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The Handbook of Insurance-Linked Securities


Luca Albertini and Pauline Barrieu are to be congratulated on this volume. Written in a period where structured projects in finance are having a difficult time, it is worthwhile to return to the cradle of securitisation: insurance. Spread out over three parts (life, non- life, and tax and regulatory issues) the 26 chapters, written mainly by practitioners, give an excellent overview of this challenging field of modern insurance. Methodology and examples nicely go hand in hand. The overall slant being towards actual analyses of concrete products. No doubt this book will become a milestone going forward for actuarial students, researchers, regulators and practitioners alike.
Paul Embrechts, Professor of Mathematics and Director of RiskLab, ETH Zurich

The convergence of insurance with the capital markets has opened up an alternative channel for insurers to transfer risk, raise capital and optimize their regulatory reserves as well as offering institutions a source of relatively liquid investment with limited correlation with other exposures. One of the financial instruments allowing for the cession of insurance-related risks to the capital markets is Insurance-Linked Securities (ILS).

This book provides hands-on information essential for market participants, drawing on the insights and expertise of an impressive team of international market players, representing the various aspects and perspectives of this growing sector.

The book presents the state of the art in Insurance-Linked Securitization, by exploring the various roles for the different parties involved in the transactions, the motivation for the transaction sponsors, the potential inherent pitfalls, the latest developments and transaction structures and the key challenges faced by the market.

The book is organized into parts, each covering a specific topic or sector of the market. After a general overview of the ILS market, the Insurance-Linked Securitization process is studied in detail. A distinction is made between non-life and life securitization, due to the specificities of each sector. The process and all the actors involved are identified and considered in a comprehensive and systematic way. The concepts are first looked at in a general way, before the analysis of relevant case studies where the ILS technology is applied.

Particular focus is given to:

  • the key stages in both non-life and life securitizations, including the general features of the transactions, the cedant's perspectives, the legal issues, the rating methodologies, the choice of an appropriate trigger and the risk modeling,
  • the particular challenges related to longevity securitization,
  • the investor's perspective and the question of the management of a portfolio of ILS, the general issues related to insurance-linked securitization, such as accounting and tax issues, regulatory issues and solvency capital requirements.

The book is accompanied by a website which will feature updates and additions to the various contributions to follow market developments.

Dr PAULINE BARRIEU is a Reader (associate professor) at the London School of Economics. She has two PhDs in Mathematics and in Finance. Her research interests are mainly on the study of problems at the interface between finance and insurance, in particular ILS. She also works on quantitative methods for risk measurement and robust decision taking, with applications in finance and environmental economics.

LUCA ALBERTINI is Chief Executive Officer of Leadenhall Capital Partners, an asset management company dedicated to insurance linked investments strategies. Luca has over 16 year’s securitisation experience, having worked at Citibank, GE Capital, Credit Suisse First Boston and at Swiss Re, where he became responsible for the European Insurance Linked Securities team.

About the Contributors.


1 Introduction (Pauline Barrieu and Luca Albertini).


2 Non-life Insurance Securitisation: Market Overview, Background and Evolution (Jonathan Spry).

2.1 Market overview.

2.2 Market dynamics.

2.3 The question of basis risk remains.

2.4 ILS and the credit crunch.

3 Cedants' Perspectives on Non-life Securitization.

3A Insurance-linked securities as part of advanced risk intermediation (Insa Adena, Katharina Hartwig and Georg Rindermann).

3B Reinsurance vs Securitisation (Guillaume Gorge

3C Securitisation as a diversification from traditional retrocession (Jean-Luc Besson).

