Sub-prime crisis offers crucial lessons for insurers

The crisis in the sub-prime mortgage market and the wide reaching effect that the securitisation of residential mortgages has had on the insurance and banking industries has brought sharp focus to the desirability or otherwise of securitised loans as an asset. Here, Graham Fulcher, chair of the Securitisation of Non-Life Insurance Working Party of the Actuarial Profession considers the lessons of the sub-prime crisis and the role played by mortgage backed securities and applies these to the use of catastrophe bonds by the non-life insurance industry. Mr Fulcher argues that insurers are entering a brave new world of enterprise risk management, particularly in Europe with the advent of the Solvency II regime. In many ways the industry is following in the risk management footsteps of the banking industry and it can learn much from the banks’ mistakes. This is an edited extract from a paper delivered at the Actuarial Profession’s General Insurance (GIRO) Convention in London last week.