Exam
- Created by: jesus christ
- Created on: 09-05-22 15:24
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- ILS
- Indemnity Triggers
- Closely mirror the sponsors actual incurred loss
- Most insurance transactions are indemnity based, so well understood
- High level of moral hazard – what is their underwriting expertise? How efficiently do they handle claims?
- Investor needs a high-level of underwriting expertise to analyse the sponsors portfolio
- High-risk of investors capital being trapped
- More expensive for sponsors – poor transparency
- Index Triggers
- Removes moral hazard because losses are based on a third-party index
- Easy to calculate losses, so no risk of trapped collateral – High transparency
- Relatively easy for non-insurance professionals to understand
- An index may not be available in the country in question
- Cheaper for a sponsor vs. indemnity
- Parametric Triggers
- Removes moral hazard because losses are based on a third-party index
- Easy to calculate losses, so no risk of trapped collateral – High transparency
- Relatively easy for non-insurance professionals to understand
- Perfectly suited for emerging markets where historical underwriting data/expertise is below the investors level of comfort
- Strong advantages for both sponsors and investors
- Cheaper for a sponsor vs. indemnity
- Work on an IF:THEN basis
- Types of ILS
- Catastrophe Bonds, Collateralise Re, Sidecars, Weather Derivatives
- Advantages of ILS
- Diversify capital providers, reduce credit/counterparty risk, access new territories, cheaper than traditional reinsurance
- Sovereign Risk Transfer
- Africa Risk Capacity (ARC), Caribbean Catastrophe Risk Insurance Facility (CCRIF), SEADRIF, FONDEN
- Advantages: Provides certainty around financial planning/budgets, protect/enhance sovereign credit rating, pay out doesnt have to be repaid like loans
- Spreads
- Many definitions. The difference between two numbers (Coupon vs. Expected Loss). Measure of liquidity in the market
- Wide spreads = Uncertainty. Tight/Narrow Spreads = Certainty
- Protection Gap = Economic Losses divided by insured losses
- Indemnity Triggers
- Securitisation
- The process of slicing risk into different layers with each layer having a different risk profile
- Collateralisation
- 100% of capital is set aside to pay claims in full. Capital is normally held in US Money Market Funds
- A tranche is a portion or slice of something. Allows for differing risk profiles in each tranche
- Senir = Low risk, Junior = Higher risk
- A tranche is a portion or slice of something. Allows for differing risk profiles in each tranche
- 100% of capital is set aside to pay claims in full. Capital is normally held in US Money Market Funds
- Why use a SPV?
- They are bankruptcy remote and ensure capital is safe in the event of either party becoming insolvent
- Asset Management
- Sharpe ratio is a measurement of a funds return vs. the risk free rate of return
- What is a driver of a modelled expected loss?
- Exposure, concentration in peak peril zones
- Maturity Date
- When the bond expires and the principal must be repaid to the investors
- Bid Spread
- Measure of liquidity and a 'live price' of the bond. Wide spread = uncertainty. Narrow spread = higher certainty
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