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OECD

OECD. Report Catastrophe-linked securities and capital markets Prof. Alberto Monti Bocconi University and OECD Bangkok, Thailand 24-25 September 2009 2nd Conference of the OECD International Network on Financial Management on Large-Scale Catastrophes. Background.

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OECD

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  1. OECD Report Catastrophe-linked securities and capital markets Prof. Alberto Monti Bocconi University and OECD Bangkok, Thailand 24-25 September 2009 2nd Conference of the OECD International Network on Financial Management on Large-Scale Catastrophes

  2. Background • The role of capital markets in the financing of large-scale risks merits policy attention • High-level Advisory Board to the OECD Network • OECD Insurance and Private Pensions Committee and Committee on Financial Markets • Convergence of insurance and capital markets • Focus of the OECD report • Public policy perspective • Key drivers, impediments and issues

  3. Public policy perspective In the context of an ex ante integrated financial management strategy, CAT-linked instruments may: Expand the capacity of private insurance/reinsurance sector Constitute innovative risk transfer tools for governments (sovereign sponsors)

  4. Purposes of the report • Assessing the potential role of capital markets in financing disaster costs • Developing a better understanding of CAT-linked financial instruments • Identifying technical and policy issues relating to the growth of the market • Making recommendations

  5. Disaster costs • Cost of emergency rescue, response and relief measures (including temporary assistance) • Damages to public assets and critical infrastructures • Property damages, including reconstruction costs, and economic losses suffered by businesses and individuals affected by a disaster

  6. CAT-linked securities:an overview Different types of instruments Different triggers Market trends Impact of the financial crisis Drivers, impediments and issues going forward

  7. Drivers Demand for additional risk transfer capacity Broader investor base and portfolio diversification benefits Advances in technology and modelling of CAT risk Broader sponsor base: corporate / sovereign issuers

  8. Impediments Market fragmentation / lack of standardised transactions Lack of standardised data gathering Lack of transparency in the underlying risk and valuation complexity

  9. Issues Cost comparison (with traditional reinsurance and other instruments) Trade-off between moral hazard and basis risk Regulatory and solvency issues Market transparency and liquidity issues (including issues in secondary market trading and investors’ protection)

  10. Issues (cont’d) Key regulatory questions: To what extent should regulated insurance and reinsurance companies be allowed to obtain capital relief for transfers of CAT-risks by way of securitisation on terms that are consistent with other methods of transferring risks, such as traditional reinsurance or retrocession? To what extent should a SPV providing protection to the sponsor of a CAT bond transaction be regulated? Regulatory developments in Europe

  11. Recommendations Promote the collection and dissemination of high-quality data on CAT risks and losses according to harmonised criteria Promote transparency in the CAT-linked securities market Consider the opportunity to use CAT-linked securities to transfer a portion of the CAT risk currently borne by governments

  12. Recommendations (cont’d) Examine the accounting, solvency and prudential rules presiding over the CAT-linked securities market to remove any unnecessary impediments Encourage research on areas worthy of further investigation Encourage further education on CAT-linked securities

  13. ContactProf. Alberto MontiBocconi UniversityDepartment of Law «Angelo Sraffa»1, via Roentgen20136 - Milano (ITALY)E-mail: alberto.monti@unibocconi.itwww.unibocconi.eu www.oecd.org/daf/fin/catrisks

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