The Handbook of Insurance-Linked Securities -- Contents -- About the Contributors -- Acknowledgements -- 1 Introduction -- PART I NON-LIFE SECURITISATION -- 2 Non-life Insurance Securitisation: Market Overview, Background and Evolution -- 2.1 Market overview -- 2.2 Market dynamics -- 2.3 The question of basis risk remains -- 2.4 ILS and the credit crunch -- 3 Cedants' Perspectives on Non-life Securitization -- 3A Insurance-linked securities as part of advanced risk intermediation -- 3A.1 Motivation for Allianz to take part in ILS activities -- 3A.2 Objectives of insurance companies -- 3A.3 Case study: Blue Fin Ltd -- References -- 3B Reinsurance vs Securitisation -- 3B.1 Keeping risk vs transferring it -- 3B.2 Reinsurance vs securitisation -- 3B.3 Application to main P&C risks -- 3B.4 Case studies: Aura re and Sparc -- 3B.5 Limits and success factors to securitisation -- References -- 3C Securitisation as a diversification from traditional retrocession -- 4 Choice of Triggers -- 4.1 General aspects -- 4.2 Indemnity triggers -- 4.2.1 Scope of coverage -- 4.2.2 Payout timing -- 4.2.3 Loss verification -- 4.2.4 Transparency -- 4.3 Non-indemnity triggers -- 4.3.1 Parametric triggers (pure and index) -- 4.3.2 Industry loss triggers -- 4.3.3 Modelled loss triggers -- 4.4 Choosing the optimal trigger -- 4.4.1 Comparison of trigger types -- 4.4.2 Choice of trigger and alternative solutions -- 5 Basis Risk from the Cedant's Perspective -- 5.1 Introduction -- 5.2 Investor vs sponsor risk -- 5.3 Trigger types -- 5.4 Catastrophe models -- 5.4.1 Key components of catastrophe models -- 5.4.2 Uncertainty -- 5.5 Sources of basis risk -- 5.5.1 Source 1: Catastrophe model error/shortcomings -- 5.5.2 Source 2: Discrepancy between the modelled index loss and the modelled company loss -- 5.5.3 Source 3: Dynamic basis risk -- 5.6 Defining basis risk.

5.7 Quantifying basis risk -- 5.7.1 Measures for pro rata hedges -- 5.7.2 Measures for digital hedges -- 5.7.3 Measuring positive basis risk -- 5.8 Minimising basis risk -- 5.8.1 Over-hedging -- 5.8.2 Choice of index -- 5.8.3 Reset clauses -- 5.8.4 Cat model input -- 5.9 Conclusion -- Acknowledgements -- References -- 6 Rating Methodology -- 6.1 Standard & Poor's ratings services' rating process -- 6.1.1 Initial interaction -- 6.1.2 Risk analysis -- 6.1.3 Documentation review -- 6.1.4 Transaction closing -- 6.1.5 Surveillance -- 6.2 Risk analysis -- 6.2.1 Trigger options -- 6.2.2 Indemnity vs non-indemnity triggers -- 6.2.3 Risk factors -- 6.2.4 Adjusted probability of default -- 6.2.5 Application of methodology -- 6.2.6 Default table -- 6.2.7 Multi-event criteria -- 6.3 Legal and swap documentation review process -- 6.3.1 Insurance focus points -- 6.3.2 Legal and structural focus points -- 6.4 Impact on sponsor -- 6.4.1 Capital model treatment of ILS -- 6.4.2 Summary of basis risk analysis -- 6.4.3 Sources of basis risk -- 6.4.4 Link to ILS revised probability of attachment -- References -- 7 Risk Modelling and the Role and Benefits of Cat Indices -- 7.1 Components of a cat model -- 7.2 Insurance-linked securities -- 7.2.1 General overview -- 7.2.2 Insurance-linked security triggers -- 7.2.3 Basis risk -- 7.3 Cat indices -- 7.3.1 Property Claims Service (PCS) -- 7.3.2 Re-Ex - NYMEX -- 7.3.3 Insurance Futures Exchange Service (IFEX) -- 7.3.4 Carvill Hurricane Index (CHI) - Chicago Mercantile Exchange (CME) -- 7.3.5 Paradex -- 7.4 Summary -- 8 Legal Issues -- 8.1 The note offering - federal securities law implications -- 8.1.1 The distribution of the notes -- 8.1.2 Application of the anti-fraud provisions of the federal securities laws -- 8.1.3 Securities offering reform -- 8.1.4 Provision of information -- 8.1.5 The Investment Company Act of 1940.

