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This paper firstly provides a description of the development of securitization in insurance industry. It also introduce the details of securitization process. Meanwhile, the paper displays the reason for the demand of securitization by description of experience in insurance industry. Then it shows how the securitization is applied in insurance industry. What's more, the paper includes the comparison between reinsurance and securitization from three aspects. Finally, it conclude the advantages of securitization.
Introduction
Securitization is one of the most important innovations in financial market. Compared with insurance and reinsurance, securitization always stands on the margin in the past. Even though the insurance industry in USA owned about four trillion dollars in assets with corresponding liabilities and equity capital that could be consideredas alternatives for securitization, securitization were still relatively slow to keep pace with this industry. The securitizationsin insurance industry of the United States were firstly used in 1988. Itinvolved sales of rights to emerging profits from blocks of life insurance policies andannuities(Millette, 2002).
Nevertheless, it developed rapidly because of the huge loss events such as Hurricane Andrew in 1992,World terrorist attacks ofTrade Center in 2001, and Hurricanes Katrina, Rita, and Wilma in 2005.(Cummins, 2009)Suffering from those disasters, the traditional methods, such as reinsurance, reducing the exposure, and controlling the most volatile part of contractual obligation, are not sufficient enough to transfer the risk (Tynes, 2000). Obviously, the assets of reinsurers were weakened seriously. The common methods of recovering the capacities of r...
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...nes of business, and that shareholders of traditional insurance firms undertake risks and expect earningon their firms’ capital that is corresponded with the level of risk exposures they assumed,securitization, the alternative solution of risk management, is required to be more efficient when the risk managers are willing to hedge risk at lower cost than use traditional insurance ways. Therefore, providing adequate returns to the risk-bearers might be a better way to help with the development of securitization, which will replace the traditional insurance methods. Actually, securitization indeed brings an efficient distribution of risk through both lower costs and increased capacity. Moreover, to keep securitization consecutively attractive to investors, the potential for supplying needed capacity for those uncovered risk exposures should be exploited gradually.
In addition, the Federal Reserve did badly on supervision of the financial market. Many banks did not have enough ability to value their risk. The Federal Reserve and other supervision institution should require these banks to enhance their ability of risk valuing.
Allstate insurance is the second largest property and casualty insurance company by premiums in the United States. Allstate insurance handles about 12% of the U.S home and auto insurance market. (Allstate, 2014). Many of Allstate’s customers fall under what one could refer to as a traditional selection of insurance for automobiles. Recently, Allstate has noticed a major shortcoming in lifestyle insurance, which includes coverage for motorcycles, boats, and other recreational vehicles, in comparison to its competitors. The motorcycle insurance sector is a 10.4 billion dollar industry and growing (PRWEB, 2012). The U.S. Department of Transportation website reports some astounding figures, including that 5,370,035 motorcycles were registered three years before the article, 7,138,476 motorcycles registered at the time of the article, and grew to 9,477,243 registered motorcycles at the end of 2012 (NHTSA, 2013). It is obvious as to why Allstate would identify motorcycle insurance as a worthy lifestyle product to devote marketing research dollars into in order to develop new strategies for cornering a share of the market.
On the other hand, they adopted a so call self-expansion way to avoid risks. Mortgage companies used securitization to transfer the underlying assets of subprime mortgage into mortgage backed securities (MBS) and transferred the risk from their balance sheet to individual or institutional investors. Once the risk had been transferred, the money that these companies could lend increased. In other word, it strengthened their loan capacity. The more money released from the loan by securities, the lager capacity that the companies gained. Thus, securitization seemed to offer mortgage companies with infinite
The presence of systemic risk in the current United States financial system is undeniable. Systemic risks exist when the failure of one firm may topple others and destabilize the entire financial system. The firm is then "too big to fail," or perhaps more precisely, "too interconnected to fail.” The Federal Stability Oversight Council is charged with identifying systemic risks and gaps in regulation, making recommendations to regulators to address threats to financial stability, and promoting market discipline by eliminating the expectation that the US federal government will come to the assistance of firms in financial distress. Systemic risks can come through multiple forms, including counterparty risk on other financial ...
Hurricane Katrina was one of the most devastating natural disasters to happen in the United States. The storm resulted in more then US$100 billion in damage when the cities flood protection broke and 80% of the city was flooded (1). The protection failure was not the only cause for the massive flooding, the hurricanes clockwise rotation pulled water from north of New Orleans into the city. 330,000 homes were destroyed and 400,000 people from New Orleans were displaced, along with 13,00 killed (1). Although the population quickly recovered, the rate of recovery slowed down as the years went on leading us to believe not everyone
So far in the American history, hurricane Katrina remains to be one of the most devastating hurricanes to have ever been witnessed. Though preparation were already in place to counter its effects, the storm’s impact turned out to be one of the most unprecedented ever seen. This is even notable from the way government agencies reacted to this disaster. It brought out the inefficiencies and inadequacies of the emergency units both at the federal and state level. This is because these governments’ response standards to this disaster were far much below the threshold expected. Government efforts could not match, and hence counter, the impacts of hurricane Katrina. This led to loss of massive property and people’s lives and property. Local and Federal governments face criticism up to date because the private sector seemed more prepared to counter effects of hurricane than the government.
