Advanced capital solutions

C-suite key risk issues

There is a trend toward severe losses in excess of company risk appetite occurring at large multinationals. These losses may arise from single risks (risk of disaster such as hurricanes, storm surge, earthquakes, pandemic, or cyber-attacks) but more often they tend to stem from risks that echo across multiple risk categories and have a tendency to aggregate (especially in crises).

Events financially impact both the traditional side:

  • property
  • casualty
  • operational
  • cyber
  • benefits risks

as well as the non-traditional and emerging side:

  • commodities
  • regulatory
  • credit
  • reputational
  • talent
  • political risks

The-interplay-of-capital-&-insurance-markets_400The C-suite contemplates objectives to transfer risks, protect key capital ratios, and provide liquidity for such aggregated risk on a portfolio basis. Further, securing timely payments is a top priority.

Solutions that tailor for this wider risk portfolio, and to the risk perspective of the C-suite, can be built where capital markets and insurance markets interplay: this is the advanced capital solutions field.

Capital positioned for optimal risk transfer for single risk and basket of risks

There are numerous solutions available that help to facilitate the C-suite’s view of risks and to implement solutions on a combined basket aggregate stop-loss basis. The solutions can be divided into six categories:

Traditional insurance

Traditional insurance refers to the solutions that offer risk capacity on an annual basis and by line of insurance. To deal with large risks/capital requirements, contracts can be syndicated to allow for multiple insurers to participate.

Contingent capital

A contingent capital solution offers the insured the right to issue equity, debt (or hybrid securities) at pre-defined conditions and over a fixed period on the occurrence of a pre-defined event such as a natural or environmental catastrophe or commodities price movements.

Catastrophe bond

Catastrophe bonds are risk linked securities that transfer a specific sent of fortuitous risks from an issuer (or sponsor) to investors. Investors take the risk of an event occurring in return for an attractive rate of return and access to assets uncorrelated to traditional asset classes.

Structured insurance solution

Structures (re)insurance solutions are a blend of risk retention and risk transfer. These multi-year solutions provide a single aggregate limit over the term of the policy. The objective is to manage the cash flow, profit and loss, and balance sheet impact of low-frequency /high severity losses on the company or captive.

Standby credit facility

A credit facility is a solution that offers liquidity by access to the right to issue equity or debt at predetermined terms. To facilitate the line of credit a fee is paid during the life of the facility.

Derivative put option

Put option is a financial product that gives the holder of the option the right to sell shares in the underlying asset at a predetermined price. The protection offered is against negative volatility in price.

In constructing the optimal risk transfer solutions and in building the optimal risk transfer portfolio, it is important to consider the advantages and disadvantages of each solution available.

Advanced capital solutions approach

The consideration and modeling of the key risk from a combined risk basket perspective (i.e. taking into account the correlations of these risks) is key to access advanced capital solutions. These tailor-made solutions are also currently supported by a strong demand of uncorrelated risks/assets by investors like sovereign-wealth funds, pension and hedge funds.

The insurance and reinsurance market is also an active player in the field and some reinsurers have created their own investment vehicles.


About Marc Paasch

Marc Paasch is the Director for Head Risk & Analytics for Western Europe, the Global Head for Alternative Risk …
Categories: Reinsurance

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