| Reinsurers limit use of derivatives to hedging purposes |
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| 08/01/2006 | |||||||||||||||||||||||||||||
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The participation of reinsurance companies in derivative markets remains limited, according to the second global reinsurance market report of the International Association of Insurance Supervisors (IAIS). "The reinsurer's participation in credit risk transfer remains modest, and that, more generally, reinsurer's involvement in derivatives continues to be primarily for hedging (i.e. risk mitigation) rather than speculative purposes", states the IAIS in the report. Interest rate contracts are the most widely used instruments for hedging purposes, while credit derivatives such as credit default swaps are reported to be used for non-hedging purposes. This is in keeping with 2003, which showed a relatively similar trend. According to the data listed by the association, the notional amount of interest rate contracts used by insurers in 2004 was $127,894 million, while credit derivatives used by reinsurers in 2004 was $45,031 million, of which only $84 million was used for hedging purposes. Non-hedging activities "might form part of an asset management strategy, with an objective of diversification, for example, or for income generation, such as locking in attractive investment conditions for future available funds", reports the IAIS. The notional amount of derivatives held by reinsurers is a measure of the contractual cash flows to be exchanged between the parties in the derivative transaction. It is a proxy for reinsurance companies' level of involvement in derivatives. Reporting entities' use of derivative financial instruments
Second part of the article In the same report, the IAIS also commented of the current state of the reinsurance industry, by all means healthy. It said that 2004 had not been as profitable as 2003, but that the capital of reinsurers further strengthened in the meantime, confirming the capacity of the sector to withstand severe natural disasters. "The reinsurance sector has shown considerable resilience in the face of two years of higher than expected natural catastrophes. It has also demonstrated more recently that it is able to attract additional capital both in the form of new start-ups as well as support for existing reinsurers", said Julian Adams, Chairman of the IAIS Reinsurance Transparency Group, the IAIS working party which produced the report. This bodes rather well for 2005, which has been replete with catastrophes, beginning with the Tsunami right at the outset of the year through Hurricane Katrina in October, now estimated to be the most costly disaster ever for insurers. "The reinsurance sector showed resilience in the face of such losses, helped by the fact that the past few years have been characterised by a hard market which had enabled reinsurance companies to rebuild balance sheets depleted by the WTC tragedy ", concluded the IAIS. Next year's report will confirm this observation. J.L. |
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Articles of the same Topic : Derivatives |
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