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

By Cummins, J. David; Weiss, Mary A. | Journal of Risk and Insurance, September 2009 | Go to article overview

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


Cummins, J. David, Weiss, Mary A., Journal of Risk and Insurance


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.

INTRODUCTION

One of the most significant economic developments of the past quarter century has been the convergence of the previously separate segments of the financial services industry. Convergence has coincided with the increasing globalization of the financial services sector and has been facilitated by the deregulation of financial markets in Europe, the United States, and Asia. The development of dynamic financial markets for derivatives and other innovative securities as well as advances in computer, modeling, and telecommunications technologies have accelerated convergence. An important factor driving convergence is the increasing focus on shareholder value maximization by corporations worldwide. Convergence has also occurred in retail markets with bancassurance gaining significant market share in many countries.

Convergence has been somewhat slower to develop in the market for risk transfer within the property-liability insurance industry, a market traditionally dominated by reinsurance. In part, this is attributable to the informational opacity of insurance markets, where underwriting information is carefully guarded and market participants earn rents by exploiting private information. Insurance markets are also especially susceptible to informational asymmetries between buyers and insurers and between insurers and reinsurers, raising transactions costs and inhibiting financial innovations that require transparency. The inherent conservatism of insurance companies and the resulting market inertia also play a role in impeding convergence.

Powerful economic forces have combined in recent years to accelerate convergence between the property-liability insurance and financial markets. The first and perhaps most important driver of convergence is the growth in property values in geographical areas prone to catastrophic risk. Trillions of dollars of property exposure exist in disaster prone areas in the United States, Europe, and Asia, resulting in sharp increases in insured losses from property catastrophes. In 1992, Hurricane Andrew caused unprecedented losses of $24 billion (2007 dollars). This event was dwarfed by the losses in 2005, when Hurricanes Katrina, Rita, and Wilma (KRW) and other events combined to cause insured losses of $114 billion (Swiss Re, 2008). Such losses are very large relative to the total equity capital of global reinsurers (Guy Carpenter, 2008) but represent less than half of I percent of the value of U.S. stock and bond markets. The recognition that it is more efficient to finance this type of risk in securities markets has led to the development of innovative financial instruments such as catastrophic risk (Cat) bonds and options.

The second major driver of convergence is the reinsurance underwriting cycle. It is well known that reinsurance markets undergo alternating periods of soft markets, when prices are relatively low and coverage is readily available, and hard markets, when prices are high and coverage supply is restricted. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

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

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.