Question
In: Finance
Describe the regulatory and accounting issues involved with insurance-linked securities and insurance derivatives.
Describe the regulatory and accounting issues involved with
insurance-linked securities and insurance derivatives.
Solutions
Expert Solution
ILS (Insurance Linked Securities) are the financial instruments driven by insurance loss events. It is directly linked to a property losses due to NATCAT (Natural Catastrophe ) events. Insurance Derivatives are also similar in nature. It also called as Catastrophe Derivatives/ Industry Loss Warranties.
Major accounting/regulatory issues are:
- These are determined to be insurance must comply with insurance regulations.
- State premium taxes need to be paid.
-However, an organization can deduct these taxes and is not required to record the outstanding losses that are covered by the insurance on the liability section of the balance sheet.
- These products are considered insurance if the payment trigger is a general value rather than based on a firm's actual losses.
- Many uses this to hedge against fixed income assets.
- To match asset/liability duration better.
-To hedge underwriting risk and foreign exchange risk.
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