market as practised by issuers,
These insights into the market are written by direct investors and investment managers. E
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the inventors of the market themselves, as well Designed for participants both experienced and ite EditEd By Morton LAnE
as the practitioners who continue to innovate in new to the industry, it is unmatched in its depth d
this fast-growing market. and breadth. b
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Alternative (Re)insurance Strategies brings together Alternative (Re)insurance Strategies is the sequel M
the extensive knowledge and experience of to Morton Lane’s Alternative Risk Strategies, o
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renowned industry pioneers such as Richard widely acknowledged as the industry standard to
n
Sandor (Environmental Financial Products, for reinsurance professionals on its publication
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LLC), Michael Millette (Goldman, Sachs & co), in 2002. a
n
Christopher Culp (Compass Lexecon), David e
Lalonde (AIR Worldwide) and Tom Bolt (Lloyd’s This new edition is published on the 10th
of London). anniversary of the first.
PEFC Certified
this book has been
produced entirely from
sustainable papers that
are accredited as PEFC Fully Revised 10th Anniversary Edition
compliant.
www.pefc.org
Alternative (Re)insurance Strategies 2ndED_10th_spine38.indd 1 23/11/2012 17:10
Alternative (Re)insurance Strategies
Alternative (Re)insurance Strategies
Edited by Morton Lane
Published by Risk Books, a Division of Incisive Media Investments Ltd
Incisive Media
32–34 Broadwick Street
London W1A 2HG
Tel: +44(0) 20 7316 9000
E-mail: [email protected]
Sites: www.riskbooks.com
www.incisivemedia.com
© 2012 Incisive Media
ISBN 978 1 906348 89 2
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library
Publisher: Nick Carver
Editorial Development: Amy Jordan
Commissioning Editor: Sarah Hastings
Managing Editor: Lewis O’Sullivan
Designer: Lisa Ling
Copy-edited by MFE Editorial
Typeset by Tricolour Design
Printed and bound in the UK by Print On-Demand World-wide
Conditions of sale
All rights reserved. No part of this publication may be reproduced in any material form whether
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Warning: the doing of any unauthorised act in relation to this work may result in both civil
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Every effort has been made to ensure the accuracy of the text at the time of publication, this
includes efforts to contact each author to ensure the accuracy of their details at publication is
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While best efforts have been intended for the preparation of this book, neither the publisher, the
editor nor any of the potentially implicitly affiliated organisations accept responsibility for any
errors, mistakes and or omissions it may provide or for any losses howsoever arising from or in
reliance upon its information, meanings and interpretations by any parties.
Contents
About the Editor xi
About the Authors xiii
1 Introduction 1
PART I: Perspectives on the Securitisation of (Re)insurance 15
2 A History of Direct Insurance-Linked Investments 17
Tom Bolt
Lloyd’s of London
3 Good Derivatives: Why Securitisation of Insurance Risks Matters,
and More 27
Richard L. Sandor; Sylvie Bouriaux
Environmental Financial Products, LLC; Illinois State University
PART II: Developments in Insurance-Linked Products 45
4 Convergence at High Noon: Catastrophe Risk in the Capital Markets
in 2012 47
Michael J. Millette
Goldman, Sachs & Co.
5 Industry Loss Warranties 75
Erik Manning
Guy Carpenter & Company, LLC
6 Sidecars 85
André Perez
Horseshoe Group
7 Fronting for Collateralised Reinsurance Capacity 103
Kathleen Faries
Tokio Millennium Re
PART III: Issuance: Buying Protection, Raising Capital 117
8 Risk Transformation Through Capital Markets 119
Martin Bisping
Swiss Re
v
AlternAtive (re)insurAnce strAtegies
9 A Case Study of a Consistent ILS Issuer: USAA 137
Roger Beckwith; Morton Lane
Lane Financial LLC
PART IV: Agents of Issuance: the Facilitators 155
10 Issues and Issuance 157
Paul Schultz; Erin Lakshmanan
Aon Benfield Securities
11 Advances in ILS Portfolio Management Analytics 177
Peter Nakada; Dominic Smith
Risk Management Solutions, Inc.
12 Role of Catastrophe Risk Modelling in ILS 195
Brent Poliquin; David Lalonde
AIR Worldwide
PART V: Investing: Selling Protection, Providing Capital 219
13 Dedicated Hedge Funds 220
Frank Majors; Laura Taylor
Nephila Capital
14 ILS Hedge Fund Business Models 241
John Seo
Fermat Capital Management, LLC
15 Some Reflections on the ILS Market from an Institutional Investor
Perspective 257
Bernard Van der Stichele
PART VI: Reflections on ILS Structural Issues 267
16 Learning it the Hard Way: An Analysis of Cat Bond Investing Pitfalls 269
Cedric Edmonds
Solidum Partners AG
17 Some Considerations with Collateralised Reinsurance and Side Pockets 295
Luca Albertini
Leadenhall Capital Partners LLP
18 Legal and Transaction Structure Developments in ILS 315
Michael J. Pinsel; Bobbi O. Anderson
Sidley Austin, LLP ; Elementum Advisors, LLC
vi
CONTENTS
19 Solvency II and the Implications for ILS and SPVs 335
Kathryn Morgan
Fellow of the Institute of Actuaries
PART VII: Risk Management and Portfolio Considerations 357
20 The “At-Risk” Metrics and Measures 359
Christopher L. Culp
The University of Chicago Booth School of Business
21 Portfolio Optimisation with Insurance-Linked Asset Classes 393
Chris Parish; Pascal Karsenti; Adolfo Peña
Nephila Capital; Nephila Advisors
22 ILS Market-Derived Metrics: Implications for Risk Adjustment
Transforms and Capital Allocation 417
Morton Lane; Jerome Kreuser
Lane Financial LLC; RisKontroller Global
REFERENCE MATERIAL 439
i PCS Industry Loss Estimates 441
Gary Kerney
Verisk Insurance Solutions
ii The PERILS Index 451
Luzi Hitz; Eduard Held
PERILS AG
iii The Basics of Cat Bond Mathematics and ILS Pricing 461
Craig Bonder
Rochdale Securities
iv Insurance as a Second Language 469
Andrew Martin
Optex Group Ltd
DATABASES 479
Appendix I 481
Appendix II 535
Appendix III 541
Index 553
vii
For my family,
My wife Claudia and my children, Megan, David and Rhodri
