Alternative Risk Transfer: Integrated Risk Management Through Insurance, Reinsurance, and the Capital Markets

ISBN-13: 9780470857458 / Angielski / Twarda / 2004 / 192 str.

Banks

Opis

A practical approach to ART-an alternative method by which companies take on various types of risk
This comprehensive book shows readers what ART is, how it can be used to mitigate risk, and how certain instruments/structures associated with ART should be implemented. Through numerous examples and case studies, readers will learn what actually works and what doesn't when using this technique.
Erik Banks (CT) joined XL Capital's weather/energy risk management subsidiary, Element Re, as a Partner and Chief Risk Officer in 2001.

Spis treści

Acknowledgements ix

Biography xi

PART I: RISK AND THE ART MARKET 1

1 Overview of Risk Management 3

1.1 Risk and return 3

1.2 Active risk management 5

1.2.1 Risk management processes 6

1.2.2 Risk management techniques 7

1.2.3 General risk management considerations 10

1.3 Risk concepts 12

1.3.1 Expected value and variance 12

1.3.2 Risk aversion 14

1.3.3 Risk transfer and the insurance mechanism 16

1.3.4 Diversification and risk pooling 17

1.3.5 Hedging 20

1.3.6 Moral hazard, adverse selection and basis risk 21

1.3.7 Non–insurance transfers 22

1.4 Outline of the book 22

2 Risk Management Drivers: Theoretical Motivations, Benefits, and Costs 25

2.1 Maximizing enterprise value 25

2.2 The decision framework 29

2.2.1 Replacement and abandonment 31

2.2.2 Costs and benefits of loss control 31

2.2.3 Costs and benefits of loss financing 32

2.2.4 Costs and benefits of risk reduction 35

2.3 Coping with market cycles 35

2.3.1 Insurance pricing 35

2.3.2 Hard versus soft markets 37

2.4 Accessing new risk capacity 42

2.5 Diversifying the credit risk of intermediaries 43

2.6 Managing enterprise risks intelligently 44

2.7 Reducing taxes 45

2.8 Overcoming regulatory barriers 46

2.9 Capitalizing on deregulation 47

3 The ART Market and its Participants 49

3.1 A definition of ART 49

3.2 Origins and background of ART 51

3.3 Market participants 52

3.3.1 Insurers and reinsurers 53

3.3.2 Investment, commercial, and universal banks 55

3.3.3 Corporate end–users 56

3.3.4 Investors/capital providers 57

3.3.5 Insurance agents and brokers 57

3.4 Product and market convergence 58

PART II: INSURANCE AND REINSURANCE 61

4 Primary Insurance/Reinsurance Contracts 63

4.1 Insurance concepts 63

4.2 Insurance and loss financing 64

4.3 Primary insurance contracts 65

4.3.1 Maximum risk transfer contracts 65

4.3.2 Minimal risk transfer contracts 66

4.3.3 Layered insurance coverage 76

4.4 Reinsurance and retrocession contracts 78

4.4.1 Facultative and treaty reinsurance 81

4.4.2 Quota share, surplus share, excess of loss, and reinsurance pools 81

4.4.3 Finite reinsurance 86

5 Captives 89

5.1 Using captives to retain risks 89

5.1.1 Background and function 89

5.1.2 Benefits and costs 91

5.2 Forms of captives 94

5.2.1 Pure captives 94

5.2.2 Sister captives 95

5.2.3 Group captives 95

5.2.4 Rent–a–captives and protected cell companies 96

5.2.5 Risk retention groups 99

5.3 Tax consequences 100

6 Multi–risk Products 103

6.1 Multiple peril products 103

6.2 Multiple trigger products 106

PART III: CAPITAL MARKETS 113

7 Capital Markets Issues and Securitization 115

7.1 Overview of securitization 115

7.2 Insurance–linked securities 116

7.2.1 Overview 116

7.2.2 Costs and benefits 118

7.3 Structural features 119

7.3.1 Issuing vehicles 119

7.3.2 Triggers 121

7.3.3 Tranches 123

7.4 Catastrophe bonds 124

7.4.1 Hurricane 124

7.4.2 Earthquake 127

7.4.3 Windstorm 129

