Does Reinsurance Need Reinsurers?

The reinsurance market is the secondary market for insurance risks. It has a very specific organization. Direct insurers rarely trade risks with each other. Rather, they cede part of their primary risks to specialized professional reinsurers who have no primary business. This article offers a model of equilibrium in reinsurance and capital markets in which professional reinsurers arise endogenously. Their role is to monitor primary insurers credibly, so that insurers can raise capital more easily. In equilibrium, the financial structure of primary insurers consists of a mix of reinsurance and outside capital. The comparative statics yield empirical predictions which are broadly in line with a number of stylized facts from the reinsurance market.     

巨灾风险证券化中的操作风险及其控制途径

巨灾风险证券化是把巨灾保险风险转化为衍生证券,销售给金融市场上的投资者,以此实现巨灾保险风险向资本市场的分散转移。但受信息不对称、触发机制等因素影响,巨灾风险证券化这种复杂的技术手段也会引起一些操作风险,如道德风险、基差风险、信用风险等。通过完善信息披露机制、合理选择触发方式、强化巨灾证券的交易保证金要求、加强监管等措施,可以有效地降低巨灾风险证券化过程中的各种风险,促进其平稳健康发展。     

AN ECONOMIC APPRAISAL OF SECURITIZING INSURANCE RISK VIA ONSHORE SPECIAL PURPOSE VEHICLES

ABSTRACT: The increased risk from natural disasters in the United States has prompted innovations in alternative forms of risk transfer and financing. Among the mechanisms that have been developed are Special Purpose Reinsurance Vehicles (SPRVs) designed to hold and segregate funds supporting a risk securitization. SPRVs have been principally formed outside the United States for tax and regulatory reasons. The National Association of Insurance Commissioners (NAIC) and the states are considering proposed model legislation that will facilitate the formation of SPRVs in the United States. Proponents also will be seeking federal tax legislation that will facilitate onshore securitization. This article examines important economic and tax issues involved with onshore SPRVs. The authors conclude that properly regulated onshore securitization vehicles could aid the diversification of high-layer catastrophe risks and other risks with similar characteristics. The proposed tax changes may create a modest inequity between special purpose vehicles and traditional reinsurers, depending on one's perspective. However, if governed by an appropriate tax and regulatory framework, onshore securitization used for appropriate purposes should benefit consumers and not erode the demand for conventional reinsurance for the types of risks it is best suited to manage.     

资产证券化的风险及其防范与化解

资产证券化业务是国际资本市场发展最快、最具活力的一种金融产品,它以其独特的筹资方式而具有高效的融资功能,同时也存在巨大的市场风险。随着我国资本市场的不断成熟,我国也开始试点,由于在经济环境、法律框架等方面的限制,我国实施资产证券化业务还面临许多障碍,为此我们必须加强对其风险的防范并采取有效的措施化解风险,不断完善我国资产证券化的模式和相关政策,使风险降到最小。     

Credit Card Securitization and Regulatory Arbitrage

This paper explores the motivations and desirability of off-balance sheet financing of credit card receivables by banks. We explore three related issues: the degree to which securitizations result in the transfer of risk out of the originating bank, the extent to which securitization permits banks to economize on capital by avoiding regulatory minimum capital requirements, and whether banks' avoidance of minimum capital regulation through securitization with implicit recourse has been undesirable from a regulatory standpoint. We show that regulatory capital arbitrage is an important consequence of securitization. The avoidance of capital requirements could be motivated either by efficient contracting or by safety net abuse. We find that securitizing banks set their capital relative to managed assets according to market perceptions of their risk, and seem not to be motivated by maximizing implicit subsidies relating to the government safety net when managing their risk. This evidence is more consistent with the efficient contracting view of securitization with implicit recourse than with the safety net abuse view.     

