Swiss Re prepares credit derivatives strategy for China
Swiss reinsurer feels China is ready to embrace trade credit insurance and securitisation
China's huge external and domestic trade - along with demands placed on banks and insurers by Basle II - may drive the next phase of development of Swiss Re's business in the region, says the group. The Zurich-based reinsurer has been operating in Asia for many years, making inroads for its services and products in Japan and southeast Asia.
"There is intensive cooperation and exchange of know-how at various levels and institutions in order to hopefully start (the Chinese business drive) soon - if not at the end of 2006, then at the start of next year," said Peter Schmidt, head of credit solutions at Swiss Re, speaking at a media briefing in Hong Kong in early October.
"There is a focus for us on China because there is a lot still to be built," he said. "And our partners in China are interested to learn more about the credit environment and credit insurance."
Swiss Re will be helping promote creditworthy behaviour in domestic trade through training and know-how transfer, and introducing Chinese insurers to innovation in structured products.
Key legislation
Key to these developments is a new bankruptcy law, said Schmidt. The Law of the People's Republic of China on Enterprise Bankruptcy will come into force in June 2007.
He said alternative products are also available in the banking sector, such as letters of credit, but he does not see these as competition. "Banks and insurance companies cooperate in big markets to support exports to grow, to support the Chinese economy to grow," said Schmidt.
When all the legislation is in place, Swiss Re aims to discuss with its clients in China the use of securitisation to transfer credit insurance risk. One such transaction was the Crystal Credit transaction completed by the reinsurer in January, the first indemnity-based credit reinsurance securitisation ever completed.
The deal involved the issue of EUR252 million by Crystal Credit, a special-purpose vehicle, of variable-rate notes in three tranches with an average pre-tax coupon of three-month Euribor plus 3.93% a year, paid quarterly and with a scheduled maturity of three years and a legal final maturity of 6.5 years.
The underlying risk was linked to claims and reserves that Swiss Re will have on its credit reinsurance business for 2006, 2007 and 2008. Investors were hedge funds, banks and insurance firms. The indemnity trigger allowed Swiss Re to achieve capital relief at minimal basis risk. The indemnity is based on the firm's loss ratio (incurred losses divided by the earned premium for an accounting or treaty period), which is 74%, said Schmidt.
The Crystal Credit deal made formerly illiquid assets a transferable risk, said Schmidt. Such credit protection unites the areas of banking, insurance and capital markets, and the next step would be a convergence in pricing, he added.
In the past 10 years, there has been dramatic growth in the issue of insurance-linked securities. New issuance in the first eight months of 2006 was $7 billion, already well exceeding the figure for new issuance for the whole of 2005 of $5.7 billion, according to Swiss Re.
There is huge potential demand for credit risk transfer in China (see box). Among Swiss Re's potential clients are the China Export and Credit Insurance Corp (Sinosure), which is the only source of medium- to long-term insurance cover for Chinese exporters in the market, while insurers such as PICC and Ping An are also potential issuers of insurance-linked securities.
"Chinese companies with global risk are our potential clients," Schmidt said. "But the same concept can be applied to the domestic market, and this is something now in the build-up phase."
At this stage, Swiss Re can only instruct its Chinese clients on the concept and benefits of creating insurance-linked securities. In future, it plans to develop products tailored to those clients.
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net
More on Structured products
A guide to home equity investments: the untapped real estate asset class
This report covers the investment opportunity in untapped home equity and the growth of HEIs, and outlines why the current macroeconomic environment presents a unique inflection point for credit-oriented investors to invest in HEIs
Podcast: Claudio Albanese on how bad models survive
Darwin’s theory of natural selection could help quants detect flawed models and strategies
Range accruals under spotlight as Taiwan prepares for FRTB
Taiwanese banks review viability of products offering options on long-dated rates
Structured products gain favour among Chinese enterprises
The Chinese government’s flagship national strategy for the advancement of regional connectivity – the Belt and Road Initiative – continues to encourage the outward expansion of Chinese state-owned enterprises (SOEs). Here, Guotai Junan International…
Structured notes – Transforming risk into opportunities
Global markets have experienced a period of extreme volatility in response to acute concerns over the economic impact of the Covid‑19 pandemic. Numerix explores what this means for traders, issuers, risk managers and investors as the structured products…
Structured products – Transforming risk into opportunities
The structured product market is one of the most dynamic and complex of all, offering a multitude of benefits to investors. But increased regulation, intense competition and heightened volatility have become the new normal in financial markets, creating…
Increased adoption and innovation are driving the structured products market
To help better understand the challenges and opportunities a range of firms face when operating in this business, the current trends and future of structured products, and how the digital evolution is impacting the market, Numerix’s Ilja Faerman, senior…
Structured products – The ART of risk transfer
Exploring the risk thrown up by autocallables has created a new family of structured products, offering diversification to investors while allowing their manufacturers room to extend their portfolios, writes Manvir Nijhar, co-head of equities and equity…