7.4.4 Multiple cat peril ILS and peril by tranche ILS 129

7.4.5 Bond/derivative variations 130

7.5 Other insurance–linked securities 131

8 Contingent Capital Structures 135

8.1 Creating post–loss financing products 135

8.2 Contingent debt 139

8.2.1 Committed capital facilities 139

8.2.2 Contingent surplus notes 140

8.2.3 Contingency loans 141

8.2.4 Financial guarantees 142

8.3 Contingent equity 142

8.3.1 Loss equity puts 143

8.3.2 Put protected equity 146

9 Insurance Derivatives 149

9.1 Derivatives and ART 149

9.2 General characteristics of derivatives 150

9.3 Exchange–traded insurance derivatives 156

9.3.1 Exchange–traded catastrophe derivatives 156

9.3.2 Exchange–traded temperature derivatives 157

9.4 OTC insurance derivatives 162

9.4.1 Catastrophe reinsurance swaps 162

9.4.2 Pure catastrophe swaps 164

9.4.3 Temperature derivatives 164

9.4.4 Other weather derivatives 166

9.4.5 Credit derivatives 167

9.5 Bermuda transformers and capital markets subsidiaries 168

PART IV: ART OF THE FUTURE 171

10 Enterprise Risk Management 173

10.1 Combining risks 173

10.1.1 The enterprise risk management concept 173

10.1.2 Costs and benefits 177

10.2 Developing an enterprise risk management program 179

10.2.1 Strategic and governance considerations 180

10.2.2 Program blueprint 182

10.2.3 Program costs 186

10.3 End–user demand 188

11 Prospects for Growth 193

11.1 Drivers of growth 193

11.2 Barriers to growth 194

11.3 Market segments 196

11.3.1 Finite structures 196

11.3.2 Captives 197

11.3.3 Multi–risk products 197

11.3.4 Capital markets issues 198

11.3.5 Contingent capital 198

11.3.6 Insurance derivatives 199

11.3.7 Enterprise risk management 199

11.4 End–user profiles 201

11.5 Future convergence 202

Glossary 205

Selected References 221

Index 223

O autorze

ERIK BANKS has held senior risk management positions at several global financial institutions, including XL Capital, where he was Partner and Chief Risk Officer of the Bermuda reinsurer′s derivative subsidiary, and Merrill Lynch, where he spent 13 years managing credit and market risk teams in Tokyo, Hong Kong, London and New York. Mr. Banks has written various books on risk management, emerging markets, derivatives, merchant banking, and electronic finance. 

Blurb

The Alternative Risk Transfer (ART) market has expanded in recent years to become a vital source of risk solutions and risk capacity and an important mechanism for the creation of integrated corporate risk management programs. 

The ART market unites the risk management and product development skills of financial institutions, insurers and reinsurers with the capital of global investors to give corporate risk managers the best possible means of managing financial and operating risks. In a time when natural and man–made disasters and financial volatility are constantly present, the need for dependable, equitably priced risk capacity and innovative, holistic risk solutions has never been greater. The ART market, which can supply both, is thus becoming an integral component of the 21st century financial markets.

Alternative Risk Transfer, written by a veteran of the banking and insurance industries, provides a practical, detailed and up–to–date review of the topic. The text is divided into four parts, including

• Risk and the ART market 
•  Insurance and Reinsurance
• Capital Markets
• Enterprise Risk Management and the Future of ART

The book contains numerous worked examples and case studies to place the subject in a practical light, and is ideal reading for CFOs, corporate risk managers, treasurers, institutional investors and fund managers seeking to understand the ART market.