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Swiss Re enters into unique "risk swap" agreement


July 12, 2001   by Canadian Underwriter


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Swiss Re, the parent company of Swiss Re Canada, has entered into a unique "risk swapping" agreement with Japanese insurer Tokio Marine and Fire, through Tokio Millennium Re of Bermuda. The catastrophe risk swapping deal, worth US$450 million covers losses from three types of perils, each exchange valued at US$150 million. Japanese earthquakes are swapped with California earthquake exposures, Japanese typhoons with Florida hurricanes and Japanese typhoons with storms in France.
According to a press release, the deal could be renewed annually, and is expected to run for several years. "Swapping exposures is a win-win situation for both companies," says Jurg Stoll, director at Swiss Re New Markets. "Swiss Re and Tokio Marine will both benefit from a diversification effect which will lower capital costs substantially, increasing shareholder value."
Not only will the agreement bring additional revenue to Tokio Marine’s bottom line, but it will also help the company diversify out of its local market and free up risk capital, states the Swiss Re release. And Swiss Re will benefit by moving these peak risks, which comprise a very small part of its book of business, to Tokio Marine.
Swiss Re predicts further development of these kinds of risk transfer models, as companies are increasingly under pressure to reduce capital costs and diversify risks.