By Erik Banks

A pragmatic method of ART-an substitute approach during which businesses tackle quite a few varieties of riskThis complete booklet indicates readers what artwork is, the way it can be utilized to mitigate threat, and the way convinced instruments/structures linked to paintings will be applied. via a variety of examples and case stories, readers will examine what really works and what does not while utilizing this system. Erik Banks (CT) joined Read more...

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

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Sample text

Non-diversifiable risk, which is common to all companies, cannot be eliminated. While it seems that a company lowering its risk through diversification should receive a lower r (p) (and thus r ), the actual savings might be negligible, as investors can often diversify more efficiently than individual companies; this depends largely on the nature of the company and its businesses. 3 highlights these relationships. 3 Cost of capital and risk The main point to stress is that a company must make decisions regarding management of risks and how they will impact enterprise value.

In practice, this ideal equilibrium state does not appear very frequently or last very long. It is more common for the marketplace to be in a state of disequilibria – where the market is described as being “hard’ or “soft”. Insurance market cycles are largely driven by industry capacity and investment returns, where capacity is directly linked to insurer/reinsurer capital. When capital levels are strong, insurers have a tendency to reduce premiums and write more cover; and when capital levels have been depleted, the reverse occurs.

That is, in transferring risk, pooling can occur, but may not be necessary. For instance, there are times when an insurance company will accept a risk that it does not pool with others. Risk transfer, in contrast, must occur; that is the essence of the insurance mechanism. 5 Hedging Insurance is generally associated with the transfer of an insurable risk and can result in a reduction of exposure. Hedging, in contrast, is generally associated with risks that are uninsurable through a standard contractual insurance framework, and typically result in transfer rather than reduction.

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