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Clemens von Weichs: Catastrophe bonds, or cat bonds, transfer the risks of natural catastrophes to the capital markets. If an insurer has built up a portfolio of risk, then it might choose to pass part of this risk on to another party. This would reduce its own loss burden in case of a large event of this type, such as a hurricane or earthquake. It could purchase traditional catastrophe reinsurance to pass some risk on to reinsurers, which then would pay a part of the loss. Or it could sponsor a cat bond to pass the risk on to investors by way of securitization. If an event triggers the bond, the insurance company is entitled to use the capital of the bond for claims payments to policyholders. If the bond expires without a trigger event, investors will be paid back their capital plus a fixed coupon above a reference rate.
Allianz uses cat bonds as an alternative and a supplement to traditional catastrophe reinsurance. It's an alternative in terms of pricing and counterparty credit risk, and a supplement in terms of capacity sources.
Through its subsidiaries, Allianz accumulates significant amounts of risk in peak perils, in particular US hurricane, US earthquake and European windstorm, but potentially others too. At times when capital in the reinsurance sector is constrained, Allianz is keen to have access to all available sources of protection.
Further, the recent financial crisis has raised the awareness of counterparty credit risk which is also a relevant factor in reinsurance relationships. Allianz had begun to diversify counterparty risk by using non-traditional instruments of cat risk protection well before the financial crisis.
Allianz is dedicated to this market segment and has successfully issued five cat bonds during the past years. We intend to issue cat bonds from time to time to supplement traditional reinsurance cover. A precondition for that is that rates for risk protection are broadly in-line in both markets – the traditional reinsurance and the cat bond market. We continuously explore all possible options to fulfil our needs for risk protection as well as our expectations regarding pricing. Hence, cat bonds are a regular part of our risk management approach, and transactions like the Blue Fin Series 3 are planned in timing and structure according to our needs.
Before 2007, the market for insurance-linked securities had developed to a stage where it began to expand into different types of risk. When the market picked up again in 2009, the majority of transactions focused on nat-cat risks in the US. The increased consideration of diversifying risks, such as European windstorm, could foster the growth of this market segment but this will also depend on converging price expectations of investors and sponsors.
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