Methods and apparatus for securitizing insurance, reinsurance, and retrocessional risk

• US 20060173720A1
• Filed: 02/01/2005
• Published: 08/03/2006
• Est. Priority Date: 02/01/2005
• Status: Abandoned Application

• Current Assignee: Amerinst Holdings Limited
• Original Assignee: Amerinst Holdings Limited
• Inventors: Thompson, David N., Harris, Jerome A., Berens, Mark H.
• Application Number:
  US11/049,326
• Publication Number:
  US 20060173720A1
• Time in Patent Office: Days
• US Class Current: 705/4
• CPC Class Codes: G06Q 40/03 Credit; Loans; Processing thereof
• CPC Class Codes: G06Q 40/08 Insurance

Abstract

A method and apparatus of securitizing insurance, reinsurance and retrocession risk is provided. The system provides a vehicle whereby investors may directly participate in such risk. The system includes establishing a limited-life business entity. Capital is raised through the sale of common and/or preferred shares in the business entity. The capital is invested against which the business entity assumes premium and risk liability. After a first predetermined period of time (i.e., an underwriting phase), the business entity stops underwriting risks for premium and gives investors options to liquidate shares in the business entity for cash or in the form of a roll over to a similar business entity. The business entity then runs off remaining risk liabilities during a second predetermined period of time (i.e., a runoff phase). Upon completion of the runoff phase, the business entity distributes all its remaining assets to its shareholders and/or rolls over their equity to another similar business entity, and the original business entity is wound up.

Claims

1. A method of securitizing risk comprising:

establishing a business entity with a predetermined period of existence, the predetermined period including an underwriting phase of a first predetermined duration followed by a runoff phase of a second predetermined duration;

raising capital through a sale of securities of the business entity;

actively underwriting and assuming a plurality of risks in exchange for premium during the underwriting phase, the plurality of risks including at least one of an insurance risk, a reinsurance risk, and a retrocessionary risk;

ending the active underwriting and assumption of risks at an end of the underwriting phase;

giving an investor a first option at the end of the underwriting phase, the first option including at least one option for (i) requiring a redemption by the business entity of shares in the business entity, (ii) rolling over equity in the business entity to a second business entity, and (iii) remaining invested in the business entity;

purchasing reinsurance-to-close to discharge risk of the business entity proportional to the shares being redeemed by the investor and to shares utilized to roll over equity in the business entity to the second business entity;

discharging risk during the runoff phase remaining after the purchase of reinsurance-to-close; and

ending the existence of the business entity at an end of the runoff phase.

2. The method of claim 1, wherein actively underwriting and assuming the plurality of risks comprises actively underwriting and assuming the plurality of risks at a plurality of times.

3. The method of claim 1, wherein the second business entity comprises a limited-life business entity embodying another underwriting phase of a third predetermined duration followed by another runoff phase of a fourth predetermined duration.

4. The method of claim 3, wherein rolling over equity in the business entity to the second business entity comprises a tax-free transfer of assets.

5. The method of claim 3, wherein the reinsurance-to-close proportionally allocable to redeemed shares is purchased from the second business entity.

6. The method of claim 3, wherein the reinsurance-to-close proportionally allocable to rolled over shares is purchased from the second business entity.

7. The method of claim 3, wherein the investor exercises the first option by redeeming a first portion of shares in the business entity and by rolling over a second portion of shares in the business entity to the second business entity.

8. The method of claim 1, further comprising making at least one interim cash distribution to the investor during the runoff phase.

9. The method of claim 3, further comprising giving an investor a second option at the end of the runoff phase, the second option including at least one option for (i) receiving a final distribution in liquidation of the business entity and (ii) rolling over equity in the business entity to a third limited life business entity that embodies yet another underwriting phase of a fifth predetermined duration followed by yet another runoff phase of a sixth predetermined duration.

10. The method of claim 9, wherein rolling over equity in the business entity to the third business entity comprises a tax-free transfer of assets.

11. The method of claim 9, further comprising discharging risk proportionally allocable to rolled over shares by purchasing reinsurance-to-close.

12. The method of claim 11, wherein the reinsurance-to-close proportionally allocable to rolled over shares is purchased from the second business entity.

13. The method of claim 9, wherein the investor exercises the second option by redeeming a first portion of shares in the business entity and by rolling over a second portion of shares in the business entity to the second business entity.

14. The method of claim 1, wherein ending the existence of the business entity comprises winding up the business entity by distributing assets of the business entity at an end of the business entity'"'"'s predetermined period of existence.

