Some of the various alternative risk transfer

Some of the various alternative risk transfer according to [ CITATION Wag98 \l 1033 ] include
the following;
Transactions relating to insurance index derivatives. This is concerned with contracts for
performance; as is normally the case with transactions relating to index derivatives, closing out
can only be carried out by appropriate contra-transaction. The basis value for insurance index
derivative is the claims ratio of a specified reference portfolio ‘(pool)’ of insurance risks in which
the pool is a fictional portfolio of risks relating to natural catastrophe covers that are actually
insured by specified insurance companies the “pool insurers”.
Another is the Catastrophe Risk Exchange (CATEX). This has been in existence since 1996 in
the USA more precisely, New York. The CATEX system operates without the involvement of the
capital market which enables licensed risk carriers to exchange catastrophe risks between each
other. The Licensed risk carriers include primary insurance and reinsurance companies and
insurance brokers as well as captives of large concerns outside the insurance industry.
Risk secularization is another form of risk transfer that was initially in the USA that involves the
transfer of insured risks, usually catastrophe risks, from insurance companies to the capital
market and the investors operating therein.
Obviously, the international capital market would be suitable for this as, in the economies of
developed countries; its degree of capitalization is many times greater than that of the insurance
market. Thus, for instance, the total published shareholders’’ equity of all property and casualty
insurance companies in the USA is only approx... USD 200 billion, whereas the assets traded in
the capital market there are account for some USD19, 000 billion. It is in the USA that the first
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steps were undertaken towards the utilization of the capital market for covering natural
catastrophe risks [ CITATION Wag98 \l 1033 ].
1.1 Statement of the Problem
Unarguably, all business operates in an environment of risk and uncertainty, and therefore an
exposure to loss or peril is an unavoidable element of every commercial entity. Indeed, the
concept of enterprise is closely associated with activities of adventure and risk taking. The scale
of operation of modern commercial and industrial organizations is such that they are exposed to
losses of catastrophic proportions which have been evidenced in a dramatic way in recent years
by the headline making disasters witnessed around the globe [ CITATION Rei95 \l 1033 ]. A
recent survey in the UK highlighted large discrepancies between the insured and the uninsured
costs of losses, demonstrating that the true cost of risk is much higher than previous estimates.
.[ CITATION Rei95 \l 1033 ]Argued that risk is never totally transferred by insurance, and if
insurers recognize that they retain a partial ownership of risk, there is a greater likelihood that
there will better loss control.