Robin Hood Finance Limited


Benefits for Insurers

There are three ways in which insurers can benefit from the securitisation markets

  • Transferring insurance risk to the capital markets
  • Having a counterparty with the highest rating (how many traditional reinsurers have top ratings?)
  • Diversifying investments and potentially increasing yield

The capital markets are far larger than the traditional insurance markets-compare the EUR 1,700bn of outstanding European ABS with Lloyds of London’s capacity of EUR 18bn, or Aon Benfield’s estimate of total world reinsurance capacity at EUR 220bn.
In addition, the capital markets can take risk for longer periods that the traditional 1-year insurance/reinsurance contract.
Types of insurance risk which have been successfully transferred to the capital markets include catastrophe risk (Hurricanes, earthquakes etc.); life risk; motor policy risk; credit insurance risk.

Solvency II

Solvency II, the proposed new regulatory regime for insurers within the EU, has many similarities to Basel II, and is currently scheduled to come into force in 2010.

This means that insurers will be going through a process which is in many ways similar to that which banks have experienced. RHF’s view is that, as part of the process, insurers should make sure that their systems are set up so that risk can be analysed and transferred to the capital markets via securitisation as and when required.

As Standard & Poor’s put it in a 2007 paper Beware Solvency II: As The 2010 Implementation Date Looms Closer, European Insurers Should Ignore It At Their Peril”

Increasing yields

Many insurers and pension funds have been suffering from significantly reduced yields in the bond markets, as interest rates have plummeted worldwide. There are significant opportunities in the ABS market, where yields a now very high on some perfectly solid AAA assets. The herd mentality is an indiscriminate “securitisation bad” so there are real bargains to be had. John Paulson made a personal fortune of $3.5bn shorting the subprime market. He seems now to be a buyer of ABS, as The Economist reports (March 09)“More encouragingly, he has started buying up bombed-out mortgage securities. The number-crunching that told him subprime-linked paper was overvalued now suggests that some previously AAA-rated tranches are a bargain.”.

There are of course still many poor assets, and the skill is in distinguishing good from bad.

For some comments on good and bad securitisation, see this Irish Independent article.

RHF is there to

  • Advise on what risks could be reinsured via the capital markets
  • Help the insurer to ensure that it is “securitisation ready” as part of the transition to Solvency II
  • Assist in getting deals done in the medium term
  • Assist in understanding the potential benefits on the investment and capital side, and put an investment plan into action

Richard Senior designed and ran a 2-day course on “Securitisation and the Insurance Industry” in collaboration with Marcus Evans [“Securitisation and the Insurance Industry”]