The Uses and Abuses of Finite Risk Reinsurance
Christopher L. Culp
Johns Hopkins University - Institute for Applied Economics, Global Health, and Study of Business Enterprise; Swiss Finance Institute; Compass Lexecon
Bartlit Beck Herman Palenchar & Scott LLP
Journal of Applied Corporate Finance, Vol. 17, No. 3, 2005
Finite risk has become what derivatives were ten years ago - a hot button for controversy and the likely subject of investigations, litigation, and new regulations. Our objective is to provide a general introduction to finite risk (or just "finite," as it is known in the trade). We begin with a brief overview of the structured insurance market. Finite risk solutions are a part of that market. We then describe the kind of risk management problems that lend themselves to finite risk solutions. Next, we provide a more precise definition of finite risk, first by distinguishing its main features from those of traditional insurance and then by discussing the kinds of risks that companies can manage with finite risk. We also describe a number of specific finite products and illustrate their applications with brief case studies. Finally we explore the potential for abuse of finite risk programs and suggest some guiding principles to help firms steer clear of such abuses.
Keywords: Structured finance, risk management, insurance, finite, financial reinsurance
JEL Classification: G18, G22, G32
Date posted: July 27, 2005 ; Last revised: December 21, 2014
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