Fronted Reinsurance and Northern Rock – What Do They Have in Common?

Sep 2015

Northern Rock started of life in the mid-1800s as a UK building society, providing savings and mortgages. As with many building societies in the 1990s it became a bank. It continued to provide mortgages for its customers financing itself in the capital markets. In 2007 it shot to fame as becoming the first UK bank in living memory to have a run on it following it approach to the Bank of England for a loan facility.

Northern Rock had been financing itself cheaply on the short-term credit market whilst lending in the long-term market. With the credit crisis and the drying up of liquidity in the market Northern Rock’s ability to refinance itself on an ongoing basis evaporated, leading to its eventual demise.

It is plain to see that ILS funds ‘finance’ themselves in the short-term market...