OECD

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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

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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

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Public policy perspective

• In the context of an ex ante integrated financial
  management strategy, CAT-linked instruments may
• Expand the capacity of private insurance/reinsuran
  ce sector
• Constitute innovative risk transfer tools for
  governments (sovereign sponsors)

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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

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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

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CAT-linked securitiesan overview

• Different types of instruments
• Different triggers
• Market trends
• Impact of the financial crisis
• Drivers, impediments and issues going forward

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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

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Impediments

• Market fragmentation / lack of standardised
  transactions
• Lack of standardised data gathering
• Lack of transparency in the underlying risk and
  valuation complexity

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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)

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Issues (contd)

• 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

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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

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Recommendations (contd)

• 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

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ContactProf. Alberto MontiBocconi
UniversityDepartment of Law Angelo Sraffa1,
via Roentgen20136 - Milano (ITALY)E-mail
alberto.monti_at_unibocconi.itwww.unibocconi.eu
www.oecd.org/daf/fin/catrisks