AIG Risk Finance Program Combines Finite Insurance, Securitization

AIG Risk Finance, a division of the American International Companies, has introduced what it calls B FIRST (Blended Finite Insurance and Risk Securitization Transactions), a combination of securitization and the capacity of the capital markets with risk transfer elements in policies that include finite and excess-of-loss coverage.

B FIRST is designed to help corporations, insurers and reinsurance companies to combine the strategic risk financing and profit sharing of finite insurance with the catastrophic loss protection and liquidity available through securitization.

Under the B FIRST program, a company could obtain an insurance or reinsurance policy underwritten by an AIG member company. That policy would provide multi-year coverage, profit sharing and catastrophic loss protection. A portion of the risk embedded in the policy would be ceded to the capital markets, through a specialized reinsurance facility that will issue an insurance-linked note or derivative to the capital markets.

Additionally, the B FIRST program can be constructed to provide the insured with liquidity by linking insurance coverage with a pre-established parametric event with a measurable statistic, such as wind speed or Richter scale magnitude.

Risks appropriate for B FIRST include any insurance risk that can be modeled using historical data or simulation methodology. This includes property catastrophe risks, such as earthquake, hurricanes, and tornadoes; as well as other short-tailed or hard-to-place risks, such as, weather, mortgage insurance, residual value insurance, credit risk, and transmission and distribution of electricity and other power sources.

"There is a significant need for affordable capacity to address major natural catastrophes and other hard-to-place risks, while the capital markets see insurance-linked bonds as an attractive means to diversify their portfolios," said Tobey Russ, president, AIG Risk Finance. "By accessing the capital markets, companies can benefit from increased availability of affordable capacity and a potential reduction in the volatility of insurance premiums."