The Uses and Abuses of Finite Risk Reinsurance

Posted: 27 Jul 2005 Last revised: 21 Dec 2014

Christopher L. Culp

Johns Hopkins University - Institute for Applied Economics, Global Health, and Study of Business Enterprise; Swiss Finance Institute; Compass Lexecon; Risk Management Consulting Services, Inc.

J.B. Heaton

Bartlit Beck Herman Palenchar & Scott LLP

Abstract

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

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

Christopher L. Culp

Johns Hopkins University - Institute for Applied Economics, Global Health, and Study of Business Enterprise ( email )

3400 N. Charles Street
Baltimore, MD 21218
United States

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Compass Lexecon ( email )

332 South Michigan Avenue
Suite 1300
Chicago, IL 60604
United States

Risk Management Consulting Services, Inc. ( email )

1501 N. State Pkwy., No. 7A
#7A
Chicago, IL Illinois 60610
United States
3125877163 (Phone)

HOME PAGE: http://www.rmcsinc.com

J.B. Heaton (Contact Author)

Bartlit Beck Herman Palenchar & Scott LLP ( email )

Courthouse Place
54 West Hubbard Street
Chicago, IL 60610
United States
312-494-4425 (Phone)
312-494-4440 (Fax)

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