4 Choice of Triggers (Dominik Hagedorn, Christian Heigl, Andreas M¨uller and Gerold Seidler).

4.1 General aspects.

4.2 Indemnity triggers.

4.3 Non-indemnity triggers.

4.4 Choosing the optimal trigger.

5 Basis Risk from the Cedant’s Perspective (David Ross and Jillian Williams).

5.1 Introduction.

5.2 Investor vs sponsor risk.

5.3 Trigger types.

5.4 Catastrophe models.

5.5 Sources of basis risk.

5.6 Defining basis risk.

5.7 Quantifying basis risk.

5.8 Minimising basis risk.

5.9 Conclusion.



6 Rating Methodology (Cameron Heath).

6.1 Standard & Poor's ratings services' rating process.

6.2 Risk analysis.

6.3 Legal and swap documentation review process.

6.4 Impact on sponsor.

7 Risk Modelling and the Role and Benefits of Cat Indices (Ben Brookes).

7.1 Components of a cat model.

7.2 Insurance-linked securities.

7.3 Cat indices.

7.4 Summary.

8 Legal Issues  (Malcolm Wattman, Matthew Feig, James Langston, and James Frazier).

8.1 The note offering – federal securities law implications.

8.2 The note offering – the offering circular.

8.3 Types of transactions.

8.4 Conclusion.

9 The Investor Perspective (Non-Life)  (Luca Albertini).

9.1 The creation of a sustainable and liquid market.

9.2 Key transaction features from the investor perspective.

9.3 Market evolution: the investor perspective.

10 ILS Portfolio Monitoring Systems (Tibor Winkler and John Stroughair).

10.1 Introduction.

10.2 Miu – An ILS platform in a convergent space.

10.3 RMS library of cat bond characterisations.

10.4 Conclusion.

11 The Evolution and Future of Reinsurance Sidecars (Douglas J. Lambert and Kenneth R. Pierce).

11.1 A brief history of the brief history of sidecars.

11.2 Sidecar structures.

11.3 The appeal of sidecars.

11.4 Structuring considerations.

11.5 The outlook for sidecars.

11.6 Conclusion.

12 Case Study: A Cat Bond Transaction by SCOR (Atlas) (Emmanuel Durousseau).

12.1 Introduction: SCOR’s recent history.

12.2 Atlas III and IV: Background.

12.3 Atlas: Main characteristics.

12.4 Basis Risk.

12.5 Total Return Swap.

12.6 Conclusion.

Appendix A.

A.1 Definition of events.

A.2 Extension events.

13 Case Study: Swiss Re's New Natural Catastrophe Protection Program (Vega) (Jay Green and Jean-Louis Monnier).

13.1 A positive evolution of Swiss Re's ILS strategy.

13.2 Swiss Re accesses multi-event natural catastrophe coverage.

13.3 The first ILS to use a cash reserve account as credit enhancement.

13.4 Innovation leads to more efficient protection.


14 General Features of Life Insurance-Linked Securitisation (Norman Peard).

14.1 Life insurer corporate and business structures, risks and products.

14.2 Actors and their roles.

14.3 Process.

15 Cedants' Perspectives on Life Securitisation.

15A A cedant's perspective on life securitisation (Alison McKie).

15B A cedant’s perspective on life securitisation (Chris Madsen).

16 Rating Methodology (Harish Gohil).

16.1 Fitch's approach to the rating process.

16.2 Insurance risk analysis.

16.3 Zest: a VIF case study.


17 Life Securitisation: Risk Modelling (Steven Schreiber).

17.1 Modelling of a catastrophic mortality transaction.

17.2 Modelling of a VIF transaction.

18 Life Insurance Securitisation: Legal Issues (Jennifer Donohue).

18.1 Monetisation of future cash flows.

18.2 Legal aspects of life insurance securitisation – some key features.

18.3 Some examples of value-in-force securitisation/monetisation.

18.4 Outlook.

19 The Investor Perspective (Life) (Luca Albertini).

19.1 Life insurance-linked risks and investor appetite.

19.2 Key transaction features from the investor perspective.

19.3 Market evolution: the investor perspective.

20 Longevity Securitisation: Specific Challenges and Transactions (Jennifer Donohue, Kirsty Maclean and Norman Peard).

20.1 Mortality and longevity risk.

20.2 A market for longevity risk.

20.3 Key structural aspects of longevity risk securitisation.

20.4 Some features of longevity risk.

21 Longevity Risk Transfer: Indices and Capital Market Solutions  (Guy Coughlan).

21.1 The nature of longevity risk.

21.2 The market for longevity risk transfer.

21.3 Importance of indices, tools and standards.

21.4 Capital market instruments for longevity risk transfer.

21.5 Customised vs standardised longevity hedges.

21.6 Case study: customised longevity hedge.

21.7 Implementing a standardised index-based longevity hedge.

21.8 Conclusions.


22 Case Study: A Cat Mortality Bond by AXA (OSIRIS) (Sylvain Coriat).

22.1 Catastrophic pandemic risk.

22.2 Considered risk transfer tools.

22.3 Detailed structure.

22.4 Risk analysis.

22.5 Investors' reaction.

22.6 Spread behaviour.

22.7 Next steps.


23 Case Study: Some Embedded Value and XXX Securitisations (Michael Eakins and Nicola Dondi).

23.1 Embedded value securitisation – Avondale S.A.

23.2 XXX securitisation.


24 The UK Taxation Treatment of Insurance-Linked Securities  (Adam Blakemore and Oliver Iliffe).

24.1 The Directive and the taxation of UK ISPVs.

24.2 Non-UK insurance special purpose vehicles.

24.3 Indirect taxes and withholding of income tax.

25 The US Federal Income Taxation Treatment of Insurance-Linked Securities (David S. Miller and Shlomo Boehm).

25.1 Avoiding US corporate income tax for the issuer.

25.2 Withholding tax and excise tax.

25.3 US federal income tax treatment of an investor in a catastrophe bond issuer: overview.

26 Regulatory Issues and Solvency Capital Requirements  (Mark Nicolaides, Simeon Rudin, Rick Watson and Katharina Hartwig).

26.1 Regulatory issues relevant for ILS sponsors.

26.2 Solvency I.

26.3 Solvency II.

Appendix A: Standard formula, solvency capital requirement (SCR).

A.1 Calculation of the basic solvency capital requirement.

A.2 Calculation of the non-life underwriting risk module.

A.3 Calculation of the life underwriting risk module.

A.4 Calculation of the market risk module.