In the current market, making the case for any asset class would be hard. However, the appetite for insurance-linked deals is growing and the market could see a volume increase over the next year, analysts said. To be certain, the potential for this market segment has been long recognized and analysts said that the current market environment might just be the right time to get the ball rolling.
On the one hand, with Solvency II - the updated set of regulatory requirements for insurance firms that operate in the European Union - implementation looming, insurers must now adapt to new capital requirements and manage their capital adequately. Agreement on a final proposal is set before the end of 2008.
Although the new regime is expected to improve risk management and transparency in the European insurance market, it's also likely to spur a spate of consolidation among European insurers. Standard & Poor's said in a report this month that Solvency II promises to have much more of an impact on the European insurance industry than subprime issues have.
Experts said that Solvency II would force more than 25% of Europe's insurers to face major strategic decisions such as reducing scale and risk, raising capital and employing more risk mitigation. There is also questions of whether to merge with or be acquired by other insurers, or whether to close new business.
As a result, smaller companies might increasingly tap the capital markets as an attractive option to manage risk and raise capital. Fitch Ratings analysts said that cat bonds, auto insurance and longevity or mortality linked bonds are some of the assets that insurance companies are currently looking to package into structures so they could better manage their capital efficiency.
"These insurance companies have not penetrated the financial market as aggressively as other issuers have," a market analyst said. "Aside from a couple of large transactions, the market hasn't begun to penetrate its size potential especially if you consider the size of the insurance world."
On the other hand, insurance-linked securitizations can also provide opportunities for other parties searching for new business in the current structured finance context. Fitch said that a number of arrangers are intent on developing expertise in this asset class. Insurers are aware that they have access to another investor base - reinsurers. Fitch said that because the investor base for these products is different from that of traditional structured finance products, these transactions have a higher probability of being placed in the market.
"The reinsurance market is huge and these buyers know the product well," the market analyst said. "Three years ago insurers looked to another segment of the market- the structured finance investors. Today that is not the case, but despite the fact that structured finance has become less interesting insurers still have the reisurance market to fall back on."
Already in motion is the recently announced venture from the Lloyds' insurer, Amlin which said it will launch its new Investment Management Partnership with John Wells and Luca Albertini, both previously at Swiss Re. The new venture will manage funds focused in traded insurance risk and will likely launch its first fund sometime in 3Q08 or 4Q08. It's the first such venture to be backed by a Lloyds' insurer, whose underwriting expertise should make the fund offering particularly attractive to investors, a Lloyds spokesperson said. Amlin will be an investor in the fund.
"If you consider what has been going on in the capital markets, structures like cat bonds stand out like stars," a market source said.
Hannah Bale, head of communications at Amlin, said that the new venture positions the company in a flow of new business and said that both Albertini and Wells are certain of the likely investor interest for this product.
"Amlin intends to be an active participant in the insurance linked securities market, both to enhance our capital and risk management capabilities and to generate returns from the growth and high margins available in this business," said Charles Philipps, chief executive at Amlin. "The combination of Amlin's proven reinsurance expertise with Well's and Albertini's wealth of relevant capital markets experience makes the new company a strong proposition in a developing market."
Allianz Leben, a unit of the German insurer Allianz said it plans to buy 2 billion ($3.09 billion) of ABS, the insurer's chief investment officer told the German financial press. Munich Re is also looking to increase ABS exposure in a selective manner.
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