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Insurance-Linked Securities And Structured Transactions.

Capital markets participants, reinsurers, brokers and insurers continue to collaborate in various combinations to create new risk-based offerings, including:

Natural Catastrophe Bonds: An alternative to reinsurance, these securities are used by insurers to protect themselves from natural catastrophes. Typically, they pay higher yields because investors could lose their entire stake in the event of a disaster. If the catastrophe happens, the funds go to the insurer to cover claims.

Sidecars: Separate, limited purpose companies, generally formed and funded by investors (usually hedge funds) that work in tandem with insurance companies. The reinsurance sidecar purchases certain insurance policies from an insurer and shares in the profits and risks. It is a way for an insurer to share risk. If the policies have low claim rates while in possession of the sidecar, the investors will make higher returns.

Surplus Notes and Insurance Trust-Preferred CDOs: Surplus notes and trust-preferred CDOs (collateralized debt obligations) provide another funding source for small and midsize insurance companies that find it costly to issue capital on their own. These companies can access the capital markets through the use of the surplus notes/insurance trust-preferred pools. Securities in these pools are issued by a standalone SPV and sold to investors. The proceeds of the notes are used to purchase the transaction's collateral, which consists of surplus notes and insurance trust-preferred securities.

Embedded Value (Closed Block) Securitizations: An insurer can close a block of policies to new business and receive immediate cash from investors in exchange for some or all of the future earnings on that block of business. The pledged assets remain with the insurer and are potentially available in the event of an insolvency.

Securitization of Structured Settlements: A structured settlement is an annuity used for settling personal injury, product liability, medical malpractice and wrongful death cases. The defendant (typically, a liability insurer) discharges its obligation by purchasing an annuity from a highly rated life insurance company. Securitization of annuity cash flows is achieved through the use of a bankruptcy-remote SPV. The issuer of the securities, the SPV, raises funds from investors that are used to purchase annuity cash flows from the annuitants. The cash flows received by the issuer are used primarily to service the principal and interest payments due the investors.

Mortality Catastrophe Bonds: Investors in these bonds lose money only if a level of deaths linked to a catastrophic event exceeds a certain threshold. The event's trigger is extreme (for example, a pandemic). These are a derivative of natural cat bonds.
Life and Non-Life Reinsurance
Gross Premiums Written Distribution by Ranking

Rank  1-10         68.6%
Rank 11-20         16.0%
Rank 21-30          7.6%
Rank 31-40          5.0%
Rank 41-50          2.8%

Source: A.M. Best data and research

Life Settlement Securitizations: A life settlement contract is a way for a policyholder to liquidate a life insurance policy. A portfolio of these contracts may be securitized to provide a source of capital. However, certain variables, such as regulatory issues and the uncertainties associated with predicting life expectancies, can create obstacles that may slow their path to the marketplace.

Securitization of Reinsurance Recoverables: Insurance and reinsurance companies have been finding alternative ways to reduce their exposure to uncollectible recoverables and reduce the concentration risk associated with ceded exposures. One approach is the securitization of reinsurance recoverables, which involves a structured debt instrument that transfers risk associated with the risk of uncollectible reinsurance to the capital markets. This risk transfer may also be accomplished through the use of collateralized debt obligation (CDO) technology.
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Publication:Best's Review
Date:Nov 1, 2017
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