3607178: After-Work Lecture: Insurance-Linked Investments - A Careful Look at the True Investment Case

Description

Insurance and reinsurance companies are in the business of assuming event-driven risks from individuals and companies. A particularly difficult risk management challenge for the industry is posed by high severity, low probability events, so-called “cat events”. For instance, the risk of major earthquakes or hurricanes cannot be easily diversified.
In fact, in the mid 1990s, the available capital in the insurance and reinsurance industry for certain extreme loss scenarios was no longer sufficient to cover catastrophic events in a number of key regions. As a result, the industry was forced to explore new and more efficient ways of adequately backing peak risks and raising capital. This led to the development of the insurance-linked investments sector, which enables insurance and reinsurance companies to transfer the pure insurance risks to capital markets – and in turn allows financial market investors to invest in an interesting asset class with low correlation to traditional asset classes. But how does it actually work? How are such investments structured, what are the risks and market opportunities and how will the new Solvency II regime affect this market?