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How insurance risk is transformed into investable assets

riskvest.io

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Re: How insurance risk is transformed into investable assets

#31

Post by jbs789 »

nilirl wrote: post #24

So, did the Covid 19 pandemic force multiple insurance companies into insolvency? Also, what does new product development look like for industries like this? How does one search for new financial products? Is it possible for a non-expert to come up with new products in this space? Are there any books you can recommend for a novice?

The impact was nuanced, and depended on the specific policies in place.

Some businesses had business interruption insurance which paid out. Many policies exclude highly correlated events such as pandemics.

And then think about specific events which were cancelled, which may have bought policies protecting them if cancelled.

And of course life insurance and health care would have been affected.

SwissRe often produces public reports in the space if of interest:

https://www.swissre.com/risk-knowledge/building-societal-res...

Re: How insurance risk is transformed into investable assets

#32

Post by Zenst »

antasvara wrote: post #4

There are a lot of interesting dynamics in this market. For example, CAT bonds are generally tied to the specific natural hazard ("this bond triggers if a hurricane of Category 3 or higher land falls in this segment of Florida") or to industry losses, as estimated by an agreed upon source. This means that a CAT bond is correlated with, but not directly informed by an insurer's actual loss experience. Traditional rein…

Having worked on reinsurance software in the 90s, one question that springs to mind, which came to light from the asbestos claims era, was brokers commission. What did happen was brokers would package up risks and sell those off (taking commission) which would see other brokers bundle those up and again package them and others up into a bundle and sell those off. So when a claim came down the line, that was huge, like the asbestos claim in period https://en.wikipedia.org/wiki/Lloyd%27s_of_London which saw such a diluted risk and brokers commission leaching all profit, brought many down financially due to exposure.

So interested how things are today regarding brokers endlessly packaging up risks they sell on, rinse repeat. I'm aware of certain changes that came about to reinsurance brokers in both the Lloyds and London Markets on the back of the asbestos claim era, but not sure of the the CAT model risks/insurance regarding brokers endlessly packaging up to offset risk exposure vs regulations limiting how much they can do that - more so the USA market.

So curious - is there a risk from brokers diluting risks for commission profits in this market or is that saftly covered against and regulated?

Re: How insurance risk is transformed into investable assets

#33

Post by richardfey »

itake wrote: post #21
bawolff wrote: post #18

Earlier quoted context omitted.

> But if you buy a bundle of CAT bonds that focus on say California Earthquake, Florida Hurricane, Japanese Typhoon, and a Cyber Event, you can imagine the diversification benefit you get there. Yeah, but imagine how bad a day you're having if all of those disasters happen at once, and then as a cherry on top you lose all your money.

Yeah, it seems like you’d want to buy bonds that covers areas that you’re not personally in…

Why? It's not like you can influence the trigger of any such catastrophe

Re: How insurance risk is transformed into investable assets

#35

Post by pm215 »

richardfey wrote: post #33
itake wrote: post #21

Earlier quoted context omitted.

Yeah, it seems like you’d want to buy bonds that covers areas that you’re not personally in…

Why? It's not like you can influence the trigger of any such catastrophe

Same principle as why many people prefer not to own shares in the company that employs them -- you're already heavily exposed to that specific risk and don't want to add more. If you live in Florida then a hurricane in Florida already might mean financial loss for you if it damages your house, so buying a CAT bond that covers a different thing is more diversified risk: you might get "house is trashed" or "bond is total loss" but at least you probably will not get both at once.

Re: How insurance risk is transformed into investable assets

#36

Post by rrjjww »

rkagerer wrote: post #17
rrjjww wrote: post #5

Blown away by the traffic from this post! For the web designers here please let me know if you noticed anything amiss. Ive had particular issues getting captchas working so please comment if you run into that issue.

Thanks for sharing your insight. Wouldn't hurt from a proofread. There are some typos / wrong words, that detract from the sense of authority lent by the article. Eg: "It's clear that we this structure" --> with "with out those protections in place" --> without "Investors would be best to limit their exposer to losses beyond their investment" --> exposure There might have been others, I had to go back and skim to sum…

Thank you! No matter how many times I read things over I managed to leave a few behind. I will make those edits shortly.

Re: How insurance risk is transformed into investable assets

#37

Post by rrjjww »

nilirl wrote: post #24

So, did the Covid 19 pandemic force multiple insurance companies into insolvency? Also, what does new product development look like for industries like this? How does one search for new financial products? Is it possible for a non-expert to come up with new products in this space? Are there any books you can recommend for a novice?

While Covid 19 was certainly a "Catastrophe", the market for pandemic insurance in 2020 was minuscule and to my knowledge did not cause any insurer solvency issues. There were a few cases of insurers being instructed to pay out significant claims by the courts on Business Interruption losses which the insurers argued were not covered due to existing policy exclusion.

Product development is usually highly specialized as there are a lot of nuances and frictions within the insurance industry that outsiders may not fully understand. It helps also to be in the industry and have the network with insurers, reinsurers, brokers, etc. This is not at all to suggest there isn't room for clever people to bring innovation to the market though!

Book recs are hard to specify for CAT bonds but for insurance in general:

Against the Gods: The Remarkable Story of Risk - Peter L. Bernstein

The Black Swan - Nassim Nicholas Taleb

On the Brink: How a Crisis Transformed Lloyd's of London - Andrew Duguid

The last one is a personal favourite of mine

Re: How insurance risk is transformed into investable assets

#39

Post by rrjjww »

OgsyedIE wrote: post #10

Would you consider a followup post about reinsurance assets targeted to derisk potential systemic or liquidity risks in the entire CAT bond market?

I'm not aware that these currently exist but the concept of reinsurance on reinsurance is not new (it's called retrocession). I will do some digging and see what I can find - thanks for the suggestion.
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