1. Introduction

The insurance industry has well demonstrated its ability to package risk for sale to capital markets. In 1771 risk underwriters doing business in Edward Lloyd’s coffee house joined in the Society of Lloyd’s. At its most basic, the Society operated by packaging risk into syndicates which then sold layers of that risk to individual investors. The appeal to investors, however, was limited since the practice of the syndicates was to require additional payments, should claims for losses exceed what investors originally bargained for. Beginning in the late 1980s, however, insurers figured out how to package risk for sale to investors in an attractive way. Insurers begun raising capital by selling debt to investors collateralized by receivables on the insurer’s balance sheet. Insurers call such instruments insurance-linked securities (ILS). Monarch Life (now defunct) in 1987 was the first insurer to collateralize receivables from its annuity policies, followed by General American (now a subsidiary of Met Life), and then Prudential with a $445 million issue backed by policyholder loans. American Skandia (acquired by Prudential in 2003) in 1997 issued securities backed with fees from a cohort of variable life policies. In 1996 Hannover Re issued the first catastrophe bond (CatBond) soon followed by a handful of other insurers with a dozen or so issues. At their most basic, CatBonds is debt whose coupon (and even principal repayment) is indexed to the intensity of a naturally occurring event. At the end of March 2016, the outstanding market for CatBonds and other ILS instruments was $26.5 billion worth, with $2.2 billion of new capital issued from ten transactions in the first quarter of 2016.