Cyber Risk in Reinsurance
February 12, 2025
It is no secret that consumers are leading extremely busy lives. In many families, both the partners are working and as a result, neither had the time to cook food. This is where food delivery apps come in handy. Apps like UberEats deliver restaurant food to the consumer at very little extra costs. There are […]
The policy of risk management is unique to every organization. Practices that may be considered acceptable in one organization may not be considered acceptable in another organization. Just like the vision and mission of any company, its risk management policy is also unique. This is a basic document, which is drawn up when the risk […]
Personality refers to an individual’s characteristics, style, behavior, mindset, attitude, his own unique way of perceiving things and seeing the world. Genetic factors, family backgrounds, varied cultures, environment, current situations play an imperative role in shaping one’s personality. The way you behave with others reflects your personality. An individual with a pleasing personality is appreciated […]
Claims processing is probably the most important function for any insurance company. This is because this process is where the insurance company actually delivers on its commitment. The speed and convenience with which the claims are settled have a long bearing on the reputation of the insurance company. Nowadays, most insurance companies have started automating […]
Why do you think an individual is recruited? Is it because he/she is qualified enough to do justice to a particular role or he/she belongs to the religion you belong? The answer is very simple. Obviously an individual is hired because the company feels that he/she can contribute to his/her level best towards achieving organization […]
In the previous article, we have already seen what securitization is in the context of reinsurance. We have also seen how securitization can be used as an alternative to reinsurance and the reasons behind the sudden increase in the volume of insurance-related securitizations around the world.
It is true that catastrophe-related securities have started proliferating different aspects of the financial system in the recent past. However, it is also true that with the increased proliferation of securitization, many of the flaws associated with securitization as a risk management tool have also come to light. In this article, we will have a look at some of the common disadvantages related to using securitization as a tool for managing insurance risks.
The probability of adverse selection is low in reinsurance because advanced statistical models are available. However, when it comes to securitization, the risk is often borne by investors who are not experts in this regard. They are not aware of how the addition of this risk affects their portfolio. Hence, there is a higher probability of investors losing money when it comes to securitization.
In the short run, this is beneficial for the ceding insurance companies. However, in the long run, this often means that fewer investors are willing to purchase securities that act as an alternative to reinsurance.
First and foremost, the ceding insurance company cannot securitize its underlying risks on its own. They need to obtain the services of an investment bank which will underwrite and distribute these securities amongst prospective customers. However, the transaction fees and charges associated with the use of an investment bank can be quite large. As a result, securitization might end up becoming expensive even if we consider the repeated regulatory expenses that occur periodically when the reinsurance route is taken.
However, this is not the case when it comes to securitization. Once a securitized contract has been completed, the entire contract has to be recreated. This generally means more transaction charges. However, it also means that the existing investors may not want to take the same risk again.
The investment banker will have to find new investors every time a new contract is made. Rolling over the existing contract can become quite difficult particularly if a loss has occurred in the previous period and the principal amount is not being refunded to the investors.
From the above points, it is obvious that while securitization is a viable alternative as compared to reinsurance, it is not without its flaws. Hence, it is important for ceding insurance companies to be completely aware of the pros and cons of securitization before they break a long-term relationship in order to make a short-term decision.
Your email address will not be published. Required fields are marked *