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Convergence Insurance and Capital Markets

Convergence Insurance and Capital Markets

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Published by Steven Strauss
We are pleased to present this report on the convergence of insurance and capital markets. It stems directly from an initiative of the Financial Services Governors launched at the World Economic Forum Annual Meeting 2007, when the assembled Governors agreed to carry the dialogue and work beyond Davos in line with the Forum’s mission of being Committed to Improving the State of the World. Subsequently, working groups comprised of industry representatives, academics, experts and Forum staff took up work on several projects that Governors felt were of broad interest, not only to the financial services industry but also the public. This project, examining the convergence between capital markets and the insurance sector, focused in particular on the role new financial instruments could play to better address and syndicate particular types of risk.
We are pleased to present this report on the convergence of insurance and capital markets. It stems directly from an initiative of the Financial Services Governors launched at the World Economic Forum Annual Meeting 2007, when the assembled Governors agreed to carry the dialogue and work beyond Davos in line with the Forum’s mission of being Committed to Improving the State of the World. Subsequently, working groups comprised of industry representatives, academics, experts and Forum staff took up work on several projects that Governors felt were of broad interest, not only to the financial services industry but also the public. This project, examining the convergence between capital markets and the insurance sector, focused in particular on the role new financial instruments could play to better address and syndicate particular types of risk.

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Published by: Steven Strauss on Mar 17, 2013
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World Economic ForumOctober 2008
Convergence of Insuranceand Capital Markets
COMMITTED TOIMPROVING THE STATEOF THE WORLD
 A World Economic Forum Report
in collaboration with
 AllianzBarclays CapitalDeloitteState FarmSwiss ReThomson ReutersZurich Financial Services
 
The Convergence of Insurance and Capital Markets
is published by the WorldEconomic Forum. The Working Papers in this volume are the work of the authorsand do not represent the views of the World Economic Forum.
World Economic Forum USA Inc.
3 East 54th Street17th FloorNew York, NY 10022 Tel.: +1 212 703 2300Fax: +1 212 703 2399E-mail: forumusa@weforum.orgwww.weforum.org/usa
World Economic Forum
91-93 route de la CapiteCH-1223 Cologny/GenevaSwitzerland Tel.: +41 (0)22 869 1212Fax: +41 (0)22 786 2744E-mail: globalrisks@weforum.orgwww.weforum.org© 2008 World Economic Forum USA Inc. All rights reserved.No part of this publication may be reproduced or transmitted inany form or by any means, including photocopying and recording,or by any information storage and retrieval system without explicitwritten permission from the World Economic Forum USA and therespective authors.
REF: 091008
 
3
Contents
Foreword and Contributors
4
1 Executive Summary
6
2 The Existing Market for Insurance Risk 
9
2.1 Market development
9
2.2 Market instruments
10
2.2.1 P&C bonds
10
2.2.2 Life bonds
12
2.2.3 Weather derivatives
13
2.2.4 Industry loss warranties
14
2.2.5 Cat swaps
14
2.2.6 Exchange traded cat risks
14
2.3 Market participants
15
3 Impediments to Growth
17
3.1 Impediments for sponsors
17
3.1.1 Basis risk 
17
3.1.2 Accounting and regulatory treatment
19
3.1.3 Inconsistent ratings treatment
22
3.1.4 Pricing of traditional reinsurance
22
3.1.5 Time and cost
23
3.1.6 Data quality and transparency
24
3.1.7 Limited types of risk 
26
3.1.8 Cultural factors
26
3.2 Impediments for investors
27
3.2.1 Lack of standardization
27
3.2.2 Limited secondary market
29
3.2.3 Long payout periods
29
3.2.4 Valuation complexity
30
4 Conclusions and Recommendations
31
 Appendices
33
 Appendix A: Project Description
33
 Appendix B: Findings
34
 Appendix C: Current Initiatives
37
References
39
 Acknowledgements
40
Footnotes
41

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