Securitizing Insurance Risks
Posted: 10 Jul 2000
Abstract
Innovations can consist of new lenses for viewing the state of the world. Securitizing risks is such an innovation. The process of securitization has been traditionally used as a method of converting illiquid financial assets into liquid marketable assets. In the process, functions are unbundled, and the risks of investors in these assets can be reduced by diversification and other means.
However, the same process of securitization can be used to transfer risks, whether represented by financial assets or attached to them. By this method risks can be stripped and transferred, creating a derivative security representing the amount and type of risk that investors in the markets are ready to underwrite (for a price). Until recently, risk transfer was considered the sole domain of institutional intermediaries, especially insurance companies. No longer. This function is becoming a joint domain of institutions and the markets.
JEL Classification: K2
Suggested Citation: Suggested Citation