CDOs as Self‐Contained Reinsurance Structures Available to Purchase

In the convergence between the capital markets and reinsurance markets, the prime mover of insurance risk into capital markets have been investment banks. Also, among the most active leveraged underwriters of capital market credit risk are reinsurers, as opposed to hedge funds or banks. A key example of the institutional consequences of “convergence,” in particular of product design are Collateralized Debt Obligations (CDOs). CDOs combine a managed portfolio of bonds or loans with a hierarchy of claims or priority of loss payments (typical of insurance structures). Early buyers of CDOs were typically high‐yield bond portfolio managers. More recently, reinsurers have come to appreciate the “insurance nature” of these CDO structures, and multiline reinsurers have begun to support CDOs via financial guarantees.