Institutional investment in reinsurance risk has become part of
the mainstream. Insurance-linked securities first appeared nearly
20 years ago, but by the end of 2012 the market for catastrophe
bonds, industry loss warranties and collateralised reinsurance had
soared to USD 28 billion.
Collateralised reinsurance, in particular, has become the
structure du jour for (re)insurers seeking comprehensive non-life
protection. An investor and insurer agree a contract with a defined
limit, premium and loss trigger, as with traditional reinsurance.
Collateral equal to the limit is posted to a special-purpose
reinsurer to hold in trust either until maturity (when it is
returned to investors) or on the occurrence of a pre-defined event
(when it is paid out to the reinsured).
