Hi In insurance linked securities ,it is stated that "The SPV establishes a reinsurance agreement with the sponsoring insurance company". So I am not clear with this line. Does this mean that the Insurer pays premiums to SPV but still the cover is not transferred entirely as still some risk is retained with the Insurer? Regards
Hi Nimisha Under the terms of the reinsurance agreement, the SPV may be taking on all the risk from the sponsoring insurance company ie providing full cover. Or as you say, the SPV may be insuring only some of the risk taken on by the insurer. I guess in theory, either is possible. However, it appears that the payment from the ILS will be no more than the principal of the bond (plus perhaps any remaining coupons?) - so the SPV may not be taking on all the risk. And the examples in the Course Notes all cover very specific extreme events - ie the SPV doesn't pay out in all circumstances. So this is suggesting to me that generally the risks are not transferred entirely.