The Shareholder Wealth Effects of Insurance Securitization: Preliminary Evidence from the Catastrophe Bond Market

Insurance securitization has long been hailed as an important tool to increase the underwriting capacity for companies exposed to catastrophe-related risks. However, global volumes of insurance securitization have remained surprisingly low to date which raises questions over its benefits. In this paper, we examine changes in the market value of insurance and reinsurance firms which announce their engagement in insurance securitization by issuing catastrophe (Cat) bonds. Consistent with the hitherto underwhelming contribution of Cat bonds to global catastrophe coverage, we do not find evidence that Cat bonds lead to strong wealth gains for shareholders in the issuing firm. More importantly, we report large variations in the distribution of wealth effects in response to the issue announcement. We show that the wealth effects for shareholders in firms which issue Cat bonds appear to be driven by explanations according to which Cat bonds offer cost savings relative to other forms of catastrophe risk management (and less by the potential of Cat bonds to hedge catastrophe risk). Thus, abnormal returns are particularly large for issues by firms which face low levels of loss uncertainty (which reduces the information acquisition costs in financial markets) as well as for issues during periods when prices for catastrophe coverage (including Cat bonds) are low.     

Risk Management, Capital Budgeting, and Capital Structure Policy for Insurers and Reinsurers

This article builds on Froot and Stein in developing a framework for analyzing the risk allocation, capital budgeting, and capital structure decisions facing insurers and reinsurers. The model incorporates three key features: (i) value‐maximizing insurers and reinsurers face product‐market as well as capital‐market imperfections that give rise to well‐founded concerns with risk management and capital allocation; (ii) some, but not all, of the risks they face can be frictionlessly hedged in the capital market; and (iii) the distribution of their cash flows may be asymmetric, which alters the demand for underwriting and hedging. We show these features result in a three‐factor model that determines the optimal pricing and allocation of risk and capital structure of the firm. This approach allows us to integrate these features into: (i) the pricing of risky investment, underwriting, reinsurance, and hedging; and (ii) the allocation of risk across all of these opportunities, and the optimal amount of surplus capital held by the firm.     

Integrated Risk Management and the Role of the Risk Manager

ABSTRACT: Although the transferring of a firm's pure risk historically has been conducted through the insurance and reinsurance markets, risk managers of large corporations are reportedly becoming more sophisticated with regard to their risk financing strategies. This increased sophistication has come in the form of greater use of techniques such as captives, finite risk insurance, financial reinsurance, and risk retention groups. The purpose of this study is to assess the characteristics and extent of integrated risk management. Using survey data, we evaluate several aspects of risk management integration, including (1) the extent to which risk managers are involved in managing both pure and financial risks facing their firms, (2) the nonoperational types of risks handled by risk managers and the techniques being used to handle a broader set of risks, and (3) the effect that factors such as the size of the firm, the firm's industry, and the background and training of the risk manager has on participation in integrated risk management activities.     

Market Price of Insurance Risk Implied by Catastrophe Derivatives

Abstract

Insurance derivatives facilitate the trading of insurance risks on capital markets, such as catastrophe derivatives that were traded on the Chicago Board of Trade. Simultaneously, insurance risks are traded through reinsurance portfolios. In this paper we make inferences about the market price of risk implied by the information embedded in the prices of these two assets.     

Nonlife actuarial models,theory, methods and evaluation by Yiu-Kuen Tse

We consider two different portfolios of proportional reinsurance of the same pool of risks. This contribution is concerned with Gaussian-like risks, which means that for large values the survival function of such risks is, up to a multiplier, the same as that of a standard Gaussian risk. We establish the tail asymptotic behavior of the total loss of each of the reinsurance portfolios and determine also the relation between randomly scaled Gaussian-like portfolios and unscaled ones. Further, we show that jointly two portfolios of Gaussian-like risks exhibit asymptotic independence and their weak tail dependence coefficient is nonnegative.     

