Convergence Of Insurance Research Articles

The Convergence of Insurance with Banking and Securities Industries, and the Limits of Regulatory Arbitrage in Finance

This Article examines the regulatory challenges raised by recent, overlooked changes in insurance markets that have led to a functional convergence between insurance and the broader financial sector. The law literature on financial regulation last addressed the issue of convergence over a decade ago, before the latest generation of market innovation and at a time when concern over systemic stability was not at the forefront. This Article revisits the convergence phenomenon in the context of insurance, and does so by applying an analytical framework that distinguishes between two “boundary problems” that accompany all financial regulation. One problem concerns jurisdictional boundaries: to what degree does market integration require that diverse regulations be harmonized across jurisdictions? The other relates to definitional boundaries: within a given jurisdiction, how should distinctions be drawn among financial products or firms that have come to perform similar economic functions? Applying this framework leads to two conclusions that are in tension with the current thrust of policy as well as the literature. First, the Federal Insurance Office established by the Dodd-Frank Wall Street Reform and Consumer Protection Act is inappropriately structured to leverage international harmonization agreements into domestic reforms, whereas the reverse orientation would be more effective. Second, frequent calls for more “functional regulation” fail to appreciate the subtle advantages of retaining formalistic legal definitions, even in the face of increasing economic convergence. Although this Article explains how the two boundary problems raise distinct sets of policy tradeoffs, at bottom both are a product of the possibility for regulatory arbitrage across jurisdictions or industry definitions, and the potential for a loosely regulated shadow finance sector to arise. Here, insurance is used as a case study for finance in general, to demonstrate that regulatory arbitrage can occur along a surprising number of fronts, which compounds the difficulty of obtaining reliable ex ante estimates of a proposed financial regulation’s effects.

The Convergence of Insurance with Banking and Securities Industries, and the Limits of Regulatory Arbitrage in Finance

This article examines the regulatory challenges raised by recent, overlooked changes in insurance markets that have led to a functional convergence between insurance and the broader financial sector.The law literature on financial regulation last addressed the issue of convergence over a decade ago, before the latest generation of market innovation and at a time when concern over systemic stability was not at the forefront. This article revisits the convergence phenomenon in the context of insurance, and does so by applying an analytical framework that distinguishes between two “boundary problems” that accompany all financial regulation. One problem concerns jurisdictional boundaries: to what degree does market integration require that diverse regulations be harmonized across jurisdictions? The other relates to definitional boundaries: within a given jurisdiction, how should distinctions be drawn among financial products and firms that have come to perform similar economic functions? Two conclusions follow from applying this framework that are in tension with the current thrust of policy as well as the literature. First, the Federal Insurance Office established by Dodd-Frank is inappropriately structured to leverage international harmonization agreements into domestic reforms, whereas the reverse orientation would be more effective. Second, frequent calls for more “functional regulation” fail to appreciate the subtle advantages of retaining formalistic legal definitions, even in the face of increasing economic convergence.At bottom, both boundary problems are a product of the possibility for regulatory arbitrage across jurisdictions or industry definitions, and the potential for a loosely regulated shadow finance sector to arise. Here, insurance is used as a case study to demonstrate that regulatory arbitrage can occur along a surprising number of fronts and is difficult to reliably estimate ex ante when formulating financial regulation. For this reason, the Article argues, scholarship that has proposed a requirement for financial regulators to perform a quantitative cost-benefit analysis as part of their rulemaking overestimates the benefits that such a procedure would provide in practice.

Convergence of Insurance and Financial Markets: Hybrid and Securitized Risk‐Transfer Solutions

AbstractOne of the most significant economic developments of the past decade has been the convergence of the financial services industry, particularly the capital markets and (re)insurance sectors. Convergence has been driven by the increase in the frequency and severity of catastrophic risk, market inefficiencies created by (re)insurance underwriting cycles, advances in computing and communications technologies, the emergence of enterprise risk management, and other factors. These developments have led to the development of hybrid insurance/financial instruments that blend elements of financial contracts with traditional reinsurance as well as new financial instruments patterned on asset‐backed securities, futures, and options that provide direct access to capital markets. This article provides a survey and overview of the hybrid and pure financial markets instruments and provides new information on the pricing and returns on contracts such as industry loss warranties and Cat bonds.

Financial Innovation in Property Catastrophe Reinsurance: The Convergence of Insurance and Capital Markets

The property catastrophe reinsurance industry faces a major challenge. Since 1989, climatic volatility has produced unprecedented insured losses of $43 billion, $18 billion of which were from Hurricane Andrew alone. A surge of insurer defaults and dramatic changes in capacity and pricing have followed in their wake. Catastrophic risks must be addressed with innovative financial approaches that bring the insurance industry closer to the securities industry. This article discusses the new financial instruments that can be successfully used to hedge unknown catastrophe risks.

Convergence of Insurance and Financial Markets: Hybrid and Securitized Risk Transfer Solutions

One of the most significant economic developments of the past decade has been the convergence of the financial services industry, particularly the capital markets and (re)insurance sectors. Convergence has been driven by the increase in the frequency and severity of catastrophic risk, market inefficiencies created by (re)insurance underwriting cycles, advances in computing and communications technologies, the emergence of enterprise risk management, and other factors. These developments have led to the development of hybrid insurance/financial instruments that blend elements of financial contract with traditional reinsurance as well as new financial instruments patterned on asset backed securities, futures, and options that provide direct access to capital markets. This paper provides a survey and overview of the hybrid and pure financial markets instruments and provides new information on the pricing and returns on contracts such as industry loss warranties and CAT bonds.

