As Hurricane Irma has left its mark on Florida, and Texas continues the cleanup from Hurricane Harvey, what do these catastrophes imply for the insurance-linked securities (ILS), alternative capital, and reinsurance markets?
Insurance-linked securities (ILS) are derivative or securities instruments linked to insurance risks. ILS value is influenced by an insured loss event underlying the security. This securitization model was born of efforts to develop an additional source of insurance and reinsurance capacity by transferring insurable risks to the capital markets. As the ILS market has developed, it has provided an alternative source of risk capital, most often for property catastrophe risks such as windstorm and earthquake.
A risk retention group (RRG) is a captive insurance company formed pursuant to the federal Liability Risk Retention Act. This article discusses some of the basics of RRGs, including differences between RRGs and other types of captives.
A panel discussion on corporate governance of Risk Retention Group (RRG) at the 2017 Captive Insurance Companies Association (CICA) Conference provided a useful way to categorize RRGs. RRGs can be divided into one of three categories based on whether there is a sponsor and, if so, the type of sponsor.
A reciprocal insurance company is an arrangement through which mutual promises of the participants are exchanged with respect to their insurance risks. While not a separately incorporated company, it is characterized as an insurance company for federal tax purposes.