Securitization Offers Way for Insurers to Spread Their Underwriting Risk

The CAS has formed the Securitization/Risk Financing Advisory Committee. The committee's initial goal was to identify research and education that the Casualty Actuarial Society should undertake in the area of securitization/risk financing. The committee's report can be found on the CAS Web Site.

The report starts by defining securitization and risk financing within the context of insurance. Securitization is not a new concept; underlying each transaction are two basic components:

1. a risk transfer mechanism, typically a reinsurance contract, which actuaries are familiar with pricing and analyzing
2. a delivery mechanism, typically a bond or an index contract which the financial market is familiar with delivering.

The committee looked at actuaries' current level of involvement and assessed the skills used.

Next, the report considers areas where actuaries may increase the level of their involvement and the skills required for doing so. The delivery mechanism and the overall combination of the risk transfer instrument with a security are areas that may be less familiar to actuaries. The core skills required are financial risk management and structured finance, which are covered to a certain extent on the current syllabus. To increase involvement in securitization, actuaries can look to broaden the scope of their financial engineering skills and their understanding of the regulatory environment surrounding investment banking.

The committee considered the state of the insurance securitization market by reviewing the types of deals completed to date. The majority of activity has been related to catastrophe bonds issued on an indemnity or index basis. The broad subject area was divided into narrower topic areas of consideration as follows:

• Definition of insurance securitization
• Pricing and analysis of the underlying risk in insurance securitization
• Index and indemnity securitization
• Rating agency considerations
• Accounting, regulatory, and tax considerations

Next the report describes the educational requirements that will enable the actuary to obtain a basic level of familiarity with these instruments as well as an expert level of knowledge. This includes a review of the current CAS exam syllabus and an identification of material needed for a general level of expertise that is not covered by the current syllabus.

Finally the report identifies and describes some areas where further research by actuaries is needed to expand the role of the casualty actuarial profession in this quickly evolving field.

William F. Dove chairs the Securitization/Risk Financing Advisory Committee. It is staffed by Brian A. Hughes, Alexander Krutov, Michael V. Leybov, Glenn G. Meyers, Christopher E. Olson, Peter Polanskyj, and Manalur S. Sandilya.