ART Products

[Georgina]

Hi

See Page 97 of Lam.



1) eg. General Insurance Company or Reinsurer (eg floods, cyclones, fires etc)I can see how the insurer or reinsurer could use weather derivatives or Cat-E-Puts, but how could it use unconventional vehicles?

2) Can anyone give me some practical exams of when unconventional vehicles are used to cover conventional risks for banks, life companies, oil companies etc?

3) Does anyone know how unconventional vehicles are treated by Regulators and/or under International Accounting Standards? For example,

- finite insurance, which effectively smoothes profit and loss, or
- risk retention groups, which pool capital for a number of small to medium sized companies.

Thanks
Georgina

 

[GottaStudyHard]

I know this is 11 years late, but I'll try and answer the question to the best of my ability.

1)
A General insurance company most likely wouldn't use unconventional vehicles to manage risk within their organization, they would possibly sell it as their line of business. For instance one of the unconventional products are self-insured retentions. A General insurer could add within the contract that the policyholder needs to take on some of the insured risks. This means that in the case of SIR if a risk event occurs, the policyholder would have to provide a minimum amount of payment towards the claim. The amount the policyholder pays will be capped at some point, which is called the attachment point.

If the claim cost is above the attachment point the insurer will be responsible for paying for everything above the attachment point. This is a good arrangement for the insurer, since it decreases the claim frequency (as claims below the attachment point are not reported), and it decreases the administrative costs of dealing with claims underwriting etc.

So insurers incorporate unconventional vehicles into their products.

2)
There's an insurance company called Alliance, I've entered their website below.
https://www.allinsgrp.com/oil_and_g...iness, they,risks exclusive to their industry.

They provide cover for companies within the oil and gas industry, the top risks faced in this industry are fire, explosions and equipment breakdown. This company sells policies that provide coverage over a basket of these risks. They tailor their insurance products to the specific company (probably because of the lack of homogeneity amongst oil companies), this is an example of multi-trigger policies which are insurance policies that cover a basket of risks.

3)
Looking at accounting standards there are unconventional vehicles that fit the definition of "insurance" (earnings protection, multi line-multi year policies, Self-insured retentions, multiple trigger policies and finite insurance), set out by IFRS https://www.iasplus.com/en/standards/ifrs/ifrs4.
All of these insurance products are treated in the same way under IFRS, I've added a link so you can check it out.

Then there are Captives (which is a licensed insurer that is wholly owned by the insured parent company), these have to be audited in the same way as normal insurance companies. However, they are considered tax havens since the premiums paid to the captives are tax-deductible. This applies to rent-a-captives as well.

Solvency II has a section https://www.eiopa.europa.eu/rulebook/solvency-ii/article-6495_en on how captives can calculate their minimum capital requirements. So the way that Captives are treated will vary from the regulator to regulator.