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5. Alternative Risk Transfer

5. Alternative Risk Transfer. BUS 200 Introduction to Risk Management and Insurance Fall 2008 Jin Park. Overview. Risk Financing Why ART? What Kinds of ART? Any Trend?. Risk Financing. Means to pay for or offset losses that occur Retention Transfer Insurance ART Hedging

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5. Alternative Risk Transfer

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  1. 5. Alternative Risk Transfer BUS 200 Introduction to Risk Management and Insurance Fall 2008 Jin Park

  2. Overview • Risk Financing • Why ART? • What Kinds of ART? • Any Trend?

  3. Risk Financing • Means to pay for or offset losses that occur • Retention • Transfer • Insurance • ART • Hedging • Other contractual transfer (Non insurance Transfer)

  4. ART • Any alternative to a traditional insurance/derivative contract • Insurance Cycle • Combined ratio • Loss ratio and Expense ratio • Hard and soft market • Liability insurance crisis • Understanding ART from • Consumers (corporations) perspective • Primary insurers and Reinsurers perspective

  5. Captive • Definition • Types • Pure captive • Group captive • Rent-a-captive • cf: Fronting company • Risk Retention Group (RRG) • Risk Purchasing Group (RPG)

  6. Annual Number of Cat Bonds Transactions and Sizes Source: Guy Carpenter and Company, LLC

  7. CAT Bonds • What is it and how does it work? • What are the factors for the rapid growth in 2006? • Increased in perceived risk for U.S. Hurricane peril • Evolution of pricing models • Standardization of issuance process

  8. ART using Capital Market • Cat-E-Puts • Contingent Surplus Notes • Weather Derivatives

  9. Hedging • Commodity • Foreign Currency • Stocks • Swaps • Interest rate swap • Credit default swap (CDS) • $45 trillion dollars (mid 07) • cf: US stock market: $22 trillion Mortgage market $7.1 trillion • American International Group (AIG): $11 billion loss

  10. Source: Bank for International Settlements, 2007

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