Catastrophic Mortality Bonds an effective hedge?

Transcription

1 Catastrophic Mortality Bonds an effective hedge? Alex Huynh, Bridget Browne and Aaron Bruhn < copyright Huynh, Browne, Bruhn>

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4 Contents t What causes catastrophic mortality? What is a Catastrophic Mortality Bond? What did we do? Built a Life portfolio Calibrated a cat bond Ran sensitivities and examined HE

5 Catastrophic Mortality Natural catastrophes Industrial accidents War Terrorism Pandemic

6 Pandemic Influenza

7 Catastrophic Mortality Bond Alternative or complement to reinsurance Insurer issues a bond instead of taking out, say, Stop Loss reinsurance But, bonds to date are parametric, ie based on a population index, and do not indemnify

8 Mechanism Overview

9 Mechanism Overview Reduction in outstanding Principal of the Bond Index < Attachment point Principal repayable in Full Index > Exhaustion point Principal completely exhausted Linear Reduction between Attachment point and Exhaustion point Loss Payment 120 Attachment Point Exhaustion Point 100 %reductioninprincipal Index

10 What did we do? Forecast mortality rates for the insured and general population Baseline mortality rate model Influenza pandemic excess mortality rate model Calculation of cash flows Life insurer ss claims model Catastrophic mortality bond payoff model Evaulation of hedge effectiveness Hedge effectiveness model

11 Mortality modelling Baseline mortality (including improvements) pretty much irrelevant (some secondary effects) Pandemic influenza excess mortality Overall level/intensity Age-specific distribution ie shape General population vs insured population

12 Life portfolio Typical term life assurance policies for tractability Ml Male Female Ttl Total Number of policies 12,406 7,594 20,000 Average Age Average Sum Insured $420k $ 270k $365k Expected Claims 2011 $5.7m $1.4m $7.1m simulations

13 Base pandemic scenario Occurs in 2013 and lasts for 1 year Population excess mortality 1.5 per mille Insured experience is 80% of general pop n Shape is as per Spanish Flu

14 Calibrated Catastrophic Mortality Bond Bond characteristics ti Risk Period Start 1 Jan 2011 Bond odtenor eo 5yeas years Principal Attachment Point Exhaustion Point $6.5m % (1 per mille excess) % (2 per mille excess)

15 Hedge Effectiveness measure

16 Base Results A. With bond recalibration: 1. Increase number of policies 2. Uniform Sum Insured B. No bond recalibration: 1. Increase/decrease age profile 2. Mortality Improvement 3. Pandemic intensity 4. Pandemic shape 5. Ratio of general to insured population excess mortality

17 Base Frequency No pandemic with no bond 800 Pandemic with no bond 700 Pandemic with bond 600 Frequency Net claims ($ millions) Hedge effectiveness (%)

18 A1. Increase number of policies i Frequency ,000 40, ,000 80, , Hedge effectiveness (%)

19 A2. Uniform Sum Insured

20 B1. Increase/decrease age profile Fre equency Five years younger Assumed Five years older Hedge effectiveness (%)

21 B2. Mortality Improvement Fr requency AGA 25 year (GPMI) & AGA 25 year (IPMI)* AGA 100 year (GPMI) & AGA 25 year (IPMI) None (GPMI) & AGA 25 year (IPMI) Hedge effectiveness (%) General population Insured population Estimated hedge effectiveness (%) mortality improvement mortality improvement Mean Median 5 th percentile AGA 25 year AGA 25 year AGA 100 year AGA 25 year None AGA 25 year

22 B3. Pandemic intensity it Frequency per 1, per , per 1, per 1, per 1, Hedge effectiveness (%)

23 B4. Pandemic shape % % U V\ W V\ W % % Fr requency Flat 50.00% % 00% Age Hedge effectiveness (%)

24 B5. Ratio of general to insured Frequency % 60% 80% 100% 120% Hedge effectiveness (%)

25 Conclusion Basis risk is an issue for these instruments The obvious insight: best for largest portfolios The slightly less obvious insight: Combination with surplus reinsurance Pooling of smaller players

26 Year Special purpose vehicle Sponsor Maturity (Years) Pi Principal i Initial spread to 3 S&P rating at amount month LIBOR / issuance (Millions) EURIBOR (bps) Attachment / Exhaustion point (%) 2003 Vita Capital I Swiss Re 4 USD 400 A / Vita Capital III Swiss Re USD 100* USD 100* USD 90 EUR 30 EUR 55* USD 100* EUR 55 USD 50* USD 50 5 USD 62 A / Vita Capital II Swiss Re 5 USD 200 BBB / USD 100 BBB / Tartan Capital Scottish Re 3 USD 75* AAA / USD 80 BBB / EUR 100* AAA / Osiris Capital AXA 4 EUR 50 A / USD 150 BBB / USD 100 BB / 110 AAA AAA A A AAA AAA AA- AAA A / / / / / / / / / Nathan Munich Re 5 USD 100 A / to 2011 Vita Capital IV Swiss Re 5 USD 75 BB USD 50 BB USD 100 BB USD 75 BB USD 100 BBB- N/A 5 USD 80 BB+ N/A U.K.: 112.5/120 & U.S.: 105/110 U.K.: 112.5/120 & U.S.: 105/110 Japan: 107.5/115 & U.S.: 105/110 Canada: 111.5/120 & Germany: 110/115 Canada: 120/130 & Germany: 125 / 135 Canada / Germany: 110 / 115, U.K.: 115 / 120 & U.S.: 105 / 110 Covered Area U.S. 70%, U.K. 15%, France 7.5%, Italy 5% & Switzerland 2.5% U.S. 62.5%, U.K. 17.5%, Germany 7.5%, Japan 7.5% & Canada 5% U.S. 100% France 60%, Japan 25% & U.S. 15% U.S. 62.5%, U.K. 17.5%, Germany 7.5%, Japan 7.5% & Canada 5% U.S. 45%, U.K. 25%, Canada 25% & Germany 5% UK U.K. &US U.S. U.K &.U.S. Japan & U.S. Canada & Germany Canada & Germany Canada, Germany, U.K. & U.S.