15. The method of claim 1, wherein the business entity comprises a first business entity and the first business entity transfers assets to a second business entity in exchange for securities in the second business entity, the securities to be distributed to the shareholders of the first business entity.

16. The method of claim 15, wherein the first business entity further transfers liabilities to the second business entity.

17. The method of claim 1, wherein actively underwriting and assuming the plurality of risks during the underwriting phase comprises assuming progressively shorter tail risks during the underwriting phase.

18. The method of claim 1, wherein the underwriting phase does not assume only a single risk.

19. The method of claim 1, wherein the underwriting phase does not assume only a single package of risks.

20. The method of claim 1, wherein substantially all underwriting risk and associated opportunity for income are transferred by the business entity to a third party through the use of derivatives.

21. The method of claim 20, wherein all of the underwriting risk and associated opportunity for income are transferred by the business entity to the third party through the use of derivatives.

22. The method of claim 1, wherein substantially all investment risk and associated opportunity for income are transferred by the business entity to a third party through the use of derivatives.

23. The method of claim 22, wherein all of the investment risk and associated opportunity for income are transferred by the business entity to the third party through the use of derivatives.

24. The method of claim 1, further comprising establishing underwriting guidelines defining types and quality of risks the business entity is authorized to assume.

25. The method of claim 1, further comprising establishing requirements for diversification of risk by the business entity.

26. The method of claim 1, further comprising establishing a predefined premium to net worth ratio cap, wherein the business entity seeks to limit its written premium to the net worth ratio cap.

27. The method of claim 1, wherein the business entity seeks to limit its aggregate loss reserves to a predefined ratio to net worth.

28. The method of claim 1, further comprising investing capital raised by the sale of securities in the business entity and writing the premium based on the capital.

29. The method of claim 28, further comprising increasing a net worth of the business entity by reinvesting net underwriting income and net investment income and gain and writing additional premium based on the increased net worth.

30. The method of claim 1, wherein discharging remaining risk includes at least one of paying losses, commuting existing risk obligations, and purchasing reinsurance-to-close.

31. The method of claim 1, wherein raising capital comprises a sale of common shares in the business entity and at least one of preferred shares in the business entity, surplus notes, and other debt instruments.

32. The method of claim 1, wherein raising capital include a sale of derivatives.

33. The method of claim 1, wherein the business entity is a special purpose corporation.

34. The method of claim 33, wherein the special purpose corporation is an off-shore corporation.

35. A method of selling at least one of insurance, reinsurance, and retrocessional risk in capital markets comprising:

establishing a business entity with at least the following parameters being fixed at a time the business entity is established;

(i) an underwriting phase having a first predetermined duration during which the business entity actively underwrites and assumes a plurality of risks;

(ii) a runoff phase to occur after the underwriting phase, the runoff phase having a second predetermined duration during which the business entity discharges risks assumed during the underwriting phase and does not assume any additional risk; and

(iii) a first investor option to redeem shares in the business entity at an end of the underwriting phase, the redemption of shares being proportionally allocable to a discharge of risk by a reinsurance-to-close purchase; and

selling securities in the business entity.

36. The method of claim 35, wherein actively underwriting and assuming the plurality of risks comprises actively underwriting and assuming the plurality of risks at a plurality of times.

37. The method of claim 35, wherein the underwriting phase and the runoff phase define a predetermined overall limited life of the business entity.

38. The method of claim 35, further comprising a second investor option to roll over equity in the business entity to another business entity.

39. The method of claim 38, wherein the second investor option to roll over equity in the business entity to another business entity comprises a tax-free transfer of assets.

40. The method of claim 35, wherein the underwriting phase does not assume only a single risk.

41. The method of claim 35, wherein the underwriting phase does not assume only a single package of risks.

42. The method of claim 35, wherein substantially all underwriting risk and associated opportunity for income are transferred by the business entity to a third party through the use of derivatives.

43. The method of claim 42, wherein all of the underwriting risk and associated opportunity for income are transferred by the business entity to the third party through the use of derivatives.

44. The method of claim 35, wherein substantially all investment risk and associated opportunity for income are transferred by the business entity to a third party through the use of derivatives.

45. The method of claim 44, wherein all of the investment risk and associated opportunity for income are transferred by the business entity to the third party through the use of derivatives.

