Public policy papers Insurance Securitization: Catastrophic event exposure and the role of insurance linked securities in addressing risk Peter Carayannopoulos, Ph.D Chair of Insurance & Associate Professor (Finance) Wilfrid Laurier University Paul Kovacs Executive Director, Institute for Catastrophic Loss Reduction Adjunct Research Professor, Economics Department, The University of Western Ontario Darrell Leadbetter Senior Policy Analyst, Insurance Bureau of Canada January 2003 ICLR Research Paper Series – No. 27
Abstract
The number of natural disasters recorded in Canada has increased almost every decade throughout the past century. More frequent severe weather events account for most of the increase. The purpose of property and casualty insurance is to spread, manage and absorb risk. It provides a mechanism for individuals and businesses exposed to possible loss to engage in risk reduction by pooling resources. Insurance provides a safety net that mitigates the effects of loss events and allows individuals and businesses to recover.
As property and casualty insurers design their risk management programs, they are increasingly likely to consider a total financial risk management approach. In recent years, insurers have had a new risk management tool available for consideration as insurers have begun issuing securities linked to bundles of insurance risk. The securitization of insurance risk transfers underwriting risks to the capital markets through the creation and issuance of financial securities.
Although securitization is a recent phenomenon within the insurance industry, the process has existed in the general financial markets since the 1970s. Securitization emerged as a balance sheet tool in response to evolving financial needs, primarily as a tool for creating liquidity for asset classes, such as mortgages, that were previously illiquid. The market for asset-backed securities (ABS) had grown to over $170 billion by the mid-1990s (Swiss Re, 1997 & Gallant-Halloran, 2000).