WHERE'S THE CAT GOING? SOME OBSERVATIONS ON CATASTROPHE BONDS

This article provides an assessment of the current state of the market for catastrophe (or "Cat") bonds. Given the changes in insurance markets since September 11th, the demand for Cat bonds is likely to increase. For issuers, Cat bonds have the effect of transferring risks to the capital markets that would normally be underwritten by insurance or reinsurance companies. And as a substitute for insurance, Cat bonds have the potential to help issuers address problems such as lack of capacity and real risk transfer, cyclicality, and credit risk that are commonly associated with insurance and reinsurance markets. Investors value Cat bonds in part because of their low correlations with stocks and conventional bonds. Notable trends in the structuring of the products involve higher levels of risk transfer, longer-term contracts, and linkage to a portfolio of catastrophic risks.     

Capital, corporate income taxes, and catastrophe insurance

We provide estimates of the equity capital needed and the resulting tax costs incurred when supplying catastrophe insurance/reinsurance using a partial equilibrium model that incorporates a specific loss distribution for US catastrophe losses. After consideration of insurer investment in tax-exempt securities, tax loss carry-back/forward provisions, and personal taxes, our results imply that the tax costs of equity finance alone have a substantial effect on the cost of supplying catastrophe reinsurance. These results help explain a variety of industry developments that reduce tax costs. Also, when coupled with non-tax costs of capital, these results help explain the limited scope of catastrophe insurance/reinsurance.     

Financial Innovation in the Management of Catastrophe Risk

Like the preceding article, this article argues that the high costs of reinsurance present the opportunity for hedging instruments to be offered to primary insurers that are both competitive with current reinsurance and that offer investors high rates of return. But the combination of high reinsurance premiums and the vast capacity of the capital market for diversification is not sufficient to ensure the success of these new instruments. If new instruments such as catastrophe options and catastrophelinked bonds are to compete successfully with reinsurance, they must provide a cost-effective means of resolving incentive conflicts between the primary insurer and the ultimate risk bearer that are known as "moral hazard." Without an effective solution of this moral hazard problem, the use of past insurance loss data to estimate the potential returns for purchasers of catastrophe bonds and other such instruments will be misleading and unreliable.
As the author demonstrates, both traditional reinsurance and each of the new catastrophe hedging instruments presents insurance companies and other hedgers with the challenge of managing a different combination of moral hazard, credit risk, and basis risk. For example, traditional catastrophe reinsurance is subject to significant credit risk and moral hazard, but little if any basis risk. By contrast, both catastrophe options and bonds can be designed in ways that reduce moral hazard and credit risk, but at the cost of taking on some basis risk. The risk manager's task in such circumstances is to design an instrument that embodies the optimal, or cost-minimizing, trade-off among these three sources of risk.     

Optimal Reinsurance Under the Risk-Adjusted Value of an Insurer’s Liability and an Economic Reinsurance Premium Principle

In this article, an optimal reinsurance problem is formulated from the perspective of an insurer, with the objective of minimizing the risk-adjusted value of its liability where the valuation is carried out by a cost-of-capital approach and the capital at risk is calculated by either the value-at-risk (VaR) or conditional value-at-risk (CVaR). In our reinsurance arrangement, we also assume that both insurer and reinsurer are obligated to pay more for a larger realization of loss as a way of reducing ex post moral hazard. A key contribution of this article is to expand the research on optimal reinsurance by deriving explicit optimal reinsurance solutions under an economic premium principle. It is a rather general class of premium principles that includes many weighted premium principles as special cases. The advantage of adopting such a premium principle is that the resulting reinsurance premium depends not only on the risk ceded but also on a market economic factor that reflects the market environment or the risk the reinsurer is facing. This feature appears to be more consistent with the reinsurance market. We show that the optimal reinsurance policies are piecewise linear under both VaR and CVaR risk measures. While the structures of optimal reinsurance solutions are the same for both risk measures, we also formally show that there are some significant differences, particularly on the managing tail risk. Because of the integration of the market factor (via the reinsurance pricing) into the optimal reinsurance model, some new insights on the optimal reinsurance design could be gleaned, which would otherwise be impossible for many of the existing models. For example, the market factor has a nontrivial effect on the optimal reinsurance, which is greatly influenced by the changes of the joint distribution of the market factor and the loss. Finally, under an additional assumption that the market factor and the loss have a copula with quadratic sections, we demonstrate that the optimal reinsurance policies admit relatively simple forms to foster the applicability of our theoretical results, and a numerical example is presented to further highlight our results.     

