Insurance-Linked Securities - Types of bonds

Does anyone here know something about Insurance-Linked Securities? I am talking about cat bond (catastrophe bond), longevity bond, mortality bond, etc., the kind of securitiess that transfer the risk from the insurance companies to the investors. Apparently these animals have been around for sometime. What are the Hedge Funds that invest in them? What are the career opportunities? Which IBD group can best prepare you for such opportunities? Will this be the next big thing in securitization?

 

Considering you've called people who work in Insurance Linked Securities (ILS) animals, I don't know why I'm responding, but I figure you're pretty pissed that you're supposed original idea of securitizing health insurance isn't panning out (since its already been done).

I just made a new username, since there aren't many people in this industry.

Cat bonds are a growing market of about 14 billion right now. Basically they transfer the risk that insurers and reinsurers have of major catastrophe's hitting their portfolios. Basically, its a way to collateralize and securitize the risk of hurricanes, earthquakes, winter storms, and typhoons. They started around 98 and have been growing since. The crisis stopped issuance of them, but the market has rebounded since then. They are SPVs that issue debt that provides reinsurance coverage, and usually pay out high yields. Insurers like that they don't take credit risk on their reinsurance, and investors (hedge funds, money managers, bond funds, etc.) like that the bonds are completely uncorrelated to their bond and stock portfolios.

I'm not gonna give specifics about the hedge funds that invest in them, but the major sell side banks that issue ILS are Goldman, BNP, Deutsche Bank, Aon Benfield Securities, Swiss Re Capital Markets, and GC Securities. Traditionally Goldman and Swiss Re were far and away the only major players, however Aon and GC have come on strong the past year and a half.

As far as career opportunities, there aren't many. This is a niche market at its finest. There are probably only 100 people who could explain the mechanics of a transaction in the world. I would think the insurance coverage groups at one of the I-Banks would be the best way to get exposure.

This will likely not be the next big thing in securitization. At least not in the next 5 years. Maybe in 10 years it can catch on. If it does, it will do for reinsurance what mortgage bonds and CMOs did to mortgages in the 80s. But there are a lot of prevailing factors that will limit this, and the reinsurance market isn't even close to the mortgage market.

If you have any other questions, post them here.

 

The previous poster misunderstands me. I called these securities "animals" because of the name "cat" bond, and I was trying to be humorous. I was talking about the securities, not the people.

I would like to understand what are the factors holding back the potential growth of this industry. I would assume capital market is a more efficient market force than the traditional insurance underwriting.

I have also the following questions:

(1) What are the market sizes of ILS in longevity risk, mortality risk, and health insurance risk, respectively?

(2) Can you explain what is value-in-force securitization?

Many Thanks.

 

I assume some of the BB trading desks (structured products) handle this...

********************************* “The American father is never seen in London. He passes his life entirely in Wall Street and communicates with his family once a month by means of a telegram in cipher.” - Oscar Wilde
 

As far as I know Swiss Re Capital markets are the biggest player. And GS are also involved. This may be incorrect. I'm from (and studied in) South Africa so my profile is not really appropriate for traditional entry into BB's. But I do think I'd have relevant skills (and am interested in) this market. I think it may have growth potential. I would ideally want to move over to the UK. I have the UK Actuarial qualification (FIA) and I have a UK passport so may be possible. I just need more info. on how I would approach this.

 

better fit for you is a life settlement fund...

********************************* “The American father is never seen in London. He passes his life entirely in Wall Street and communicates with his family once a month by means of a telegram in cipher.” - Oscar Wilde
 

Thanks lifeofpurpose. Just had a look at that topic now. However, it gives minimal info. about networking into the industry and the typical profiles of pratitioners etc.. Gives more info. about the securities themselves. I'm not a life actuary. I'm actually working as a buy-side research analyst. Just happened to qualify as an acutary cause that's what bright people are supposed to do in South Africa (or so I was told).

Which country would this latam job be in? Would they pay for me to do Spanish lessons?

 
safricactury:
Thanks lifeofpurpose. Just had a look at that topic now. However, it gives minimal info. about networking into the industry and the typical profiles of pratitioners etc.. Gives more info. about the securities themselves. I'm not a life actuary. I'm actually working as a buy-side research analyst. Just happened to qualify as an acutary cause that's what bright people are supposed to do in South Africa (or so I was told).

no they wouldnt pay for spanish lessons. Which country would this latam job be in? Would they pay for me to do Spanish lessons?

 

Veritas - thanks for the suggestion but I really don't want to do viaticles. Anyway, as far as I understand there are regulatory problems holding that market back right now. I'm much more interested in cat bonds.

 

Some are predicting the mortality bonds to be the next big thing in securitization. I don't know what firms or groups would be best as far as pursuing this as a career.

This is ripe because imo, you'll see people wanting the cash because the economy is still weak, and at the same time life expectancy in the US is actually expected to go down thank to all the diabetes-ridden fatties.

