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Catastrophe risk bonds SPV Related Issues

Author: ZuoZuo From: www.yourpaper.net Posted: 2009-04-02 05:29:43 Read:
Summary: SPV (Special Purpose Vehicle, ie special purpose entities) is a key link in the operation of the catastrophe risk bonds and core strength. Starting from the current market conditions, and draw on the research of asset securitization, and taking into account the special nature of the catastrophe risk bonds, SPV legal form of organization, set up the basic operation of the main body and the risk of isolation measures catastrophe risk bonds The problem was discussed.
Keywords: catastrophe risk bonds SPV

Spawned out of a new type of ART (non-traditional risk transfer) tools, which they appear in the context of catastrophe risk bonds (Catastrophe Bond) since the 1990s global catastrophe accident frequent occurrence and the magnitude of such losses continuously improve not only enhances the Insurance underwriting capacity for the development of the insurance industry has injected new vitality, and also to provide investors with an effective way to get a higher income from a diversified investment portfolio, the insurance industry and the whole financial sector development has generated considerable big impact. SPV (Special Purpose Vehicle, that the special purpose vehicle) intermediaries as securitization activities, play a role related to the success or failure of the operation of catastrophe risk bonds. SPV at home and abroad about the operation of catastrophe risk bonds less specialized research. In the current international context, especially American and European countries catastrophe risk securitization carried out in full swing environment, domestic academia and relevant departments, such as floods, earthquakes and other natural disasters the securitization operation to transfer risk to finance capital the increasing demands. Learn from some of SPV research consensus view of the SPV core position in the operation of the catastrophe risk bonds, taking into account the special nature of the catastrophe risk bonds, this aspect of the basic issues to do preliminary study to for catastrophe risk bonds this new tool in our country actually put into use to provide certain draw.

Catastrophe risk bonds SPV Overview

Catastrophe risk bonds is so far used the most widely used and mature the ART tool for one. It is the special bonds issued yield depends directly on the original insurance company or reinsurance company (or the establishment or designation of the SPV) catastrophic loss situation of the company or the industry as a whole. Different from ordinary bonds, catastrophe risk bond principal return depends on the occurrence of specific events. Obligation bonds prescribed trigger event (Triggering Event), then the bond issuer to pay principal or interest to investors of some or even all be exempt. The bond issuer (insurer or re-insurer) will use such funds for claims. Compared to traditional reinsurance, catastrophe risk bonds with default risk and moral hazard, low transaction costs for and dispersed investors portfolio risk increase revenue advantage, and as reinsurance supplement or even replace, insurance and capital markets are increasingly developed into the new darling. Figure 1 shows the typical catastrophe risk bond structure.

SPV duties in the operation of the catastrophe risk bonds is that apply to (re) insurance premiums charged to future insurance period cash flow as the basis for the capital market investors to issue bonds, then investment monies paid by investors short-term investment or the investment of the funds deposited in a trust fund, resulting in the catastrophic accident or loss reaches a certain magnitude is used to apply to (re) insurer claims, and vice versa for payment of the return on investment of capital market investors. SPV is a key link in the operation of catastrophe risk bonds and core strength, can be said that the most ingenuity for catastrophe risk securitization, its running success directly determine whether the operation of the bonds can play its due role.
Earlier state in the United States on behalf of the insurance securitization operations, catastrophe risk bonds is usually aimed to pass the catastrophe risk (re) insurer to the establishment or operation of an existing SPV, SPV general such as the Cayman Islands and Bermuda offshore financial market insurance license with a special purpose reinsurance company is a holding such as open (usually a limited liability company). SPV offshore operations aim to enjoy the offshore financial market low capital requirements and tax incentives to business entities. SPV commissioned by the (re) insurers to issue bonds to investors in capital markets, the funds raised by the bond issue will usually be included in a mortgage account or trust fund to as SPV bonds held by the other party to the contract of reinsurance or guarantee of payment obligations. Since the operation of the securitization of insurance risk began to emerge in the early 1990s, the case of the United States, the operation of its insurance-linked securities has accumulated some experience, which is commendable (bankruptcy remote SPV independence and bankruptcy risk isolation ) stringent requirements, mainly include: (re) insurer initiated just as the organizers of the securitization transaction and not directly involved in the transaction; SPV the promoters remain independent organizations and accounting; SPV confined engaged in securitization related business; the SPV to issue bonds to raise funds for its own only a nominal amount, while the real by an offshore charitable trust, enjoy the right to manage these funds, and this trust is not a sponsor of members, it is also a direct link;, as well as some of the other restrictions and regulations on the governance structure and organization of the SPV.
Catastrophe risk bonds SPV operation specializes in small, study of the existing domestic and international large are focused on the general asset securitization SPV related legal issues, including the SPV legal forms of organization, set up the main bankruptcy risk isolation, conflict with the existing legal provisions. For SPV's legal organizational forms and the establishment of a principal home and abroad, there are still a lot of controversy. The general consensus was that the bankruptcy risk isolation measures SPV away from bankruptcy is the cornerstone of all securities transactions, to achieve the purpose of the bankruptcy isolated, first to ensure that the SPV operations simple, restrictions engaged in asset securitization transactions outside any other operating activities and financing activities; Second, SPV in its governance structure and decision-making process to the fullest extent possible to meet certain procedures, such as the establishment of a number of independent directors to the SPV internal, these independent directors to consider whether to make the SPV enter bankruptcy or liquidation proceedings, the obligation to deal with SPV itself and investors rather than shareholders, this joint-stock enterprises differ. The basic aspects of these studies can learn to catastrophe risk bonds.

