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OECD. Report Catastrophe-linked securities and capital markets Prof. Alberto Monti Bocconi University and OECD Bangkok, Thailand 24-25 September 2009 2nd Conference of the OECD International Network on Financial Management on Large-Scale Catastrophes. Background.

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Oecd

OECD

Report

Catastrophe-linked securities and capital markets

Prof. Alberto Monti

Bocconi University and OECD

Bangkok, Thailand 24-25 September 2009

2nd Conference of the OECD International Network on Financial Management on Large-Scale Catastrophes


Background

Background

  • The role of capital markets in the financing of large-scale risks merits policy attention

    • High-level Advisory Board to the OECD Network

    • OECD Insurance and Private Pensions Committee and Committee on Financial Markets

  • Convergence of insurance and capital markets

  • Focus of the OECD report

    • Public policy perspective

    • Key drivers, impediments and issues


Public policy perspective

Public policy perspective

In the context of an ex ante integrated financial management strategy, CAT-linked instruments may:

Expand the capacity of private insurance/reinsurance sector

Constitute innovative risk transfer tools for governments (sovereign sponsors)


Purposes of the report

Purposes of the report

  • Assessing the potential role of capital markets in financing disaster costs

  • Developing a better understanding of CAT-linked financial instruments

  • Identifying technical and policy issues relating to the growth of the market

  • Making recommendations


Disaster costs

Disaster costs

  • Cost of emergency rescue, response and relief measures (including temporary assistance)

  • Damages to public assets and critical infrastructures

  • Property damages, including reconstruction costs, and economic losses suffered by businesses and individuals affected by a disaster


Cat linked securities an overview

CAT-linked securities:an overview

Different types of instruments

Different triggers

Market trends

Impact of the financial crisis

Drivers, impediments and issues going forward


Drivers

Drivers

Demand for additional risk transfer capacity

Broader investor base and portfolio diversification benefits

Advances in technology and modelling of CAT risk

Broader sponsor base: corporate / sovereign issuers


Impediments

Impediments

Market fragmentation / lack of standardised transactions

Lack of standardised data gathering

Lack of transparency in the underlying risk and valuation complexity


Issues

Issues

Cost comparison (with traditional reinsurance and other instruments)

Trade-off between moral hazard and basis risk

Regulatory and solvency issues

Market transparency and liquidity issues (including issues in secondary market trading and investors’ protection)


Issues cont d

Issues (cont’d)

Key regulatory questions:

To what extent should regulated insurance and reinsurance companies be allowed to obtain capital relief for transfers of CAT-risks by way of securitisation on terms that are consistent with other methods of transferring risks, such as traditional reinsurance or retrocession?

To what extent should a SPV providing protection to the sponsor of a CAT bond transaction be regulated?

Regulatory developments in Europe


Recommendations

Recommendations

Promote the collection and dissemination of high-quality data on CAT risks and losses according to harmonised criteria

Promote transparency in the CAT-linked securities market

Consider the opportunity to use CAT-linked securities to transfer a portion of the CAT risk currently borne by governments


Recommendations cont d

Recommendations (cont’d)

Examine the accounting, solvency and prudential rules presiding over the CAT-linked securities market to remove any unnecessary impediments

Encourage research on areas worthy of further investigation

Encourage further education on CAT-linked securities


Oecd

ContactProf. Alberto MontiBocconi UniversityDepartment of Law «Angelo Sraffa»1, via Roentgen20136 - Milano (ITALY)E-mail: [email protected]

www.oecd.org/daf/fin/catrisks


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