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RISKS, RE-INSURANCE & CAT

BOND
Presented by :

Sharaneeshwar M C 41
Vinir Shah C 54
Ashish Srivastava C 17
Alisha Kaushal C 05
Anurag Shukla C 09
Types of Risks in Insurance

▸Sharaneeshwar M - C 41
▸Vinir Shah - C 54
Risks
▸Operational Risk
▸Investment Risk
▸Insurance Risk
▸Strategic Risk
Operational Risk
Cyber Security Risk

IT / Systems / Technology Gap

Legislative & Regulatory


“ Investment Risk
Investment Market Risk
Insurance Risk
▸Pricing & Product Line Profit

▸Natural Catastrophe
Strategic Risks
▸Competition

▸Strategic Direction /
Opportunities Missed
RE-INSURANCE AND ITS TYPES

▸ASHISH SRIVASTAVA – C-17


WHAT IS RE INSURANCE?
WHAT IS RE INSURANCE?
Insurance Companies

Re Insurance Companies
Insurance Policy Holders

GIC-Re
ITI Re

Transfer of Risk
WHY RE INSURANCE?

▸Reinsurance boosts Insurance Business


▸Reinsurance Increases Goodwill of Insurer
▸Reinsurance Stabilizes premium Rates
▸Reinsurance Reduces profit fluctuations
TYPES OF RE INSURANCE CONTRACTS
Reinsurance – Alternate Source of
Capital
ALISHA KAUSHAL – C 05
Sources of Alternate Capital in Reinsurance

Types of Alternative Capital:


•Cat bonds (Insurance linked securities – ILS)

•Collateralised Re insurance

•Reinsurance Side Cars

•Industry Loss Warranties


Need for alternative capital

For topline growth - Low reinsurance pricing because of


low catastrophic activities

Global alternative capital is estimated at $595 billion at


the end of 2016. This is an increase of 5% from 2015
with an annual growth of 4% since 2007.
Growth of alternative Capital
• Cat bonds – introduced in 1990s
• The demand for reinsurance increased in 2005 due to
a series of catastrophes like Hurrican Katrina, Rita and
Wilma.
• First growth period in Cat bonds from 2005-07 – Boom
• Second Phase – Decline from 2008-2010
• Third Phase – Explosive growth 2011- 2016
• At the end of 2016, alternative capital was pegged at
$76 billion and was made up of the following
components:
• $ 39 billion in collateratlised reinsurance
• $25 billion in cat bonds
• $ 8 billion in sidecars (represented one of the
largest growth rate)
• $4 billion in ILWs
CAT BONDS

ANURAG SHUKLA – C 09
•Major category of insurance-linked securities or ILS.
•Purpose: to crowd-source reinsurance coverage, in order to
reduce reinsurers’, insurers’, and self-insurers’ reserve
requirements and reduce their cost of coverage.
•Created in the mid-1990s after
•Despite extremely poor credit ratings (typically BB or B-
equivalent to non-investment-grade junk bonds) for their
high risk, these bonds are attracting investors because :
1. risks they cover are virtually uncorrelated with other
risks such as equity market risk, interest rate risk, and
credit risk.
2. rates of return have averaged in the range of 7-9%
annually since 2002 with little volatility(2-3% higher than
those of comparably-rated high-yield corporate bonds).
Mechanics of CAT Bond
Participants
1. Issuers : reinsurers and insurers such as Munich Re, Swiss Re, USAA, AIG, Aetna,
Chubb, and Berkshire Hathaway, but can also be a government entity, corporation
2. Structuring agents : assist the issuer in selecting the trigger type and the level of
protection. Ex: Swiss Re Capital Markets, Deutsche Bank Securities, Goldman Sachs,
Aon Benfield Securities, and Towers Watson Capital Markets
3. Modeling agents: Estimates the risk of the catastrophe bond. Three main modeling
agents, Risk Management Solutions, Inc. (RMS), AIR Worldwide, and Eqecat.
4. Ratings agencies : Both Standard & Poors (S&P) and A. M. Best rate CAT bonds.
5. Performance index compilers : rates of return on investment over historical time
periods. These computations are performed regularly by Swiss Re and Aon Benfield
to present their Swiss Re Global CAT Bond Index and Aon Benfield ILS Indices,
respectively.
6. Investors : institutional investors such as pension funds, endowment funds and
hedge funds. Institutional investors that invest directly include such entities as
TIAA-CREF, the academic and nonprofit organization retirement fund manager,
Ontario Teachers fund, and hedge funds like DE Shaw and AQR.
Trigger Types
1. Indemnity trigger: covers actual excess claims paid by
issuer
2. Industry loss trigger: coverage based on whole-industry
losses on the extreme event)ex.: Property claim services or
PCS in U.S.A.)
3. Parametric trigger: coverage based on exceedance of
specified natural parameters)i.e. magnitude of earthquake
or wind speed of hurricane)
4. Modeled trigger: coverage based on claims estimated by a
computer model
78% increase on 2016 cat bond issuance of just slightly over $7 billion and
38% higher than the previous record, of just over $9 billion in 2014.
THANKS!
27

References
▸https://blog.willis.com/2017/01/2017-most-dangerous-risks-for-
insurers/
▸http://www.milliman.com/uploadedFiles/insight/2017/alternative-
capital-shaping-global-insurance.pdf
▸https://www.iii.org/sites/default/files/docs/pdf/paper_alternativecapit
al_final.pdf
▸https://www.irdai.gov.in/ADMINCMS/cms/NormalData_Layout.aspx?p
age=PageNo1687&mid=3.3.6
▸https://timesofindia.indiatimes.com/business/india-business/Five-
reinsurers-get-final-licence/articleshow/56263994.cms
▸http://www.policyholder.gov.in/uploads/CEDocuments/Annual%20Rep
ort%202015-16.pdf

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