The particularity of catastrophe risk bonds SPV

Are similar catastrophe risk bonds operations the SPV and general asset securitization the SPV from which the main role of risk diversification, financial intermediation, are securities intermediary and the hub of the activities. The difference is that the First, the relative asset securitization, catastrophe risk bonds is a tool to transfer catastrophe risk to the capital markets through the financial securities will be borne by the insurance company, in essence, is a securitization of insurance liabilities. Reflect the operation of the SPV, it has a dual identity: that is, on the one hand as an intermediary of the securitization of insurance risk, commissioned (Trust) by (re) insurers to issue bonds to diversify risk, raise capital; On the other hand, SPV is a special reinsurance companies (such as the above, the SPV in the operation of catastrophe risk bonds are basically from reinsurance companies play), it shoulders the obligation to (re) insurance benefit payments under the agreed conditions its special, and compared to the (re) insurance companies is reflected in its form of organization, and the establishment of requirements and business scope.
Furthermore, the general operation of the asset securitization, capital flows between the originator and the SPV are generally one-way, from all of the underlying asset (stock promoters) transferring its claims with the SPV, the SPV immediately to the capital market investors to issue securities backed by the claims. Catastrophe risk bonds between the originator and the SPV capital flows is not necessarily a one-way, there is uncertainty. SPV issuing bonds commissioned by the promoters (Trustee), also responsible for the obligations of benefit payments to (re) insurers in catastrophic accident or loss of amplitude achieve the agreed standards. Similarly, SPV investors assume the obligation to repay the principal and interest of bonds there is uncertainty. This uncertainty is the root cause the catastrophic incidents occurred and the uncertainty of the magnitude of such losses, is an extension of the operation in insurance risk securitization factors. Also can be seen that the catastrophe risk bonds, insurance and securities are complementary and inseparable.

Catastrophe risk bonds SPV set up the main thinking

From the experience of the developed countries and regions of the securities or issuance of catastrophe risk bonds of view has been implemented, the establishment of the main body of the SPV are mainly the following three:
(A) The Government
The government funded the establishment of the SPV, also has other unique advantages in addition to reducing the cost of the promoters. First, the government set up the SPV can more effectively avoid collusive fraud promoters, SPV and other intermediaries investors can rely on government credit support or guarantee to obtain a higher credit rating and win the trust of investors, thus contributing to the catastrophe risk of bonds issued and outstanding. Secondly, a government background SPV easier convenience of historical loss data and data about catastrophic accidents made contact with the disaster prevention department, which helps bond pricing. Moreover, relying on the government's special background and the insurance market, the familiarity of the capital markets, more conducive SPV lower barriers to market entry, and also because of this, many countries and regions in the securitization of the initial stage of the government responsible for the establishment of SPV duties, three U.S. government agencies - the Federal National Mortgage Association (FNMA), Government National Mortgage Association (GNMA) and Federal Home mortgages Corporation (FHLMC), and the Hong Kong Mortgage Corporation Company SPV actor. But at the same time, the government as the establishment of the main body of SPV also has its flaws, mainly in the government will likely lead to the SPV in the operation is not rational and non-market. Especially after the catastrophic accident, the government will be funds for earthquake relief and compensation decision made in the construction of the project tend to immediate consumption (ie relief to disaster victims).
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