How insurance risk is transformed into investable assets

7 hours ago

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Insurance risk involves selling policies, collecting premiums, and paying claims, with underwriting profit or loss depending on claims versus premiums.
Most insurance is not fully collateralized; insurers hold capital (insurance capital & surplus) to cover potential losses exceeding premiums.
Insurance losses follow a probability distribution, with insurers holding capital to cover extreme scenarios beyond collected premiums.
Retail investments like margin accounts are partially collateralized, similar to insurance, requiring additional assets to cover losses.
Regulators restrict retail investors from direct insurance risk investments due to potential unlimited losses beyond the initial investment.
Fully collateralized structures, like CAT Bonds, allow retail investors to access insurance risk with capped potential losses.
CAT Bonds are tied to insurance events, providing returns based on risk and risk-free components, with principal at risk in case of qualifying events.
Insurance companies balance capital efficiency with solvency, holding enough capital to cover likely but not all extreme loss scenarios.
Insurance risk investments for retail are designed to be fully collateralized to limit exposure to losses beyond the invested amount.

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