Convergence of insurance and capital markets

Abstract

While formerly viewed as separate, finance and insurance are now converging in part due to such changes as the globalization of economies and finance, deregulation and liberalization, changing needs toward finance and insurance, IT innovations, and innovation in financial technology. Sophisticated securitization methods to transform cash flows have expanded the scope for risk management practices in financial companies to a level where risk embedded in typical financial sector products such as corporate bonds, commercial loans and insurance can be repackaged into financial market securities. Many financial institutions and institutional investors have now become familiar with these tools (credit - and insurance - linked securities). As a by-product from growth in risk transfer markets, greater interdependence between banks and insurance companies may have emerged thus bridging the two financial sectors and financial markets. Banks are shifting credit risks from their balance sheets to insurance companies, amongst others, and insurance companies are issuing catastrophe bonds that are being sold to institutional investors such as investment funds. With higher activity in risk transfer markets, financial market participants with traditional business lines could assume completely different roles as “virtual insurers” or “virtual bankers”.