
Contents
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8.1 The Emergence of Alternative Risk Transfer Instruments 8.1 The Emergence of Alternative Risk Transfer Instruments
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8.2 Financial Capacity Provided by Insurance-Linked Securities: Past and Present 8.2 Financial Capacity Provided by Insurance-Linked Securities: Past and Present
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Industry Loss Warranties Industry Loss Warranties
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Catastrophe Bonds Catastrophe Bonds
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Protection of the Principal Protection of the Principal
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Trigger Trigger
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Size of the Bond Size of the Bond
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Maturity of the Bond, or How to Stabilize Insurance and Reinsurance Prices Maturity of the Bond, or How to Stabilize Insurance and Reinsurance Prices
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Sidecars Sidecars
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8.3 Benchmark: The Market for Credit and Weather Derivatives 8.3 Benchmark: The Market for Credit and Weather Derivatives
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Credit Derivatives Credit Derivatives
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Weather Derivatives Weather Derivatives
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8.4 Enhancing Capital Market Solutions: The Need to Address Stakeholders’ Concerns 8.4 Enhancing Capital Market Solutions: The Need to Address Stakeholders’ Concerns
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Issuers’ Concerns Issuers’ Concerns
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Investors’ Concerns Investors’ Concerns
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8.5 Looking Ahead: Solutions and Innovations for Reaching the Tipping Point in this Alternative Market 8.5 Looking Ahead: Solutions and Innovations for Reaching the Tipping Point in this Alternative Market
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Increasing Investors’ Interest in Insurance-Linked Products through Tranching Increasing Investors’ Interest in Insurance-Linked Products through Tranching
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Addressing the Basis Risk Challenge through Index-Based Derivatives Addressing the Basis Risk Challenge through Index-Based Derivatives
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Innovating through the Development of New Products Innovating through the Development of New Products
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Derivative Solutions Based on Equity Volatility Dispersion Derivative Solutions Based on Equity Volatility Dispersion
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Summary Summary
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8 Innovative Insurance-Linked Securities for Financing Extreme Events
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Published:June 2009
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Abstract
In the aftermath of the 2005 hurricane season, reinsurance prices for catastrophic risks increased dramatically in the United States. The pronounced reduction in the size of the retrocession market (reinsurance for reinsurers) forced reinsurers to assess whether such coverage would be available to them in the long term. These developments contributed to the growth of alternative risk transfer instruments that complement traditional insurance and reinsurance. This chapter examines the role of insurance-linked securities (ILS) in the securitization markets for catastrophes. In particular, it considers how the market for industry loss warranties and catastrophe bonds (cat bonds) has evolved in the wake of the 2004 and 2005 hurricane seasons. It also looks at some recent financial innovations in the ILS market as well as the impact of the respite from major hurricanes in 2006 and 2007.
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