1. 5. Alternative Risk Transfer BUS 200 Introduction to Risk Management and Insurance Fall 2008 Jin Park

2. Overview Risk Financing Why ART? What Kinds of ART? Any Trend?

3. Risk Financing Means to pay for or offset losses that occur Retention Transfer Insurance ART Hedging Other contractual transfer (Non insurance Transfer)

4. ART Any alternative to a traditional insurance/derivative contract Insurance Cycle Combined ratio Loss ratio and Expense ratio Hard and soft market Liability insurance crisis Understanding ART from Consumers (corporations) perspective Primary insurers and Reinsurers perspective

5. Captive Definition Types Pure captive Group captive Rent-a-captive cf: Fronting company Risk Retention Group (RRG) Risk Purchasing Group (RPG)

7. Annual Number of Cat Bonds Transactions and Sizes Source: Guy Carpenter and Company, LLC

8. CAT Bonds What is it and how does it work? What are the factors for the rapid growth in 2006? Increased in perceived risk for U.S. Hurricane peril Evolution of pricing models Standardization of issuance process

11. ART using Capital Market Cat-E-Puts Contingent Surplus Notes Weather Derivatives

12. Hedging Commodity Foreign Currency Stocks Swaps Interest rate swap Credit default swap (CDS) $45 trillion dollars (mid 07) cf: US stock market: $22 trillion Mortgage market $7.1 trillion American International Group (AIG): $11 billion loss

13. Source: Bank for International Settlements, 2007