风险证券化的会计与税收问题研究——特定目的再保险机构(SPRVs)的视角

缺乏合理而明确的会计处理方法和税收待遇是影响在岸SPRVs和风险证券化发展的主要原因。进入新世纪以来,美国一直在试图改进对SPRVs的会计处理和税收待遇,但因各方意见不一而进展缓慢。本文回顾了相关政策的发展演变,在对SPRVs的本质属性进行深入剖析的基础上,指出风险证券化是传统再保险的补充方式,SPRVs是一类新型的再保险主体,应该为SPRVs和风险证券化建立与传统再保险相一致的会计处理方法和税收待遇。     

Does Regulatory Capital Arbitrage, Reputation, or Asymmetric Information Drive Securitization?

Banks can choose to keep loans on balance sheet as private debt or transform them into public debt via asset securitization. Securitization transfers credit and interest rate risk, increases liquidity, augments fee income, and improves capital ratios. Yet many lenders still retain a portion of their loans in portfolio. Do lenders exploit asymmetric information to sell riskier loans into the public markets or retain riskier loans in portfolio? If riskier loans are indeed retained in portfolio, is this motivated by regulatory capital incentives (regulatory capital arbitrage), or a concern for reputation? We examine these questions empirically and find that securitized mortgage loans have experienced lower ex-post defaults than those retained in portfolio, providing evidence consistent with either the capital arbitrage or reputation explanation for securitization.     

Internal Versus External Capital Markets in the Insurance Industry: The Role of Reinsurance

This study compares internal and external sources of capital in the insurance industry by analyzing reinsurance activity between affiliated and unaffiliated insurers. Tests are performed using data from a large sample of property-liability insurers that are affiliated with at least one other property-liability insurer. Results indicate that while demands for internal and external reinsurance have some factors in common, there are cost-based differences in internal and external capital, as well as structural differences in the use of internal and external reinsurance. Results are consistent with previous theories related to internal versus external capital markets.     

贷款证券化、监管资本套利与资本监管改进

巴塞尔协议的资本充足率指标可以反映银行部门吸收风险损失的能力,但是无法监测和控制银行体系外的贷款总额和累积的信用风险。20世纪70年代的贷款证券化创新导致银行进行监管资本套利,并使得资本充足率监管趋于失效。本文基于贷款证券化下银行贷款余额与社会贷款余额的差异,分析银行监管资本套利的微观机制并提出改进资本监管的建议。     

Catastrophe Bonds,Reinsurance, and the Optimal Collateralization of Risk Transfer

Catastrophe bonds feature full collateralization of the underlying risk transfer and thus abandon the reinsurance principle of economizing on collateral through diversification of risk transfer. Our analysis demonstrates that this feature places limits on catastrophe bond penetration, even if the structure possesses frictional cost advantages over reinsurance. However, we also show that catastrophe bonds have important uses when buyers and reinsurers cannot contract over the division of assets in the event of insolvency and, more generally, cannot write contracts with a full menu of state‐contingent payments. In this environment, segregation of collateral—in the form of multiple reinsurance companies, as well as catastrophe bond vehicles—can ameliorate inefficiencies due to reinsurance contracting constraints by improving welfare for those exposed to default risk. Numerical simulation illustrates how catastrophe bonds improve efficiency in market niches with correlated risks, or with uneven exposure of buyers to reinsurer default.     

住房抵押贷款证券化的法律风险研究

住房抵押贷款证券化是一项结构复杂的金融创新,涉及诸多法律问题。本文结合我国住房抵押贷款证券化的金融生态环境,探讨了投资者面临的假按揭风险、抵押物处置风险和房贷险等法律问题,提出了完善相关法律金融制度的建议。