 

Mortality Bond, which sometimes gets confused with Life Settlement, really has nothing to do with individual policy holders. It simply transfers the mortality risk from insurance companies to the investors. Life Settlement is the one that have the investors buy up the policies from policy holders with cash. That's not what I am talking about. The Insurance-Linked Securities I am talking about, including Mortality Bonds, are wholesale arrangement between investment banks and insurance companies, and are totally transparent to the policy holders.

 
Best Response

i am a life actuarial... i dont think my company offers such securities (top life insurer in my country), but i would imagine buyer would get paid to assume the claims from a certain policy holder group (example: single men between 60 and 65), that is: i am the insurance company and i give you 1 million dollars, in return you assume the claims for life for that group (usually pensions are for life, but not always), so if the group dies in a higher rate than expected by the insurer (the mortality table used to price the bond), the person that buys the bond will make money, if not they will loose money. it would be a sort of reinsurance policy for the insurer. This is called longevity risk (the risk is that the client lives longer than expected). the mortality risk is the contrary, the risk is that the client dies before than expected (i dont think there would be a big market for mortality risk unless they force you in the states or europe to buy a life insurance to cover your mortgage like where i live) the Cat risk would be really difficult to price, since cat's are really random (i dont know much about it since i am a life actuarial) so the trick to make money out of this strategy is to really validate your mortality table and really really make sure the law of big numbers apply (it would be better to get a bond of 1 million that contais 1000 policies than 10 policies), also people with low pensions die sooner.

 
feenans:
lifeofpurpose fyi, for a portfolio of individual life insurance policies, increasing the number of contracts above 400 will decrease the standard deviation of returns in a less than marginal magnitude. Supposedly that's an industry "constant", and simplistic simulations seem to support it

are you talking about a real portfolio of policies (reserve) or a portfolio of bonds linked to life insurance... i am very interested in this, is there a paper about this 400 figure or a link or anything (not to discredit what you saying, just because i am really interested in this topic)

i think this bonds could be an expensive alternative for borrowing money. However i dont know how they let the insurers to match their reserves with this bonds (in my country it is very regulated and you cant match your reserves with just ANY asset)

 

Yeah, policies not bonds. I don't really know anything about the business except for this bit of trivia. Yeah, I did read an academic paper that comes out with similar results (as part of a bigger thesis, don't remember what), but I don't have it saved. It did take me less than half an hour to find it through google so you can try your luck.

 

Qui dicta maiores consequatur voluptate est iste. Iusto ad excepturi fugit debitis exercitationem excepturi molestiae. Delectus numquam nisi eaque velit sapiente dolores id. Est est recusandae quidem blanditiis nostrum natus aut.

Rem optio quia maxime nulla doloremque nemo. Provident sed qui ipsum pariatur nemo iste distinctio ut. Sunt aut sed eum ut ipsa quaerat animi quis. Esse alias quasi et corporis alias quaerat. Sunt dolore enim eum.

Suscipit cumque aliquid non ipsum consequatur fugit. Quis corrupti ut itaque repellendus numquam consequatur et. Ut fugiat voluptatibus quis voluptatum ea.

Ipsam qui aut est eum et esse. Ut itaque eos consequuntur consequatur quae dolor. Ut dolor odio sed vitae. Velit voluptas labore voluptatem reprehenderit quo.

Career Advancement Opportunities

March 2024 Investment Banking

  • Jefferies & Company 02 99.4%
  • Goldman Sachs 19 98.8%
  • Harris Williams & Co. (++) 98.3%
  • Lazard Freres 02 97.7%
  • JPMorgan Chase 03 97.1%

Overall Employee Satisfaction

March 2024 Investment Banking

  • Harris Williams & Co. 18 99.4%
  • JPMorgan Chase 10 98.8%
  • Lazard Freres 05 98.3%
  • Morgan Stanley 07 97.7%
  • William Blair 03 97.1%

Professional Growth Opportunities

March 2024 Investment Banking

  • Lazard Freres 01 99.4%
  • Jefferies & Company 02 98.8%
  • Goldman Sachs 17 98.3%
  • Moelis & Company 07 97.7%
  • JPMorgan Chase 05 97.1%

Total Avg Compensation

March 2024 Investment Banking

  • Director/MD (5) $648
  • Vice President (19) $385
  • Associates (86) $261
  • 3rd+ Year Analyst (13) $181
  • Intern/Summer Associate (33) $170
  • 2nd Year Analyst (66) $168
  • 1st Year Analyst (202) $159
  • Intern/Summer Analyst (144) $101
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
BankonBanking's picture
BankonBanking
99.0
3
Betsy Massar's picture
Betsy Massar
99.0
4
Secyh62's picture
Secyh62
99.0
5
kanon's picture
kanon
98.9
6
DrApeman's picture
DrApeman
98.9
7
dosk17's picture
dosk17
98.9
8
GameTheory's picture
GameTheory
98.9
9
CompBanker's picture
CompBanker
98.9
10
Jamoldo's picture
Jamoldo
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”