Convergence of insurance and financial markets: Hybrid and securitized risk-transfer solutions

One of the most significant economic developments of the past decade has been the convergence of the financial services industry, particularly the cap-ital markets and (re)insurance sectors. Convergence has been driven by the increase in the frequency and severity of catastrophic risk, market inefficien-cies created by (re)insurance underwriting cycles, advances in computing and communications technologies, the emergence of enterprise riskmanage-ment, and other factors. These developments have led to the development of hybrid insurance/financial instruments that blend elements of financial contracts with traditional reinsurance as well as new financial instruments patterned on asset-backed securities, futures, and options that provide direct access to capital markets. This article provides a survey and overview of the hybrid and pure financial markets instruments and provides new informa-tion on the pricing and returns on contracts such as industry loss warranties and Cat bonds