At a special press briefing recently, Carpenter released a special report which outlined the plan. By establishing insurance risk as an asset class, participants will provide the insurance industry with vast pools of capital to mitigate catastrophic risk through the use of new non-traditional reinsurance products. These products look like financial instruments to investors and reinsurance contracts to insurance companies. Investors can now invest directly and solely in insurance risk through these instruments without becoming a reinsurance company. The Carpenter report maintains that insurance exposures are clearly large enough, durable enough, and distinctive enough to be considered a separate asset class.
Some observers argue that there is no point distributing insurance risks across more investors.
This line of argument, however is flawed. There is plenty of liquidity to finance these risks in an inexpensive and orderly way, if and when the risks are widely distributed. In other words, a large and infrequently experienced cat exposure is smaller than the average daily change in total financial wealth. As with any asset class, diversified investor holdings can only be achieved through the creation of low cost, standardized portfolio investments that can be purchased by pension funds, mutual funds, endowments and high net-worth individuals. And, as with any asset class, the rationale for holding these instruments must lie in their portfolio properties.