1. Alternative Risk Transfer 27 October 2000 Peter Allen Head of Alternative Risk Transfer Lloyd’s

2. What is ART? ART is an umbrella term for a range of products, other than conventional annual insurance or reinsurance, which handle financial risk. Generally, these products import techniques, attitudes and language from corporate finance and the capital markets into areas normally dominated by insurers, or vice versa.

3. Examples of ART n Securitisation and insurance derivatives n Insuratisation n Finite and financial reinsurance n Captives

4. Examples of ART Insurance Securitisation n Transferring bundles of risk directly to the capital markets

5. bond investors principal coupon bond claim r/i policy CAT BOND if the cat bond is triggered, then there is no return of principal premium SPVcedant

6. Cat bonds For cedantmore capacityfrictional costs no credit risk traditional reinsurance is cheaper For bond high yield debtdo they understand? holdernon-correlation Advantages:Disadvantages:

7. Types of cat bond trigger

8. Examples of ART Insuratisation n Using insurance capital and skills to price and assume banking risk n Expands the insurable universe of risk towards the inclusion of any surprise which can impact corporate earnings

9. Examples of insuratisation n Revenue guarantee n Residual value n Credit derivatives n Enterprise risk

10. Insuratisation For insurernew line of businessmoral hazard less competitioncorrelation not correlated unfamiliarity with traditional book For clientnew source of risk capitallevel of disclosure competitive pricinghow certain is pay out? Advantages:Disadvantages:

11. Examples of ART Finite n Usually multi-year contracts in which the loss experience and time value of money is explicit.

12. Examples of ART Finite YEARS LOSS RATIO (%) 15432 200 100 50 150

13. Examples of ART Captives and protected cells n Businesses bundle up their risks before transfer to reinsurers or the capital markets

14. ART at Lloyd’s Why Lloyd’s should be strong n Entrepreneurial culture n Expertise in pricing basis risk n Capacity to support the expertise

15. ART at Lloyd’s Why Lloyd’s should be strong n Direct access to decision makers n Contingent capital market n Strong licence network

16. ART at Lloyd’s n Insuratisation: changes to financial guarantee rules n Securitisation and derivatives n Finite

17. Financial guarantee at Lloyd’s n Change to FG system for 2001 n Previously prohibited classes now permitted n Legal & regulatory limits

18. Securitisation at Lloyd’s n RK Carvill and Lehman Brothers: Lloyd’s syndicate receives reinsurance protection in the event of a US catastrophe n ARTransform