He believed many opportunistic participants who had seen money-making opportunities in recent years by offering protection on credit default swaps, and have now lost money, are exiting the market.
"Spreads, which have already started to widen considerably, will continue to widen. Risks will be much better priced,” he said
Despite the current downturn in credit derivatives because of large-scale bankruptcies, Blondeau believed credit derivatives can still make money. “It’s a market in which we remain very confident. There is a real demand and it is truly part of the general evolution of today’s financial world.”
Credit derivatives are also likely to grow in Asia. While Scor remains cautious about emerging markets such as Argentina, Brazil, Indonesia and, to a certain extent Thailand, it typically considers Asian risks favourably.
At the moment, Scor’s Asian exposure is included in the portfolios of international banks to whom it offers protection. Total premium from credit default swaps brought Scor over $100 million a year.
Scor doesn’t have any contract with local Asian banks because international banks are “the only ones that can offer the diversity of risk” that can balance out the portfolio, Blondeau said.
All contracts are for a mix of risks, and Scor never has an exposure of more than $20 million on any given credit risk. For instance, the reinsurer’s total exposure to Enron was $20 million and its exposure to WorldCom is $17 million.
Blondeau reckoned the market for credit reinsurance, credit default swaps and credit derivatives is concentrated around five or six specialists.
In terms of risk management and product creation, he added that the current burst of the financial bubble, with the series of accounting scandals and bankruptcies, will bring financial markets back to more basic and traditional instruments and away from too complicated structures - at least for the moment.