Insurers to have largest exposure to credit derivatives by 2004, says BBA

Insurance companies are expected to overtake banks for market share in the global credit derivatives market within a couple of years, according to a new report published by the British Bankers' Association (BBA) today.

The report, based on a survey of 25 market leaders in credit derivatives, says banks constituted the largest share of the sellers’ market in 2001 at 39%, with insurance companies, including monoline and re-insurers, coming a close second with 33% of the market share. By 2004, insurance companies are expected to outweigh banks’ market share by 1%, by claiming 33% of the market. Other sellers, including hedge funds, mutual funds, pension funds and corporates, are also expected to cut into the banks’ share of the market.

On the buyers side, hedge funds had a market share of 12% at the end of 2001, up from 3% at the end of 1999. Again, smaller players, including funds and corporates, are expected to cut into the banks and securities houses share of the buyers market by 2004.

Overall the global market in credit derivatives is expected to rise to $4.8 trillion by 2004. The BBA predicted the global market would be $1,581 billion in 2002. The latest survey revises this to $1,952 billion in 2002. The survey also predicts that London will remain the world's major centre for credit derivatives products, with over half the global market share.

Reasons given by market practitioners for this continued and accelerating growth include a substantial increase in synthetic securitisation, increasing pressure on firms to improve financial performance in a hostile economic climate, and greater market awareness of the benefits of credit protection following recent high-profile corporate and sovereign debt defaults.

Roger Brown, executive director of the BBA, said: "Confidence among market participants for continued growth and development of the credit derivatives market remains high, and in a difficult economic environment credit derivatives have proven their worth as efficient risk transfer and pricing instruments.”