LONDON (Reuters) - The multi-trillion dollar insurance market is ripe for the development of widespread derivatives trading, ICAP (IAP.L: Quote, Profile, Research, Stock Buzz) Chief Executive Michael Spencer told Reuters on Tuesday.
The world's biggest inter-dealer broker set up a joint venture in February with insurance broker Jardine Lloyd Thompson Group (JLT.L: Quote, Profile, Research, Stock Buzz) to originate, structure and act as broker on insurance-related securities, in anticipation of a growing convergence between the insurance and capital markets.
Speaking at the Reuters Finance Summit in London, Spencer said he had no idea whether tradable insurance securities "will be a small bang or a big bang" but said he saw ample opportunity for their development.
"It seems glaring to me that the insurance market is one of the few very substantial global financial markets where derivatives have not really made an impact," said Spencer.
A market for insurance-linked securities has developed over the past 15 to 20 years to cover catastrophes, the value of life insurance portfolios and motor books of business, among other exposures. But it remains tiny compared to the overall size of the insurance market.
The value of publicly announced insurance-linked securities at the end of 2006 was around 22 billion euros ($31.99 billion), compared to about 1.5 trillion euros of premiums for global non-life risks, while European life insurers have reserves worth 7 trillion euros, according to data by Fitch Ratings.
"I have made my career out of the OTC derivatives market and it strikes me that the insurance market has many, many characteristics which suggest it would benefit from the arrival of derivatives," Spencer said.
"Parts of it have considerable price volatility ... The secondary market in insurance is very cumbersome, bid/offer spreads are very, very wide, transaction costs are extremely high and yet the volume of financial risk transfer in insurance is a very, very big number," he said.
There are problems with introducing tradable securities into the insurance market, such as the lack of benchmark indices on which counterparties can design triggers in contracts for determining claims payouts, Spencer acknowledged.
"But nevertheless I remain an optimist, that where there is a will there's a way," said Spencer. Derivatives "have made an impact on all sorts of other things which 20 years ago you might have found improbable ... Why not insurance? It's a big market."
Speaking of his foray into insurance, Spencer said: "I thought I'd give it a go. I still like to innovate, I haven't lost the enthusiasm to try to change the world a little bit."
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