The Securitization of Insurance Liabilities: The View from Zurich

Insurance-linked securities (ILS) will play an important role in the future. At Zurich Financial Services, ILS have contributed to a better understanding of alternative capital market solutions. They are an essential part of our capital market activities and a key strategic lever. More broadly, the process of securitization has contributed to the recent transformation of the banking industry, and we should ask ourselves whether the banking model (“originate to securitize”) could be valid for insurers too. One strength of securitization is that it will open access to non-traditional and seemingly unlimited sources of capital on a multi-year basis and with limited counterparty credit risk. Securitization is also likely to foster a more efficient use of capital. But insufficient data and modeling capacity make it hard to repackage insurance risk for the markets. Additional impediments are the lack of standardization and the industry's reluctance to disclose proprietary underwriting information. Our comparative advantage is underwriting, which appears to make capital market solutions relatively unattractive. At the same time, we should not discount the demand side. ILS constitute an alternative and attractive class of assets. The development of secondary trading platforms will be essential for the ILS market to grow to maturity. We should also ensure that the incentive structure of market participants reflects underlying risks. This could be done within a framework of self-regulation.