Recognition of the array of risks facing an

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recognition of the array of risks facing an organization which leads to well-defined strategic action Additional capital reduces the probability of insolvency, but also is costly. Investors require compensation for (1) any additional risk arising from the negative correlation between insurer liabilities and investors’ other assets, (2) agency costs, and (3) issuance and underpriced costs. Benefits encouraging insurers to hold more capital Costs to insurers of increasing capital - obtain higher premiums from policyholders - better protection against loss of the insurer’s franchise value - double taxation of investment returns on capital, agency costs, and issuance/underpricing costs Residual Risk – whatever insolvency risk remains after the capital level is chosen and all other risk management techniques have been applied
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Many factors have contributed to insurer insolvencies, including inadequate prices, excessive growth in business in comparison to capital, excessive investment risk, catastrophe losses, and declines in asset values. Insurers commonly reduce insolvency risk by: (1) diversifying underwriting risk across geographical regions and different types of coverage (2) entering into reinsurance contracts that help achieve better diversification of risk
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