OECDReportCatastrophe-linked securities and capital markets

Prof. Alberto Monti Bocconi University and OECDBangkok, Thailand 24-25 September 20092nd 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/reinsurance 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 securities:an 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 (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

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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 (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

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ContactProf. Alberto MontiBocconi UniversityDepartment of Law «Angelo Sraffa»1, via Roentgen20136 - Milano (ITALY)E-mail: alberto.monti@unibocconi.it

www.unibocconi.eu

www.oecd.org/daf/fin/catrisks