Introduction to the SCOR-JRI Special Issue on New Forms of Risk Financing and Risk Engineering

By Cummins, J. David; Dionne, Georges | Journal of Risk and Insurance, September 2009 | Go to article overview

Introduction to the SCOR-JRI Special Issue on New Forms of Risk Financing and Risk Engineering


Cummins, J. David, Dionne, Georges, Journal of Risk and Insurance


The world's insurance markets face growing exposure to catastrophic risk as well as rising loss exposure from legal liability, marine, aircraft, and other risk exposures. In response, global reinsurers have raised significant amounts of new capital, and the financial markets have responded with the development of innovative alternative financing techniques. The special issue examines many relevant aspects of these dynamic changes in risk financing and risk engineering.

The articles in the special issue fall into two primary categories. The first category of articles focuses on risk financing by insurers and reinsurers and the relative importance of various sources of new risk capital. This group of articles analyzes the financing of catastrophic risk and the relationship between reinsurance and capital market solutions. The discussion considers innovative sources of risk capital including industry loss warranties, multiperil and multitrigger contracts, sidecars, and risk-linked securities, such as catastrophe bonds, options, and swaps. Theoretical articles consider alternative securitization designs that may be able to expand the market for insurance-linked securities, and a comparative analysis is provided of alternative regulatory approaches to catastrophe risk finance in the United States and the European Union. The second category of articles in the special issue focuses on risk engineering and modeling, with particular emphasis on methodologies that can be utilized in solvency measurement and risk management. Articles in this category consider the theory and application of copulas as well as the impact of linear and nonlinear dependencies among risks. Also considered are optimal reinsurance strategies under regulatory constraints, the modeling of mortality risk and securitization with stochastic jumps, and the economic relationship between insurance premiums and financial markets. The remainder of this introduction provides a brief overview of the articles published in the special issue.

RISK FINANCING BY INSURERS AND REINSURERS

J. David Cummins and Philippe Trainar consider strengths and weaknesses of reinsurance and securitization in managing insurable risks. Traditional reinsurance operates efficiently in managing relatively small, uncorrelated risks and in facilitating efficient information sharing between cedants and reinsurers. However, when the magnitude of potential losses and the correlation of risks increase, the efficiency of the reinsurance model breaks down, and the cost of capital may become uneconomical. At this juncture, securitization has a role to play by passing the risks along to broader capital markets. Securitization also serves as a complement for reinsurance in other ways such as facilitating regulatory arbitrage and collateralizing low-frequency risks.

J. David Cummins and Mary A. Weiss conduct a broad analysis of the convergence of insurance and financial markets in transferring risk. Convergence has been driven by the increase in the frequency and severity of catastrophic risk, market inefficiencies created by (re)insurance underwriting cycles, advances in computing and communications technologies, and the emergence of enterprise risk management, among other factors. These developments have led to the creation of hybrid insurance-financial instruments that blend elements of financial contracts with traditional reinsurance as well as new financial instruments patterned on asset-backed securities, futures, and options that provide direct access to capital markets. Cummins and Weiss also provide new information on the pricing and returns on contracts such as industry loss warranties and catastrophe (cat) bonds. The results show that cat bond returns have low correlations with returns on alternative investments such as stocks and bonds.

Pauline Barrieu and Henri Louberge analyze diversification issues related to cat bonds. Insurance-linked securities, such as cat bonds, have been issued to complete the international risk transfer process, but so far they account for only a small proportion of the overall market for insurance risk transfer. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Introduction to the SCOR-JRI Special Issue on New Forms of Risk Financing and Risk Engineering
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.