Risk 2002 USA: credit risk transfer under the spotlight

Robin Lenna - head of portfolio management at FleetBoston Financial - highlighted the important role of insurers in the credit risk transfer market at the Risk 2002 USA conference in Boston today, while Carl Groth - a director at Willis Structured Financial Solutions - closed the conference by examining insurers’ involvement in synthetic securitisations.

"With the current number of defaults, portfolio managers have many worries. Credit risk transfers can help allay such concerns," Lenna said. Insurance contracts mimicking derivatives such as basket credit default swaps are increasingly common, and insurers have stepped in where banks aren't willing to go, she said. This gap in banks' coverage is most apparent when trying to buy protection on assets originated in certain emerging markets such as Africa, she added.

However, information on credit insurance pricing and performance needs to become more accessible if the market is to develop fully, Lenna said.

Meanwhile, Willis' Groth said that regulators' concerns over credit risk contagion spreading via collateralised debt obligations could potentially have a significant impact on the way the market develops. Some insurers originally got into the credit risk transfers market because they wanted a new source of revenue where pricing wasn't low, but now they are pricing and managing risk appropriately, Groth said. "Innocent capacity is now being replaced by smart capacity," he added.