More news from the Cat House: The unregulated, nefarious Bermudan market for collateralized reinsurance. Can’t match those yields…

That’s right folks, this is the market our politicians like Commish Mike Chaney and his band of GOP idiots tell us we should trust and believe in. Never mind what happened when this coutry’s official economic policy was to trust the unregulated derivates market, the gang in Jackson has their story and they are sticking to it. Perhaps this is also why our state’s windpool has become a bottomless pit for taxpayer subsidy. I’ll let the good folks at Risk and Insurance Online explain:

But perhaps the investor summed up all his unspoken concerns when he stood up at the end of the presentation and asked, in not so many words: Isn’t it true that you reinsurance guys keep all the good catastrophe risks for yourselves, then give what’s left to catastrophe bond investors?

It is a matter of debate whether the speakers denied that or not, but what they did say definitely is that collateralized reinsurance has its own special place in the world of insurance-linked securities (ILS), separate from CAT bonds. It’s not that one product covers better property-catastrophe risks than the other.

It’s that collateralized reinsurance has found itself a niche at the bottom of the reinsurance program. Collateralized reinsurance usually comes into play at the lowest layers of a primary carrier’s reinsurance program. We’re talking even below the traditional “working layers” where the big-name reinsurers play.

Yep we have a new kid on the block in Collateralized Re and guess what kids? It operates in a non transparent market out of Bermuda as we continue:

Bonds usually cover something like a one-in-100-year event. Bad things that aren’t supposed to happen. Collateralized reinsurance is for bad events that could, and do, happen…….

The collateral in these arrangements is frequently held in cash or treasuries. Not $1 has been lost over the last couple years in any of the collateralized reinsurance trusts at insurance-focused investment firm Juniperus Capital, according to its chief underwriting officer, Stephen Velotti.

Most amazingly, investors can see returns upward of 20 percent to 30 percent for putting up that collateral.

Talk about a sweet deal but as we well know on the Mississippi coast those yields come off the backs of shipyard workers, school teachers, the elderly and the taxpayers of Mississippi as we continue:

While some at the CAT bond conference put on by IQPC called collateralized reinsurance “pioneering” and an “integral part” of a hedging program, Velotti admitted that “the market has a ways to go.”

As Zeng pointed out, it can still be tricky for investors to enter into because, for one, no centralized market exists. And analytics can also be a hurdle, as licensing expensive catastrophe modeling software is but one part of understanding the underlying exposures.

Still, he predicted, should another active hurricane season occur, the capital markets will not launch another “Class of 2005” of fledgling reinsurance companies Chances are, investors will funnel their cash through vehicles like Bermuda-based Juniperus and Nephilia, which can set up these ILS deals.

For the time being, though, our grumbling investor still considered collateralized reinsurance “the hidden market,” one whose current size no one can be certain of.

Hey Buck you getting the picture dude? Somehow I doubt it but the more the rest of us look, the greater the stench that eminates from your beloved, so called “free market”.


4 thoughts on “More news from the Cat House: The unregulated, nefarious Bermudan market for collateralized reinsurance. Can’t match those yields…”

  1. I emailed this article around with this comment:

    The article points out the difference between the catastrophe risks covered by reinsurance and those covered by cat bonds. What it does not explain is how these reinsurance products distort the insurance markets in coastal communities on the Gulf of Mexico and the Atlantic.

    All private insurance companies are limiting their exposure in coastal areas, but not because they cannot charge high premiums. They can and do. They are limiting their exposure so they can limit the volume and amount of catastrophe claims they would have to pay for an extreme event. They don

  2. Thanks Brian. This article illustrates what we’ve been saying for over 2 years now.

    It also illustrates why the solution has to come from Uncle Sam instead of Uncle Haley.


  3. From Mr CLS over at Yahoo ALL:

    good stuff – but let’s go back to the beginning:
    Fourth Quarter Issue /1999
    Bowne – Insurance Finance Report
    Agreement Reached on Financial Modernization Bill
    On November 4th, Congress passed financial modernization legislation, now named the Gramm-Leach-Bailey Financial Services Modernization Act. The new bill repeals the Glass-Steagall Act of 1933 which restricted banks, investment banking firms and INSURANCE companies from affiliating with with each other and engaging in each other’s business….
    Although the legislation re-affirms the McCarran-Ferguson Act, which gives the states the power to regulate the business of insurance, the new legislation also increases the level of FEDERAL regulation over the insurance industry in several important respects.
    Under the new legislation, SECURITIES and INSURANCE underwriting are permitted in a “HOLDING” company.

    Securitization advances slowly, But Surely
    By Dan Lonkevich, The National Underwriter Company
    There are four basic types of securitized insurance products: Catastrophe bonds, catastrophe options and futures, FINANCIAL swaps and index-linked products.
    Cat bonds, which are the most common, can be collateralized or non-collateralized. Typically, because of regulatory, accounting and tax concerns, cat bonds are issued by an offshore special purpose vehicle set up to securitize an insurance company’s exposures….
    Meanwhile, perhaps in an effort to tap the small-to-mid-sized market, several investment banks have formed reinsurance securitization vehicles in Bermuda, namely Lehman Reinsurance Company Ltd. (owned by Lehman Brothers HOLDINGS) and Arrow REinsurance Company Ltd. (owned by Goldman Sachs & Company)

    Now remember that Lehman had the HOLDING company but Goldman didn’t until they were told by Mr. Paulson to take the TARP money and ALSO receive the status of a Bank HOLDING company.
    Did GS really need the TARP money or did they need the HOLDING company status more?
    Could the 100% AIG counterparty CDS payments been legally made to GS without the accomplishment of a HOLDING company?
    Who knew, Paulson, Geitner, Liddy?
    Why did Mr. Wilson go to Lehman Brothers Re (owned by Lehman Brothers HOLDINGS) with Allstate’s Willow Re instead of Goldman’s Arrow Re (owned by Goldman Sachs & Company)?

    “Under the new legislation, securities and insurance underwriting are PERMITTED in a HOLDING company.”

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