Capital market innovation in the insurance industry
No. 3/2001
In recent years, firms have developed a new class of financial instruments that transfer insurance risk to the capital markets. Approximately USD 12.6 billion of these capital market insurance solutions have been issued since 1996. A newly released Swiss Re sigma study, "Capital market innovation in the insurance industry," examines the process of financial innovation and assesses the prospects for capital market insurance solutions. The study concludes that these securities have vast market potential.
The study examines capital market insurance solutions in the context of the global wave of financial innovation that has occurred since the 1970s. A variety of forces have stimulated this innovation: the need to protect against market risk; technological progress facilitating the innovation process; and a desire to minimise the costs imposed by taxes and regulation.
Capital market insurance solutions are a recent financial innovation. Following Hurricane Andrew and the Northridge earthquake of the early 1990s, property
catastrophe reinsurance was in short supply and premium rates more than doubled. In reaction to this rate spike, insurers began developing a new class of financial instruments that transfer insurance risk to capital markets. Because global capital markets are so vast – publicly traded stocks and bonds have a total value of more than USD 50 trillion – they offer a promising means of funding protection for even the largest potential catastrophes. Capital market insurance solutions also allow issuers to reduce counterparty risk and diversify funding sources. Investors purchasing the securities can earn high-risk adjusted returns while diversifying their portfolios.
This publication can be downloaded in English, German, Spanish, French and Italian.
Download "Capital market innovation in the insurance industry"
Download "Innovative Kapitalmarktprodukte in der Versicherungsbranche"
Download "El mercado de capitales: fuente de innovación para el sector asegurador"
Download "Les marchés des capitaux, source d'innovation pour le secteur de l'assurance"
Download "L'innovazione dei mercati dei capitali nel settore assicurativo"
For further questions and copies of Chinese or Japanese versions, please contact sigma@swissre.com.
