Insurance master

This is an alternative where a large corporation such as IBM, Exxon, BMW can retain a large risk because of the size and strength of its balance sheets. Another choice would allow companies to forget insurance and incorporate other hedging instruments themselves. The rationale is that the total savings on insurance premiums for the company are more than the will cut costs so that operational efficiency in the insurance companies diminishes, so that client satisfaction falls and business leaves.
This means that there will be more regulations from Basel II as the insurance business overlaps with that of pure banking. The insurance industry needs to be innovative.
substitute hedging costs of the portfolio. The hedging instruments would match or exceed the total insured losses for an adequate substitution. Banks may adopt self-insurance (SIR) retained part for only a portion or threshold level of the potential operational risk hazard. The rest that they feel unable to handle would be covered by the captives.
Yet, the matter can be different where the big losses surround the downside risk.
The view of long-term value theorists is that such sudden losses or short-term volatility offer too much potential for damage to the portfolio. Once the company’s long-term earnings are discounted for short-term losses, the calculus still comes out in credit territory. But, such huge drops in stock prices in 2000–2 remain highly worrying to fund managers. The comparison and substitution of increasing insurance premiums after September 11th 2001 against other forms of loss cover will still continue.
The usual insurance practice is pooling, transferring to institutions with more capital, or transferring to those who know the risk better. We have seen that a loss database, plus the associated actuarial skills, puts the insurers way ahead of the banks when it comes to analysing risk. Backed up with easy access to large sums of capital for insuring potentially huge disasters, these loss risk managers could be on to a winning business.
There can be no bigger or more well-known capital or knowledge base for risk transfer than Lloyds, London. The capital for covering losses and claims is derived from a large reserve base built up over a long time, as in the three centuries of the company.
The ramifications of September 11th for reinsurance are that people will buy and pay more insurance premiums. The insurers will buy more reinsurance, but both insurers and reinsurers will restrict their risk offer and coverage. Supply shrunk, demand rose – insurance prices have already risen substantially.
What is needed is an industrial shift from pure insurance to risk protection services. Outsourcing tail event risks is a good business practice, but a better procedure is to work in partnership with risk experts to manage these risks. Business continuity planning is the typical part of active risk management, rather than simplistic outsourcing. Mitigating risks by pooling within the same insurance group is called “spray and pray”.
The risks are that:
1. The insurance companies will not have enough capital reserves to pay the insurance liabilities of their clients’ claims.
2. The insurance companies will expand their policy small-print so that their clients find that certain conditions nullify, or reduce, their insurance coverage.
3. Operational weaknesses within the structure of the insurance companies continue so that client satisfaction diminishes.
The insurance industry should learn and expand skills. Instead of designating risks bought or eliminated from policies as being “uninsurable”, we should train ourselves to be active risk managers beforehand. The unintended result so far is a host of uncovered risks; risks that could be avoided are pooled. This produces a lack of risk awareness and risk mismanagement. We must move forward.