Rousmaniere, Peter. “Facing a tough situation.” Risk & Insurance 17.7 (June 2006): 24-25. Expanded Academic ASAP. Web. 23 March 2011.
Flawed financial innovations: the implementation of innovations in investment instruments such as derivatives, securitization and auction-rate securities before markets. The indispensable fault in them is that it was difficult to determine their prices. “Originate to distribute securities” was substituted by securitization which facilitated the increase in ...
Obviously, financial establishments can endure breathtaking misfortunes notwithstanding when their risk management is top notch. They are, all things considered, in the matter of going out on a limb. At the point when risk management fails, be that as it may, it is in one of the many fundamental ways, almost every one of them exemplified in the present emergency. In some cases, the issue lies with the information or measures that risk directors depend on. At times it identifies with how they recognize and impart the risks an organization is presented to. Financial risk management is difficult to get right in the best of times.
In the challenges that Americans will fact the issue will always raise with issue of securities. The United States has dealt with major issue which made the public think about what was going on need to be looked at in debt to understand what is being done to help the American populate know there is something in place to keep the people safe. The United States is a country uses the national security strategy to keep the country. In the security of the country face it should be known what us best for the country best interest and the objectives which can help the nation safe secure.
During the 1920s, approximately 20 million Americans took advantage of post-war prosperity by purchasing shares of stock in various securities exchanges. When the stock market crashed in 1929, the fortunes of many investors were lost. In addition, banks lost great sums of money in the Crash because they had invested heavily in the markets. When people feared their banks might not be able to pay back the money that depositors had in their accounts, a “run” on the banking system caused many bank failures. After the crash, public confidence in the market and the economy fell sharply. In response, Congress held hearings to identify the problems and look for solutions; the answer was found in the new SEC. The Commission was established in 1934 to enforce new securities laws that were passed with the Securities Act of 1933 and the Securities Exchange Act of 1934. The two new laws stated that “Companies publicly offering securities must tell the public the truth about their businesses, the securities they are selling and the risks involved in the investing.” Secondly, “People who sell and trade securities must treat investors fairly and honestly, putting investors’ interests first.”2
Finance theory does not provide a complete framework for explaining risk management under the fluctuated financial environment in which firm operates. Hence, for corporate managers, they rank risk management as one of their top priorities. One of the strategies to reduce risk is by hedging. This paper will discuss the advantages and disadvantages of hedging risk using financial derivatives.
Hurricane Katrina, the most expensive natural disaster in the history of the United States of America, hit the Gulf Coast on the 29th of August 2005, leaving behind an estimated damage worth $125 billion US, and a total death toll of over 1800(Graumann et al., 2006). The essay will discuss why Hurricane Katrina had such a devastating effect on New Orleans, the worst affected area, and the post-disaster recovery process.
Disaster Recovery Planning is the critical factor that can prevent headaches or nightmares experienced by an organization in times of disaster. Having a disaster recovery plan marks the difference between organizations that can successfully manage crises with minimal cost, effort and with maximum speed, and those organizations that cannot. By having back-up plans, not only for equipment and network recovery, but also detailed disaster recovery plans that precisely outline what steps each person involved in recovery efforts should undertake, an organization can improve their recovery time and minimize the disrupted time for their normal business functions. Thus it is essential that disaster recovery plans are carefully laid out and carefully updated regularly. Part of the plan should include a system where regular training occurs for network engineers and managers. In the disaster recovery process extra attention should also be paid to training any new employees who will have a critical role in this function. Also, the plan should require having the appropriate people actually practice what they would do to help recover business function should a disaster occur. Some organizations find it helpful to do this on a quarterly or semi-annual basis so that the plan stays current with the organization’s needs.
The use of derivatives can be a great tool for institutions to increase profits or minimize risks. Nevertheless, the significant risks associated with derivatives suggests that derivatives must be actively managed. Derivatives can mitigate substantial losses should there be a significant increase or decrease in interest rates (Saunders & Cornett, 2011). In addition, these financial security instruments can help financial institutions to manage various types of risks (Saunders & Cornett, 2011). Furthermore, financial institutions can make use of various strategies to minimize the risks associated with derivatives making them optimal financial instruments if used and managed appropriately.