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Innovative Risk Transfer Mode (art)

Posted on:2004-12-31Degree:MasterType:Thesis
Country:ChinaCandidate:Y ZhangFull Text:PDF
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This thesis is a comprehensive study on Alternative Risk Transfer (ART) in the (re)insurance industry. Compared to classical (re)insurance, ART is a relatively novel concept. It covers a variety of new forms. Until now, there is still no universally accepted definition for ART, so in practice, any risk finance/transfer tool that differs from traditional reinsurance in way of handling risks can be named ART.The past couple of decades have seen a fast rising of ART in North American and European (re)insurance markets. The development of ART is mainly aimed at overcoming the limits of traditional (re)insurance in transferring risks. Due to globalization and technological advancements, new kinds of risks evolve all the time. These are either difficult or impossible to insure by traditional (re)insurance means. What's more, since the late 1980S, the natural catastrophes have kept on striking the world one after another, which incurred enormous amount of losses that far exceeded the capacity of many (re)insurance companies. Thus, as the result of a chain effect, a large number of players went to bankruptcy. Hard conditions now prevail in (re)insurance markets, which in turn leads to the shortages of market capacity and hence the increased premiums and tightened terms. Also, the new idea of integrated risk management is currently getting more and more popular, which has gradually blurred the distinction between so-called insurable risks and non-insurable risks. What the enterprises are in urgent need of is a comprehensive solution to all the risks that affect their operations. In short, all above-mentioned factors have posed a big challenge to the (re)insurance industry. To sustain the present market shares and also to raise the capacity as well, those large-scaled (re)insurance companies have established their own daughter companies, which focus on the R&D in ART field. To date, they have successfully launched a wide range of flexible ART products and solutions. These products are mainly tailor-made ones that can better cater to the specific needs from different clients across the industries. The highlight of ART products is that they all go beyond the traditional way of transferring risks as (re)insurance forms do. Some of them are even a hybrid of insurance and capital markets.The first ART form is Captive, which is a limited purpose insurance company set up with the specific aim of financing its parent company's risks. Though it's still a method of risk retention. Captives adopt the form of company, which enable them to take advantage of the exclusive tax benefits for insurance companies. Besides, some complex types of coverage can be secured through Captives, even if they are difficult to obtain via traditional insurance. In this sense, Captive is the Pioneer in ART field.Finite Risk Product is another kind of mature ART form. It is indeed a traditional product which has been expended to include risks from the insurable ones to somepreviously uninsurable ones, e.g. financial risks over a relatively long period, though it only assumes limited risks transferred from clients. It can spread risks over years and employ the value of time as well, hence can stabilize the results of the businesses over the medium term and optimize the balance sheet, etc.As a positive response to the demands of enterprise-wide risk management, some so-called Integrated Risk Management Products are developed. Multi-line Products and Multi-trigger Products are typical ones among others. The former bundles several risks from different lines so the payment to the buyer reflects the joint losses from these risks. The buyer can benefit from the portfolio diversification of the risks within the product. The latter allows the buyer to transfer the risks only when the several triggers occur at the same time. In this way, the cost of the product can be lowered and also the moral hazard can be eliminated to some extent.The recent trend toward convergence in insurance and capital markets largely explains the application of capital...
Keywords/Search Tags:Innovative
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