Keywords
nsurance
bond market
bun kruptcy
catastrophe bonds
diversification of risk
car insurance
securitization
How to Cite
Abstract
In recent years, a new generation of capital market-based alternative risk transfer and hedged risk financing derivatives has been developed and refined in the branch of nonlife insurance. Known as securitization, the ultimate goal of these products has been to increase the insurance market underwriting capacity, by offering a better coverage through the development and issuance of insurance-based financial derivatives (Insurance-Linked Securities, ILS), such as bonds.
The most widespread and refined form of securitization to date is the issuance of catastrophe bonds (or Cat bonds), whose cashflows, coupons and principal are dependent upon the occurrence of a catastrophic event of those specified by the issuance. In 2005, AXA made a significant breakthrough by using these transactions to cover high frequency, low intensity events typically hedged with insurance and reinsurance tradicional mechanisms, such as the automobile portfolio underwriting risk.
This article first examines the evolution and development of the cat bond market from its origins until as late as 2007, the last year with available data. Then, the main features of two securitization transactions carried out by AXA to hedge against the highest layers of its automobile portfolio underwriting risk are described. Finally, the paper points out the advantages in using this kind of instruments to the securitization of mass risk.
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