Risk warehousing within insurance firms and the role of securitization
Thesis (M.B.A.)--Massachusetts Institute of Technology, Sloan School of Management, 2011.
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| Other Authors: | |
| Format: | Thesis |
| Language: | eng |
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Massachusetts Institute of Technology
2011
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| Online Access: | http://hdl.handle.net/1721.1/65789 |
| _version_ | 1826189370120470528 |
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| author | Strydom, Johann J. (Johann Jurie) |
| author2 | S.P. Kothari. |
| author_facet | S.P. Kothari. Strydom, Johann J. (Johann Jurie) |
| author_sort | Strydom, Johann J. (Johann Jurie) |
| collection | MIT |
| description | Thesis (M.B.A.)--Massachusetts Institute of Technology, Sloan School of Management, 2011. |
| first_indexed | 2024-09-23T08:13:58Z |
| format | Thesis |
| id | mit-1721.1/65789 |
| institution | Massachusetts Institute of Technology |
| language | eng |
| last_indexed | 2024-09-23T08:13:58Z |
| publishDate | 2011 |
| publisher | Massachusetts Institute of Technology |
| record_format | dspace |
| spelling | mit-1721.1/657892019-04-09T17:28:11Z Risk warehousing within insurance firms and the role of securitization Strydom, Johann J. (Johann Jurie) S.P. Kothari. Sloan School of Management. Sloan School of Management. Sloan School of Management. Thesis (M.B.A.)--Massachusetts Institute of Technology, Sloan School of Management, 2011. Cataloged from PDF version of thesis. Includes bibliographical references (p. 55-58). Insurance firms perform two key economic functions. First, they intermediate risk by marketing, selling and administering insurance policies. Second, they warehouse the risks underlying those policies. If viewed as separate businesses, intermediation and warehousing have very different risk profiles and characteristics. While intermediation is a function essential to the firm's role, the warehousing of those risks is mostly optional. It involves deciding to retain risks for the insurance firm's account rather than hedge the risk and thereby pass it on to a third party. The decision to retain or hedge risks is critical to a firm's financial outcomes. Insurance risks include underwriting factors like longevity, mortality and exposure to natural disasters. They also include economic factors like interest rates, currencies, counter-party default and equity markets. The consensus in the academic theory is that since insurance firms face significant frictional costs in raising capital, value-maximising firms will hedge all risks where the spread costs of the hedging instrument are low. This would seem to include most or all economic risks. As for underwriting risks, where hedging spreads are high, the decision will be a trade-off The firm will weigh up the reduced Risk-Bearing Costs offered by the hedging counter-party versus the Risk Transfer Costs incurred in these transactions. In practice it seems many firms hedge less than might be expected, retaining more economic and underwriting risk than may be explained by the theory. Factors which may be driving a bias towards risk are briefly explored, including regulatory drivers and an expectation of beating the market. Insurance-linked securitization offers benefits as a means of hedging risk and enhancing shareholder value through reduced Risk-Bearing Costs, although it faces informational problems that increase Risk Transfer Costs. Catastrophe Risk Bonds appear to have achieved a critical mass on the back of some historical capital shortages in the reinsurance industry. The life insurance securitization market could be poised for growth, but based on the history of Catastrophe Risk Bonds it may also require capital shortages in the life industry as a catalyst. Regulatory capital requirements will play a pivotal role in this regard. by Johann J. Strydom. M.B.A. 2011-09-13T17:52:54Z 2011-09-13T17:52:54Z 2011 2011 Thesis http://hdl.handle.net/1721.1/65789 749893776 eng M.I.T. theses are protected by copyright. They may be viewed from this source for any purpose, but reproduction or distribution in any format is prohibited without written permission. See provided URL for inquiries about permission. http://dspace.mit.edu/handle/1721.1/7582 58 p. application/pdf Massachusetts Institute of Technology |
| spellingShingle | Sloan School of Management. Strydom, Johann J. (Johann Jurie) Risk warehousing within insurance firms and the role of securitization |
| title | Risk warehousing within insurance firms and the role of securitization |
| title_full | Risk warehousing within insurance firms and the role of securitization |
| title_fullStr | Risk warehousing within insurance firms and the role of securitization |
| title_full_unstemmed | Risk warehousing within insurance firms and the role of securitization |
| title_short | Risk warehousing within insurance firms and the role of securitization |
| title_sort | risk warehousing within insurance firms and the role of securitization |
| topic | Sloan School of Management. |
| url | http://hdl.handle.net/1721.1/65789 |
| work_keys_str_mv | AT strydomjohannjjohannjurie riskwarehousingwithininsurancefirmsandtheroleofsecuritization |