Insurance-linked securities survive “acid test” of credit crisis

The significance of insurance-linked securities will likely increase over time, despite the global credit crisis, suggests The Geneva Association in its most recent Insurance Economics report.
Now that AIG has become a systemic risk in its role as a major financial services provider, and not as an insurer, the sustainability of the convergence of capital and insurance markets has become an issue, wrote Daniel M. Hofmann, chief economist, and Alex P. Lehmann, chief risk officer, both of Zurich Financial Services.
Insurers have increasingly offered insurance-linked securities over the past few years, but, unlike in the banking industry, these securitizations have remained within the scope of risk and capital management, the authors suggest.
“Catastrophe bonds, to cite the best-known product, tend to cover only peak losses,” they write. “Because part of the risk remains on the insurance company’s balance sheet, the securities are attractive to investors.”
As a result, “it is not surprising that they have successfully withstood the acid test applied by the credit crisis, in contrast to other financial products.
“The significance of insurance-linked securities will undoubtedly increase over time.”