Alternative Risk Transfer Study

This dissertation theoretically and practically demonstrates that it is very valuable to study and verify the necessity and feasibility for the existing of Alternative Risk Transfer ( hereinafter called ART ), the relationship between ART and capital efficiency. The emerging ART has transcended the conceptual scope of the traditional (re)insurable risks as well as uncovered the ways how to deal with the catastrophic risks, and, thus promoted the aggregate economy working well. The dissertation includes the preliminary remarks and seven chapters: The preliminary remarks introduce the readers the backgrounds of the emerging ART and the study levels at home and abroad. It illustrates the necessity, means, targets, theoretic basis and innovative arguments. As the basis of the whole dissertation, the first chapter historically studies the risk. It argues that risk is existing only in terms of human and its wealth. So far, there are three stages man has sought a better way to deal with risks: the first is "Bottomry" as we might call the era of subjective risk; the second is the discovery and application of the Large Number Law as we might call the era of objective risk; the third is the risk classification as we might call the mixed era. The more the social economy develops, the more cost-efficient man thinks the way of risk transfer. Thus, hardly had the objective probability been obtained when the necessity needing a new way to transfer risks became imminent, and the (re)insurers face the challenges. The author deduces two important points from this chapter studying: one is that risk-spread might be carried out among those who do not face the same risky situations; (Re)insurance and other risk transfers are the same way of a kind of risk financing, and these base the following text analysis of ART. The second chapter financially studies the way of risk transfers and recognizes the intrinsic quality of (re)insurance and ART. As the same with the inheritance and the genetic variation of a creature, the (re)insurance attains its development based on the unification of inheritance and innovation. Actually, ART is the innovation of risk transfers other than (re)insurance innovation. But ART really promotes the development of (re)insurance industry. The second section sets up a conceptual frame of ART and says the channels of ART includes not only captives but also (re)insurance companies, banks and capital markets. This conceptual frame of ART appears to be more realistic, explicit and perfect in comparison with the international theoretical circle. Based on the changing risk environment, the third chapter voices that the innovation of risk transfer meets the need of the changing objective world and economic environment. The trend of globalization and the development of technology have also hatched new risks. Catastrophic risks breaks the Large Number Law. The risks many economic organizations face are beyond the traditional (re)insurable ones. They need more: not only traditional (re)insurance, but also the security of efficient cash flows. As an efficient way of risk-financing, ART meets their need at most. Improving the cash flows of economic organizations will become the first need of their risk management. The forth chapter is about the basic theory study of emerging ART. The result of individual selection is not in accordance with that of collective ones. As the (re)insurance develops and there is an adverse selection in the market, some of the catastrophic risks or hazards or basic risks in some cases are gradually dissociated from the ordinary risks, and which stimulates longing for the capital market and the ART emerging. The disequilibrium between the demand of risk transfers and the supply of (re)insurance protection manifests that: risk-based capitals pursue the maximum profits rather than the maximum risk transfer. It is the intangible hand that controls the selections of risk transfers, and thus stimulus the innovation. The fifth chapter focuses on the study and analysis of the fair premium. It says that the traditional stochastic procedure is so sophistic and is lack of individual risk characters. ART meets the individual risk characters and has the function of discovering the fair premium and offers the solutions to the unfair pricing as possible. The sixth chapter demonstratively analyzes ART. The study of this chapter shows that ART manifests itself very efficient meeting the need of risk-transfer or risk-spread beyond what is traditionally thought acceptable. The relationship between the traditional (re)insurance and ART is more complementary to each other than substitutional. The seventh chapter first explains and analyze the situations of risk, (re)insurance industry and the capital market in China. Second, it tries to simulate two models and shows the use of ART to deal with the catastrophic losses in China. And it says that, ART has its promising market in this country and the Chinese risk management circle should take it into account and study it as a new assignment.