Alternative capital and ils vehicles an increasingly

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alternative capital and ILS vehicles an increasingly prominent piece of their hedging and retrocession strategies The formation of collateralized reinsurance sidecar vehicles, sponsorship of CAT Bonds and increased use of collateralized retrocessions, are all helping reinsurers manage their risk profile more efficiently At the same time, reinsurers are increasingly securing and growing asset management mandates with capital market investors, enabling them to earn fee revenue as interest in insurance risks and ILS structures grows among institutional investment markets The upshot of the increasing use of alternative capital, as hedging and as a source of lower cost underwriting capacity, is a general reduction in the cost of insurers underwriting capital, which at a time of pressured rates and high competition has been invaluable for some players Use of alternative capital has also allowed reinsurance firms to grow their positions with
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certain key clients, while also reducing their exposures to certain peak zone probable maximum loss (PML’s) relative to the capital they need to hold Chapter 7 - Decision Making Under Uncertainty - Risk Management Alternatives Selecting The Proper Tools Steps: Construct a loss matrix/table that identifies the various after-tax expenses and accidental losses associated with: Each possible decision Each possible outcome Describe precisely the objective that the risk manager wishes to attain Design a decision-making rule that will attain this objective The loss matrix: a structured approach to identifying outcomes The after-tax tangible loss matrix Shows for each possible accidental loss the probability that loss will occur: Without loss control With loss control If the business retains the potential accidental losses, the firm would incur no expenses and, if no accidents occur, would suffer no accidental loss Objectives and decision making rules Objectives will be divided into 2 major categories: Those objectives that assume the risk manager does not estimate the probability distribution of the accidental losses Case 1: Minimize the maximum potential loss during the period (minimax) Risk manager with this objective wants to be protected against the worst possible loss, regardless of the outcome Select the decision which for that outcome produces the smallest loss Because this objective is unduly conservative in most instances and because insurance premiums are almost always a small fraction of the maximum insured loss, this decision rule would almost always lead to the purchase of insurance Case 2: Minimize the minimum potential loss during the policy period (minimin) Risk manager wants the lowest possible loss, no matter what outcome occurs Select the decision producing the minimum loss for that outcome Risk manager will almost never select insurance Those objectives that assume the risk manager does estimate this distribution “Minimaxer” will almost always lead the risk manager wither to purchase insurance
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  • Fall '12
  • M.M.
  • overview of Risk Management

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