Remember Larry from Newhart? I think about him and his brother Darryl and brother Darryl – both of whom were mute, btw – when I look at these graphs of the changing picture of investors in insurance linked securities (ILS).
A look at who securitizes insurance risks as of July 2007 shows insurance and reinsurance are the leading ILS sponsors.
Another view of the changing picture is seen in the ILS natural catastrophe investor base is illustrated in the companion graphic below.
In the first graphic, the percentage of government-sponsored insurance linked securities doubled when the years 2001-2007 are segregated from the total ten-year period 1997-2007. However, the percentages represent an average indicating government sponsored ILS accounted for a larger percentage in one or more years.
Government is also not subject to the private-sector factors that produce large swings in premiums around expected loss in private insurance markets. Thus, compared with the private sector, government should be able to set insurance prices closer to expected loss for hurricanes and other catastrophic risks, and keep those prices closer to expected loss over time.
While most in this country would expect government to protect taxpayers from the investment loss in the private insurance market, take note of today’s breaking news.
A massive foreclosure rescue bill cleared a key Senate test Tuesday by an overwhelming margin, with Democrats and Republicans both eager to claim election-year credit for helping hard-pressed homeowners.
However, opponents like Senator Mike Enzi (R-Wyoming) claim the bill is bailout that supports those who created the crisis.
They expect the federal government to turn their backs on responsible lenders and borrowers and renters waiting — waiting — to become first-time homeowners, and support those groups that have pushed our housing market into decline with bad loans and bad investments…
Although it too collapsed, one of those in the group was the Bear according to this story tying the collapse of two hedge funds to the collapse of the sub-prime mortgage market.
The change in the funding base of insurance linked securities during this period depicted in the second set of graphs gives cause to question the possibility of a link – a lack of transparency precludes an answer.
However, with the government now investigating off-shore investments, transparency may come sooner than later – and for that information, a h/t to cominglatersooner who likely has some idea if the banks and hedge funds that invested in sub-prime mortgages are the brother Darryl to some of those in the funding base of ILS.
If nothing else, all of this suggests Brian Martin is correct and that wind coverage will be added to NFIP by design or default as the case may be”