Insurance industry key in rise of credit derivatives

The insurance sector will continue to be a significant player in the “opaque” credit derivatives market, says the Fitch ratings agency.
Fitch surveyed the activities of 120 financial institutions 73 banks and broker-dealers, 39 insurance companies and reinsurers, and eight financial guarantors in credit derivatives markets throughout the world.
A credit derivative is a contract between parties in which a third party assumes the risk of default on another party’s credit asset such as a loan, installment credit, or a financial lease contract in exchange for receiving a premium payment. The third party does not hold title to the asset in any direct way.
“The global insurance sector (excluding financial guarantors) has once again emerged as the largest seller of protection on a net basis with an exposure of US$319 billion,” Fitch reported. “As in the past, this reflects the dominant footprint of AIG Financial Products Corp in this market (net sold position of US$268 billion). Excluding AIG, global net exposure at US$51billion (US$18 billion in 2003) has also grown rapidly, albeit from a low base.
“In Fitch’s opinion, the insurance sector will continue to be a significant player in the [credit derivatives] market.”
Fitch’s earlier reports have identified that the credit derivatives market is expanding rapidly. “In 2004, the market expanded to US$5.3 trillion of outstanding contracts on a notional amounts basis an increase of 86% from US$2.8 trillion last year,” the ratings agency reports.