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Contribution Details

Type Master's Thesis
Scope Discipline-based scholarship
Title Determinants of the Issuance and Pricing of Insurance-Linked Securities
Organization Unit
  • Philipp Handler
  • Thorsten Hens
  • Alexandre Ziegler
  • English
Institution University of Zurich
Faculty Faculty of Business, Economics and Informatics
Number of Pages 37
Date September 2016
Zusammenfassung This thesis examines the drivers of the issuance and pricing of Insurance-Linked Securities (ILS). It is based on one of the broadest data sets publicly available consisting of 596 tranches issued from 1996 up to the first half of 2016. I adapt and extend the model introduced by Braun (2014) to assess the factors responsible for pricing. I also introduce a possible methodology to assess the drivers affecting the issued volume of ILS. The latter is accomplished, on one hand through summing issues on an annual fiscal quarter basis and additionally by including all tranches and testing the different variables impacting the market. I use a methodology similar to the one used for pricing, but looking at the size of the issuance as dependent variable. For the pricing aspect, I find several factors having changed since the prior analyses. For the entire period covered in this analysis, I find that an indemnity trigger no longer significantly drives the pricing. I interpret this as a result of increasing demand for ILS in general, driving down prices for parametric, modeled or index-based bonds. Another conclusion concerning established sponsors contradicts findings of earlier papers (e.g., Braun (2014) or Damas (2015)). Swiss Re sponsored bonds, which account for almost a third of the bonds considered in the pricing analysis, are no longer issued at a lower spread compared to bonds issued by other sponsors. Most likely other sponsors have adopted a better cost structure base on the volume of their own issuances and the accumulative experience of other sponsors. I find evidence, that catastrophes having occurred within 6 months prior to the issuance increase the spreads for ILS. This conclusion is based on an analysis with a dummy variable, for the 10 catastrophes with the highest property damage during the past 20 years. As far as size of the issuance, it becomes apparent that the volume is the largest during the second quarter. This finding is not surprising, as most bonds issued have exposure in US-Hurricane/Wind and are issued prior to the North Atlantic hurricane season, which starts at the beginning of the second half of the year. Dealing with the size of new emissions on an individual basis, I find evidence for a negative relation of the High Yield Bond Index and Defaults occurring in the 6 months prior to issuance. The former might be a measure of sponsors to deliver bonds at a spread in a similar range as the High Yield segment, whilst the latter might be interpreted as a desire of the market to a more cautious approach and a diversification of risk over several (smaller) tranches. The data shows that the occurrence of catastrophes has a positive impact on the size issued. After large Catastrophes, traditional reinsurance companies are impacted on their available risk capital which needs to be refinanced, requiring price increase to generate new funds. This is mirrored in the pricing of new bonds and the demand for higher volume as outlined in this paper. This master thesis contributes to previous literature by assessing what factors might drive the volume of emission empirically and by taking new factors into account that could drive pricing.
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