Financial Instruments and Markets: A Casebook

10

Catastrophe Bonds at Swiss Re

It was March 2002, and Peter Giessmann, head of Swiss Re's Retrocession Group in ZÅrich, Switzerland, looked at the documents strewn across his desk. A few months earlier, the Swiss Re board of management had made the strategic decision to try to securitize parts of their risk portfolio in the capital markets. They had given Giessmann the mandate to operationalize the decision: Which would be the best way to transfer risk to the capital markets, to the benefit of both Swiss Re and its clients? After researching the market, Giessmann now had to make a proposal.

For the 139-year old reinsurance company, the decision to securitize risk marked a turning point. Never before had Swiss Re, the world's second largest reinsurer, transferred significant parts of the risk it held on its balance sheet. The management board now believed, though, that large natural catastrophe risks—such as Florida hurricanes, European gale storms or Tokyo earthquakes—could not be well diversified within traditional global risk portfolios. These so called “peak risks,” and their disproportionate need for capital if they occurred, were expensive to cover for reinsurers, insurers—and ultimately the insurance takers themselves.

In addition, population and value growth in some regions were projected to increase strongly, while capacity in the insurance industry had just been badly hit by claims resulting from the September 11-event and declining equity markets. In this context, ceding ...