OECD Report Catastrophe-linked securities and capital markets Prof. Alberto Monti Bocconi University and OECD Bangkok, Thailand September nd Conference of the OECD International Network on Financial Management on Large-Scale Catastrophes

2 Background The role of capital markets in the financing of large-scale risks merits policy attention High-level Advisory Board to the OECD Network OECD Insurance and Private Pensions Committee and Committee on Financial Markets Convergence of insurance and capital markets Focus of the OECD report  Public policy perspective  Key drivers, impediments and issues

3 Public policy perspective  In the context of an ex ante integrated financial management strategy, CAT- linked instruments may: ►Expand the capacity of private insurance/reinsurance sector ►Constitute innovative risk transfer tools for governments (sovereign sponsors)

4 Purposes of the report  Assessing the potential role of capital markets in financing disaster costs  Developing a better understanding of CAT-linked financial instruments  Identifying technical and policy issues relating to the growth of the market  Making recommendations

5 Disaster costs  Cost of emergency rescue, response and relief measures (including temporary assistance)  Damages to public assets and critical infrastructures  Property damages, including reconstruction costs, and economic losses suffered by businesses and individuals affected by a disaster

6 CAT-linked securities: an overview  Different types of instruments  Different triggers  Market trends  Impact of the financial crisis  Drivers, impediments and issues going forward

7 Drivers  Demand for additional risk transfer capacity  Broader investor base and portfolio diversification benefits  Advances in technology and modelling of CAT risk  Broader sponsor base: corporate / sovereign issuers

8 Impediments  Market fragmentation / lack of standardised transactions  Lack of standardised data gathering  Lack of transparency in the underlying risk and valuation complexity

9 Issues  Cost comparison (with traditional reinsurance and other instruments)  Trade-off between moral hazard and basis risk  Regulatory and solvency issues  Market transparency and liquidity issues (including issues in secondary market trading and investors’ protection)

10 Issues (cont’d)  Key regulatory questions:  To what extent should regulated insurance and reinsurance companies be allowed to obtain capital relief for transfers of CAT-risks by way of securitisation on terms that are consistent with other methods of transferring risks, such as traditional reinsurance or retrocession?  To what extent should a SPV providing protection to the sponsor of a CAT bond transaction be regulated?  Regulatory developments in Europe

11 Recommendations  Promote the collection and dissemination of high-quality data on CAT risks and losses according to harmonised criteria  Promote transparency in the CAT-linked securities market  Consider the opportunity to use CAT- linked securities to transfer a portion of the CAT risk currently borne by governments

12 Recommendations (cont’d)  Examine the accounting, solvency and prudential rules presiding over the CAT-linked securities market to remove any unnecessary impediments  Encourage research on areas worthy of further investigation  Encourage further education on CAT- linked securities

13 Contact Prof. Alberto Monti Bocconi University Department of Law «Angelo Sraffa» 1, via Roentgen Milano (ITALY)