Benefits of ART

Question 1

Diversification

Answer 1

• Swap contracts to swap uncorrelated risk packages

* Exposure to counterparties other than reinsurers (cap markets, banks, etc.)

Question 2

Smoothing of results

Answer 2

• Integrated risk covers provide multi-line, multi-year reinsurance, which stabilises the cedant’s results
• Increased diversification = reduced volatility

Question 3

Solvency

Answer 3

Stabilise experience over time = possible easing of sol reqs that insurer needs to meet

Question 4

Source of capital

Answer 4

• Post loss funding

* Securitisation – liability does not have to be accounted for in stat returns

Question 5

Cheaper cover

Answer 5

• Securitisation – insurance risk uncorrelated with market risk, cap markets may require lower return on capital than reinsurers
• Integrated risk covers – insurer not over-insured
• Integrated risk covers - reinsurer obtaining multi-line (diversified) portfolio, therefore may be happy to offer more favourable terms than if the individual risks were priced separately

Question 6

Greater security of payment

Answer 6

• Capacity of cap markets greater than that of reinsurers = lower risk of default
• Securitisation = capital provided to insurer up-front

Question 7

More efficient risk management

Answer 7

• ART products can be tailored to requirements of insurer = over-insurance avoided
• Insurance derivatives to hedge against risks

Question 8

Tax advantages

Answer 8

• Products may be structured to exploit tax loopholes