Intelligent Hydraulics in New Dimensions. Industrial - Bosch Rexroth
Post on 11-Feb-2022
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Big picture• Risks being transferred
– Catastrophic (cat) risk• $1 trillion of assets at risk
– Reinsurance risk• Driven by insurance cycle
• The vehicles– Cat bonds– Sidecars, collateralized Re– Industry loss warranties
• The rewards– High returns– Low correlations with
financial markets
End of 2012: $15.5b2013 to date: $1.95b
ART’s wake‐up call: Hurricane Andrew(Florida, 1992)
• $15.5 billion in claims– ($24.5b in 2008 dollars)
• 9 smaller Florida insurance companies became insolvent– (15 throughout the region)
• Florida branch of State Farm paid out $4b– Had to be bailed out by parent company
• Florida branch of Allstate paid out $1.9b– $500m greater than total profits from all lines of Allstate
business to that date• Industry adapted
– Stopped writing hurricane insurance– No insolvencies after 9/11
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Difficulty created by catastrophic losses: Ambiguous risk
• Low mean losses• High maximum losses• Infrequent (1/6) in any single location– No way to pool risk for regional carriers
• Frequent (5/6) from global perspective– Global capacity insufficient
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Structural cash flows from a collateralized loan obligation & cat bond
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Potential catastrophic
losses SPRI
Risk slice 1
Risk slice 2
Risk slice 3
Risk slice 4
Risk slice 5
Why they are popular• Issuers
– Use SPR• Capture tax and accounting benefits associated with traditional reinsurance
• Investors– Prefer SPR
• Isolates investment risk from business and credit risk of insurer
– Value near zero correlation with other asset classes
• Insureds– Fully collateralized
• Little or no counterparty risk
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Why they are popular• Issuers
– Use SPR• Capture tax and accounting benefits associated with traditional reinsurance
• Investors– Prefer SPR
• Isolates investment risk from business and credit risk of insurer
– Value near zero correlation with other asset classes
• Insureds– Fully collateralized
• Little or no counterparty risk
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The beginning: 9/11
• Huge re/insurer losses• Market hardens
• Hedge funds entered reinsurance business–BUT couldn’t get out!
Joined mainstream ART market in 2005 after Katrina, Rita & Wilma
Statistics• Total insured cat losses ≈
$83.4 billion• U.S. portion ≈ $73–79 billion• Models failed
Effects on reinsurance• Models revised
– Predict greater losses
• Capital requirements raised on cat losses
• Ratings agencies changed way they assessed cat risk
,
Record Capital Model Rating agencylosses erosion revisions reassessments
Need for newSidecars
capital fast
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Sidecar background / overview• Another ART vehicle driven by reinsurance cycle
– Shrinking equity + low returns + catastrophic losses→ increased premiums
→ new capital• Flexible structure
– Can be tailored to virtually any situation• Key advantages
– Short life• 1‐2 years
– Speed and low cost• 3‐6 weeks, privately placed, no registration fees
– Pure reinsurance exposure
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Typical sidecar structureThe players
Reinsurance companyCreated to assume underwriting risk from ceding (re)insurer
Constrained Special purpose entity that attaches to sponsor
Adds capacity Limited purposeFinite life
Re(insurer) championing the sidecar
Sole clientService provider
Assumes underwriting and claims settlement of sidecar
Receives feesReceives additional fees tied to profits
Capital market institutions seeking pure reinsurance exposure
Directly underwrite specific risksHedge funds, investment banks, private equity
High risk appetiteSeeking high returns
Equity Investors
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Typical sidecar structureThe transactions
Sponsor buys coverage (quota share)
Percentage of reinsurer’s bookShort‐tail business
Receives fees and commissions
Procuring businessUnderwriting and claimsShare of profits
InvestorsHolding company owns 100% of sidecar
Equity and debtReceive interest and dividends
Equity Investors
Monies provided bind sidecar, sponsor & investor
Initial investment and premiums deposited to trust accountTrust collateralizes liabilities
If lossNo loss
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Newer developments
• Collateralized reinsurance (similar to sidecars)– Direct access to cat exposure
• No fees, etc.
• “Rent‐a‐sidecar”• Swiss Re sponsoring its own sidecar
– Putting in $100 million, seeking another $150‐200 million
• Aon → Lloyd’s → Berkshire Hathaway sidecar
Summary
• Cat bonds• Long‐term (3‐5 year) catastrophic coverage• In hard markets, cost effective• Issued by insurers, reinsurers, states, countries
• Sidecars– Provide just‐in‐time capital– Direct access to reinsurance exposure w/o balance sheet risk
– Finite, quota‐share agreement
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