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Home > Insurance Markets Best Practice > Issues in Issuing Insurance-Linked Securities

Insurance Markets Best Practice

Issues in Issuing Insurance-Linked Securities

by Morton Lane

Executive Summary

The checklist of considerations for insurers planning to issue insurance-linked securities (ILS) into the capital markets includes the following:

  • Identify risk concentrations;

  • Quantify the loss consequence of such concentrations;

  • Design offsetting structure to transfer risks to capital markets with the help of agents;

  • Engage a placement agent or investment banker—essential to fruitful design;

  • Engage a risk modeling firm—essential to fruitful design;

  • Decide on denomination of loss measures: indemnity or index;

  • Choose SPV location and attendant experts in those locations;

  • Review structure, design, price, and alternatives to ensure the ILS suitability;

  • Execute.


The first insurance-linked security (ILS) was conceived in 1992, three months before Hurricane Andrew. However, perhaps to the chagrin of the potential issuer, AIG, the deal was not consummated. Had it been, the issuer would have collected for both Hurricane Andrew and the Northridge earthquake of 1994. The first executed ILS took place two years later, but it and some subsequent issues were relatively small in size. Two years after that, the first sizable issue of a catastrophe ILS (usually referred to as “Cat ILS”) heralded the beginning of the modern era. The cedant was the United Services Automobile Association (USAA), the placement agent was Goldman Sachs, and the issue size was US$500 million.

Since that beginning the market has steadily expanded to the undisputed advantage of investors and issuers alike. Almost US$35 billion in risk has been transferred from issuers of ILS to the capital markets (of which US$30 billion is Cat). Furthermore, every time there is another catastrophe, the revealed utility of ILS to cedants leads to increased adoption by traditional risk transferees in the insurance market. To date, issuance has been consummated by insureds (e.g. Tokyo Disneyland, Universal Studios), insurance companies (e.g. USAA, Hartford), reinsurers (e.g. Swiss Re, Munich Re), retrocessionaires (e.g. Montpelier Re, PXRE), official institutions (e.g. IBRD) and sovereigns (e.g. Mexico, North Carolina).

While each different type of issuer has particular needs, many elements of issuance are common to each. Our purpose here is to list the elements to consider when issuing ILS. These elements, listed by importance, are: risk concentration, effect on the overall portfolio of the ILS risk, the investment banker, the risk-modeling agency, denomination, choice of additional agents, the structure of the bond, and the law firm, as well as other factors. We discuss each element below.

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Further reading


  • Lane, Morton (ed). Alternative Risk Strategies. London: Risk Books, 2003.
  • Kunreuther, Howard C., and Erwann O. Michel-Kerjan, with Neil A. Doherty et al. At War With the Weather: Managing Large-Scale Risks in a New Era of Catastrophes. Cambridge, MA: MIT Press, 2009.
  • Himick, Michael (ed).Securitized Insurance Risk, Strategic Opportunities for Insurers and Investors. Chicago, IL: Glenlake Publishing, 1998.
  • Culp, Christopher L. Structured Finance and Insurance: The ART of Managing Capital and Risk. Hoboken, NJ: Wiley, 2006.
  • Froot, Kenneth A. (ed). The Financing of Catastrophe Risk. Chicago, IL: University of Chicago Press, 1999.
  • Tang, Kenny (ed). Weather Risk Management: A Guide for Corporations, Hedge Funds and Investors. London: Risk Books, 2010.


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