8.2 The note offering - the offering circular -- 8.2.1 Important terms -- 8.2.2 ERISA considerations -- 8.2.3 Other considerations regarding the proceeds and payment of interest -- 8.2.4 The risk analysis -- 8.2.5 Opinions -- 8.3 Types of transactions -- 8.3.1 Parametric, index and modeled loss transactions -- 8.3.2 Indemnity transactions -- 8.4 Conclusion -- 9 The Investor Perspective (Non-Life) -- 9.1 The creation of a sustainable and liquid market -- 9.1.1 Creation of common terminology -- 9.1.2 Risk analysis -- 9.1.3 Correlation with other investments in the portfolio -- 9.1.4 Relative value -- 9.1.5 Valuation and liquidity -- 9.2 Key transaction features from the investor perspective -- 9.2.1 Assessment of the underlying risks being securitised -- 9.2.2 Risk assessment of the instrument -- 9.2.3 Pricing and risk-return profile -- 9.3 Market evolution: the investor perspective -- 9.3.1 Collateral arrangements -- 9.3.2 Data transparency -- 9.3.3 Exposure monitoring -- 9.3.4 Modelling rigour -- 10 ILS Portfolio Monitoring Systems -- 10.1 Introduction -- 10.1.1 Completing the circle -- 10.1.2 'Square peg in a round hole?' -- 10.2 Miu - An ILS platform in a convergent space -- 10.2.1 Overview -- 10.2.2 Nuts and bolts - how the platform works -- 10.2.3 Step by step - entering a contract -- 10.2.4 Portfolio analysis -- 10.3 RMS library of cat bond characterisations -- 10.3.1 Motivation and objectives -- 10.3.2 How is it done? A bird's eye view -- 10.3.3 Apples to apples - a leap for the market -- 10.4 Conclusion -- 11 The Evolution and Future of Reinsurance Sidecars -- 11.1 A brief history of the brief history of sidecars -- 11.2 Sidecar structures -- 11.2.1 Basic structure -- 11.2.2 Market-facing sidecar -- 11.2.3 Non-market-facing sidecar -- 11.2.4 Capitalising sidecars -- 11.2.5 How sidecars and catastrophe bonds are different.

11.3 The appeal of sidecars -- 11.3.1 From a cedant/sponsor perspective -- 11.3.2 From an investor perspective -- 11.4 Structuring considerations -- 11.5 The outlook for sidecars -- 11.6 Conclusion -- 12 Case Study: A Cat Bond Transaction by SCOR (Atlas) -- 12.1 Introduction: SCOR's recent history -- 12.2 Atlas III and IV: Background -- 12.3 Atlas: Main characteristics -- 12.4 Basis Risk -- 12.4.1 Reset -- 12.4.2 Gross up -- 12.4.3 Overlap -- 12.4.4 Synthetic covers -- 12.5 Total Return Swap -- 12.6 Conclusion -- Appendix A -- A.1 Definition of events -- A.2 Extension events -- 13 Case Study: Swiss Re's New Natural Catastrophe Protection Program (Vega) -- 13.1 A positive evolution of Swiss Re's ILS strategy -- 13.2 Swiss Re accesses multi-event natural catastrophe coverage -- 13.3 The first ILS to use a cash reserve account as credit enhancement -- 13.4 Innovation leads to more efficient protection -- PART II LIFE SECURITISATION -- 14 General Features of Life Insurance-Linked Securitisation -- 14.1 Life insurer corporate and business structures, risks and products -- 14.1.1 Mutual life offices -- 14.1.2 Proprietary life offices -- 14.1.3 Other forms of life office -- 14.1.4 Principal risks associated with life insurance business -- 14.1.5 Principal product types and associated risks -- 14.2 Actors and their roles -- 14.2.1 Sponsor -- 14.2.2 Investors -- 14.2.3 Regulators -- 14.2.4 External professional advisers -- 14.2.5 Ratings agencies -- 14.2.6 Monoline insurers -- 14.2.7 Liquidity providers -- 14.2.8 Swap providers -- 14.2.9 Others -- 14.3 Process -- 15 Cedants' Perspectives on Life Securitisation -- 15A A cedant's perspective on life securitisation -- 15A.1 Why securitise? -- 15A.2 Life ILS can be complex -- 15A.3 Outlook for life ILS -- 15B A cedant's perspective on life securitisation -- 15B.1 Key considerations.

15B.2 Examples of securitisation opportunities -- 15B.3 Differences between securitisation and reinsurance -- 16 Rating Methodology -- 16.1 Fitch's approach to the rating process -- 16.2 Insurance risk analysis -- 16.2.1 Risk modelling -- 16.2.2 Ratings benchmarks -- 16.2.3 Analysis of sponsor and other counterparties -- 16.2.4 Surveillance -- 16.3 Zest: a VIF case study -- References -- 17 Life Securitisation: Risk Modelling -- 17.1 Modelling of a catastrophic mortality transaction -- 17.2 Modelling of a VIF transaction -- 18 Life Insurance Securitisation: Legal Issues -- 18.1 Monetisation of future cash flows -- 18.1.1 Some background on monetisation -- 18.1.2 The market drivers of monetisation -- 18.1.3 Monetisation in the current climate -- 18.1.4 Some transaction structures -- 18.2 Legal aspects of life insurance securitisation - some key features -- 18.2.1 Closed book/open book -- 18.2.2 Unit-linked policies - not 'with profits' policies -- 18.2.3 Risk transfer versus no transfer -- 18.2.4 Warranties -- 18.2.5 Monoline wrap (payment obligation) -- 18.2.6 Recharacterisation risk -- 18.3 Some examples of value-in-force securitisation/monetisation -- 18.3.1 A classical VIF structure: Gracechurch -- 18.3.2 A private but reported transaction: Zest -- 18.4 Outlook -- 19 The Investor Perspective (Life) -- 19.1 Life insurance-linked risks and investor appetite -- 19.1.1 The role of the monolines -- 19.1.2 Understanding the risk -- 19.1.3 Correlation with other investments -- 19.1.4 Relative value -- 19.1.5 Valuation and liquidity -- 19.2 Key transaction features from the investor perspective -- 19.2.1 Risk assessment of the instrument -- 19.2.2 Pricing and risk-return profile -- 19.3 Market evolution: the investor perspective -- 20 Longevity Securitisation: Specific Challenges and Transactions -- 20.1 Mortality and longevity risk.

20.2 A market for longevity risk.