OECD
Report
Catastrophe-linked
securities and capital
markets
Prof. Alberto Monti
Bocconi University and OECD
Bangkok, Thailand 24-25 September 2009
2nd Conference of the OECD International Network on
Financial Management on Large-Scale Catastrophes
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
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Public policy perspective

In the context of an ex ante integrated
financial management strategy, CATlinked instruments may:
► Expand the capacity of private
insurance/reinsurance sector
► Constitute innovative risk transfer tools for
governments (sovereign sponsors)
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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
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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
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CAT-linked securities:
an overview





Different types of instruments
Different triggers
Market trends
Impact of the financial crisis
Drivers, impediments and issues
going forward
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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
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Impediments
 Market fragmentation / lack of
standardised transactions
 Lack of standardised data gathering
 Lack of transparency in the underlying
risk and valuation complexity
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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)
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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
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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 CATlinked securities to transfer a portion of
the CAT risk currently borne by
governments
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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 CATlinked securities
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www.oecd.org/daf/fin/catrisks
Contact
Prof. Alberto Monti
Bocconi University
Department of Law «Angelo Sraffa»
1, via Roentgen
20136 - Milano (ITALY)
E-mail: alberto.monti@unibocconi.it
www.unibocconi.eu
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