Alternative risk transfer : integrated risk management by Erik Banks

By Erik Banks

A realistic method of ART-an replacement strategy wherein businesses tackle quite a few forms of riskThis complete ebook indicates readers what paintings is, the way it can be utilized to mitigate possibility, and the way sure instruments/structures linked to paintings will be carried out. via a variety of examples and case reports, readers will examine what truly works and what does not while utilizing this method. Erik Banks (CT) joined Read more...

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Extra info for Alternative risk transfer : integrated risk management through insurance, reinsurance, and the capital markets

Sample text

Consider the following simple example: An automobile driver (A) has a 20% probability of being in an accident that will cost $2500. , 80% × (0 − 500)2 + 20% × (2500 − 500)2 ). Assume Those who are more aggressive can borrow at r (f) and invest in X . Accordingly, all investors choose the same portfolio, but vary the level of financing. , individual policies) that are independently exposed to the risk of loss; thus, if a loss occurs on one policy, it need not necessarily occur on others. Each unit of risk exposure has some probability of loss, and the sum of all units represents the insurance company’s total liability.

In fact, these can allow coverage of risks that might not normally be insurable through standard mechanisms, and they may be a cost-effective way of protecting business. However, coverage can be ambiguous and the level of credit risk the company assumes necessarily rises. While these are certainly valid risk transfer mechanisms, we shall not discuss them in detail in this book. 4 OUTLINE OF THE BOOK With this brief overview of basic risk management issues, we are now prepared to consider how and why the ART market exists and the specific products, vehicles, and solutions that are available to those who actively manage their risks.

If a firm has only a small number of units the portfolio risk profile will not change markedly, and the number of risk units is therefore a key driver in diversification. However, some benefit will still accrue if N is not particularly large, as long as the units are not perfectly correlated. 5 More formally, ρ(x, y) = Cov(x, y)/(σ (x)σ (y)), where Cov(x, y) is p((x − µ(x)) × (y − µ(y))). , an accident by A will not lead to an accident by B, and vice versa). Under a pooling concept, both drivers agree to share the costs of an accident equally.

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