Cat bonds may be an attractive investment EU insurers in the Solvency II framework

9 March 2017 —
Investing in catastrophe bonds is viewed as an attractive investment by some primary insurance companies, with the implementation of Solvency II meaning the assets can have certain capital benefits, depending on an insurers profile, reads a column recently published by Artemis.

On particular in Europe, Artemis syas, there is a trend emerging whereby insurers from certain countries are looking at catastrophe bonds as an asset that will not be so detrimental to their solvency capital requirements if they are invested in, which alongside the benefits of a stable return and diversification is making catastrophe bonds increasingly attractive.

Under Solvency II, investments made by insurers in catastrophe bonds are supposed to take into account both credit and catastrophe risk, but with credit risk extremely minimal, due to their fully collateralised nature, that is perhaps less relevant in terms of capital charges.

Additionally, holding catastrophe bonds as assets at an insurance firm should be treated as though the underlying catastrophe exposure is being directly held by the investor, which suggests that therefore an insurer could leverage this to enhance its diversification under Solvency II rules as well, as an added bonus.

So for some European insurers there could be benefits to investing in ILS such as catastrophe bonds, over and above other types of alternative asset classes. The charges under solvency capital ratios could be lower and the benefits of diversification can also have some positive effects as well.

It's important to note that this isn't applicable to every insurer and different countries regulators have differing opinions on, or even an outright ban on, insurers investing in catastrophe bonds.

Read the full article here.

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