Posted: 27 Jul 2005 Last revised: 21 Dec 2014
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
Suggested Citation: Suggested Citation
Culp, Christopher L. and Heaton, J.B., The Uses and Abuses of Finite Risk Reinsurance. Journal of Applied Corporate Finance, Vol. 17, No. 3, 2005. Available at SSRN: https://ssrn.com/abstract=759745