Alternative Risk Transfer: Integrated Risk Management by Erik Banks

By Erik Banks

The booklet looks effortless to learn, yet nonetheless relatively complete. the recent trends of artwork suggestions are reliable captured and defined in a good understandible demeanour. reliable e-book for everybody who desires to understand major positive factors of artwork marketplace with out getting himself misplaced in small mathematical info

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Extra info for Alternative Risk Transfer: Integrated Risk Management through Insurance, Reinsurance, and the Capital Markets

Sample text

The more a company spends on its cost of risk, the more variability it eliminates from expected NCFs, but the more it reduces its operating income. All other things being equal, a firm with lower expected NCFs reduces its probability of insolvency (which carries costs of its own). However, at some point the marginal cost of loss control, loss financing and risk reduction will be greater than the reduction in expected losses; when this occurs the firm’s risk elimination, diversification and control techniques no longer serve to maximize enterprise value.

The relative costs associated with withdrawing from the market can be quantified through an abandonment or sale scenario; the ensuing benefits relate to reduced variability of cash flows from operations once impacted by an unwanted peril, as well as the cost savings associated with no longer having to protect against that exposure. If risks are simply reduced through a portfolio diversification scheme, then the cost/benefit analysis focuses on the incremental costs required to achieve a particular portfolio balance.

In such cases there may be greater incentives to use ARTrelated mechanisms. Naturally, insurers (particularly those that are sensitive to value maximization) strive to charge different premiums for different expected claims. Again, however, there is a cost/benefit tradeoff involved. Reducing information asymmetries to price risks more appropriately may be expensive, and greater than the incremental premiums that can be charged. Insurers are also sensitive to the time value of money; indeed, it is a key source of profit and loss and must be managed properly.

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