46. A method of investing in at least one of insurance, reinsurance and retrocessional risk by an investor comprising:

purchasing securities of a business entity established with

(i) an underwriting phase having a first predetermined duration during which the business entity actively underwrites and assumes a plurality of risks;

(ii) a runoff phase to occur after the underwriting phase, the runoff phase having a second predetermined duration during which the business entity discharges risks assumed during the underwriting phase and does not assume any additional risk; and

(iii) a first investor option to redeem shares in the business entity at an end of the underwriting phase, the redemption of shares being proportionally allocable to a discharge of risk by a reinsurance-to-close purchase; and

exercising the investor option at the end of the underwriting phase.

47. The method of claim 46, wherein actively underwriting and assuming the plurality of risks comprises actively underwriting and assuming the plurality of risks at a plurality of times.

48. The method of claim 46, wherein the underwriting phase and the runoff phase define a predetermined overall limited life of the business entity.

49. The method of claim 46, further comprising a second investor option to roll over equity in the business entity to another business entity.

50. The method of claim 49, wherein the second investor option to roll over equity in the business entity to another business entity comprises a tax-free transfer of assets.

51. The method of claim 46, wherein the underwriting phase does not assume only a single risk.

52. The method of claim 46, wherein the underwriting phase does not assume only a single package of risks.

53. The method of claim 46, wherein substantially all underwriting risk and associated opportunity for income are transferred by the business entity to a third party through the use of derivatives.

54. The method of claim 53, wherein all of the underwriting risk and associated opportunity for income are transferred by the business entity to the third party through the use of derivatives.

55. The method of claim 46, wherein substantially all investment risk and associated opportunity for income are transferred by the business entity to a third party through the use of derivatives.

56. The method of claim 55, wherein all of the investment risk and associated opportunity for income are transferred by the business entity to the third party through the use of derivatives.

57. An apparatus comprising:

a controller;

an input/output device coupled to the controller; and

a memory coupled to the controller, the memory storing a software program for execution by the controller, the software program being structured to cooperate with the input/output device to facilitate;

establishing a business entity with a predetermined period of existence, the predetermined period including an underwriting phase of a first predetermined duration followed by a runoff phase of a second predetermined duration;

raising capital through a sale of securities of the business entity;

actively underwriting and assuming a plurality of risks in exchange for premium during the underwriting phase, the plurality of risks including at least one of an insurance risk, a reinsurance risk, and a retrocessionary risk;

ending the active underwriting and assumption of risks at an end of the underwriting phase;

giving an investor a first option at the end of the underwriting phase, the first option including at least one option for (i) requiring a redemption by the business entity of shares in the business entity, (ii) rolling over equity in the business entity to a second business entity, and (iii) remaining invested in the business entity;

purchasing reinsurance-to-close to discharge risk of the business entity proportional to the shares being redeemed by the investor and to shares utilized to roll over equity in the business entity to the second business entity;

discharging risk remaining after the purchase of reinsurance-to-close during the runoff phase; and

ending the existence of the business entity at an end of the runoff phase.

58. The apparatus of claim 57, wherein actively underwriting and assuming the plurality of risks comprises actively underwriting and assuming the plurality of risks at a plurality of times.

59. The apparatus of claim 57, wherein rolling over equity in the business entity to the second business entity comprises a tax-free transfer of assets.

60. The apparatus of claim 57, wherein the software program is further structured to facilitate giving an investor a second option at the end of the runoff phase, the second option including at least one option for (i) receiving a final distribution in liquidation of the business entity and (ii) rolling over equity in the business entity to the second business entity.

61. The apparatus of claim 57, wherein the underwriting phase does not assume only a single risk.

62. The apparatus of claim 57, wherein the underwriting phase does not assume only a single package of risks.

63. The apparatus of claim 57, wherein the software program is further structured to facilitate the transfer of substantially all underwriting risk and associated opportunity for income by the business entity to a third party through the use of derivatives.

64. The apparatus of claim 63, wherein all of the underwriting risk and associated opportunity for income are transferred by the business entity to the third party through the use of derivatives.

65. The apparatus of claim 57, wherein the software program is further structured to facilitate the transfer of substantially all investment risk and associated opportunity for income by the business entity to a third party through the use of derivatives.

66. The apparatus of claim 65, wherein all of the investment risk and associated opportunity for income are transferred by the business entity to the third party through the use of derivatives.

67. The apparatus of claim 57, wherein the software program is further structured to facilitate a conformance to underwriting guidelines and promote a diversification of risks.

68. The apparatus of claim 67, wherein the software program is further structured to facilitate an analysis of premium trends and lost trends.