Pure vs speculative risk

PurposeThe purpose of this editorial is to study the relationship between the pure risks of insurance and the speculative risks of other financial markets in the context of financial services “convergence”.Design/methodology/approachThe editorial recasts the difference between pure risks and speculative risks as a distinction between empirical risks (which arise from observable natural processes largely insulated against behavioral effects) and market risks (which contain substantial non‐empirical or behavioral components).FindingsUsing the empirical risk/market risk dichotomy, it is argued that there is little reason to anticipate a dramatic convergence of insurance and other financial markets.Originality/valueThe editorial challenges conventional distinctions between insurance and other financial risks, as well as conventional expectations regarding financial services convergence.

Reinventing Prevention: Why Did 'Crime Prevention' Develop So Late?

While crime prevention is taken to exemplify governance in the ‘risk society’, it may represent a retarded example of risk-based urban security. Crime prevention was unaffected by risk-based prevention characteristic of much nineteenth-century government of this domain. The development of risk-based fire prevention, by contrast, was substantially in place at the turn of the twentieth century, promoted by the convergence of insurance and other interests in securing property. Rather than seeing crime prevention as exemplifying the move toward the ‘risk society’ thesis, it may be better understood as a case in which neo-liberal governance and insurance technologies transformed a domain of governance that had been unusually resistant to risk-based approaches.

Weather Derivatives and Weather Risk Management

Weather derivatives are a relatively recent kind of financial product developed to manage weather risks, and currently the weather derivatives market is the fastest‐growing derivative market. The development of weather derivatives represents one of the recent trends toward the convergence of insurance and finance. This article presents an overview of weather risks, weather derivatives, and the weather derivatives market, and examines the valuation of weather derivatives in an incomplete market, the hedging effectiveness of standardized weather derivatives, as well as optimal weather hedging with the consideration of basis risk and credit risk.

Capital Markets and Insurance Cycles

Although much research has been published on the convergence of insurance and capital markets, few researchers have explored the interrelation between capital market and insurance cycles, i.e., the covariation between (excess) capital and the supply of insurance capacity. The article focuses, in particular, on how investment returns restricted capital outflow and thus impaired the influence of capital market discipline on property and casualty over‐capacity during the mid‐1990s. The authors also discuss how certain risk convergence products develop or evolve in response to the insurance cycles.

The Fundamentals of Insurance Markets II: Advanced Principles and Concepts in Alternative Risk Transfer

Alternative risk solutions describe the transactions and vehicles that manifest the convergence of insurance and financial markets. This brief article surveys the concepts and issues (regulatory, legal, accounting, etc.) that form the foundation for the transfer and financing of risks not previously priced or traded in financial markets.

THE REVOLUTION IN CORPORATE RISK MANAGEMENT: A DECADE OF INNOVATIONS IN PROCESS AND PRODUCTS

The explosion of corporate risk management programs in the early 1990s was a hasty and ill‐conceived reaction by U.S. corporations to the great “derivatives disasters” of that period. Anxious to avoid the fate of Barings and Procter & Gamble, most top executives were more concerned about crisis management than risk management. Many companies quickly installed (often outrageously priced) value‐at‐risk (VaR) systems without paying much attention to how such systems fit their specific business requirements. Focused myopically on loss avoidance and technical risk measurement issues, the corporate risk management revolution of the '90s thus got underway in a disorganized, ad hoc fashion, producing a curious amalgam of policies and procedures with no clear link to the corporate mission of maximizing value.But as the risk management revolution unfolded over the last decade, the result has been the “convergence” of different risk management perspectives, processes, and products. The most visible sign of such convergence is a fairly recent development called “alternative risk transfer,” or ART. ART forms consist of the large and growing collection of new risk transfer and financing products now being offered by insurance and reinsurance companies. As just one example, a new class of security known as “contingent capital” gives a company the option over a specified period—say, the next five years—to issue new equity or debt at a pre‐negotiated price. And to hold down their cost, such “pre‐loss” financing options are typically designed to be “triggered” only when the firm is most likely to need an infusion of new capital to avoid underinvestment or financial distress.But underlying—and to a large extent driving—this convergence of insurance and capital markets is a more fundamental kind of convergence: the integration of risk management with corporate financing decisions. As first corporate finance theorists and now practitioners have come to realize, decisions about a company's optimal capital structure and the design of its securities cannot be made without first taking account of the firm's risks and its opportunities for managing them. Indeed, this article argues that a comprehensive, value‐maximizing approach to corporate finance must begin with a risk management strategy that incorporates the full range of available risk management products, including the new risk finance products as well as established risk transfer instruments like interest rate and currency derivatives. The challenge confronting today's CFO is to maximize firm value by choosing the mixture of securities and risk management products and solutions that gives the company access to capital at the lowest possible cost.

Advantages of finite‐structured environmental insurance policies

AbstractOver the last five years, insurance products have been expanded to assist companies better manage environmental liabilities. The most progressive of these products is a finite‐structured program whereby the convergence of insurance and financial markets expand the meaning of “alternative risk transfer.” Finite programs blend financial markets and banking concepts with risk transfer concepts to more effectively and efficiently allow the insured to manage the financial implications of its environmental liabilities. This article presents the advantages of using finite‐structured environmental insurance policies and discusses how potential insureds can protect against several types of remediation project risks, including cleanup costs, inflation uncertainty, and variability in investment returns. © 2001 John Wiley & Sons, Inc.

On the Convergence of Insurance and Finance Research

On the Convergence of Insurance and Finance Research