The Theory of Catastrophe Risk Financing: A Look at the Instruments that Might Transform the Insurance Industry

Posted: 5 Feb 2007

See all articles by Stanley Mutenga

Stanley Mutenga

City University - Cass Business School

Sotiris K. Staikouras

City University - Cass Business School; ALBA Graduate Business School

Abstract

The current study reviews the risk financing techniques employed in the insurance markets and looks at the changing field of the risk management arena. The overarching view is that apart from the traditional channels of financing risk, alternative routes should be explored. The latter is strengthened with the surfacing of off-balance sheet instruments in modern financial markets. The paper extends the discussion to the layered risk financing approach and reinforces its importance. That is, cash flow engineering instruments are employed to match different segments of the loss distributions. The role of insurance risk capital, to assume extreme losses, is further discussed; while reinsurance still remains a form of capital restructuring. Taken all together, the intention is that risk financing should be able to release assets committed to liabilities, and should reduce the cost of risk capital in sponsoring all-purpose equity. Finally, risk management platforms are redefined, while the securitisation of insurance risk is explored along with its effectiveness and possible caveats.

Keywords: (Re)insurance Business, Alternative Risk Transfer, Catastrophe Risk, Hedging Vehicles, Risk Financing, Insurance Securitisation

JEL Classification: G10, G20, G22

Suggested Citation

Mutenga, Stanley and Staikouras, Sotiris, The Theory of Catastrophe Risk Financing: A Look at the Instruments that Might Transform the Insurance Industry. Geneva Papers on Risk and Insurance, Vol. 32, pp. 222-245, 2007, Available at SSRN: https://ssrn.com/abstract=961137

Stanley Mutenga (Contact Author)

City University - Cass Business School ( email )

London
United Kingdom

Sotiris Staikouras

City University - Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

ALBA Graduate Business School ( email )

Athinas Ave. & 2A Areos Str.
Vouliagmeni 166 71, Athens
Greece

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