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Seminar on Reinsurance

Seminar on Reinsurance. Secondary Uncertainty/Parameter Risk in Pricing. Old Risk Financing Continuum. Timing Risk Investment Risk Underwriting Risk. Finite-Risk Range. Risk-free. Unlimited Risk. New Risk Financing Continuum. Insurance Markets. Capital Markets.

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Seminar on Reinsurance

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  1. Seminar on Reinsurance Secondary Uncertainty/Parameter Risk in Pricing

  2. Old Risk Financing Continuum Timing Risk Investment Risk Underwriting Risk Finite-Risk Range Risk-free Unlimited Risk

  3. New Risk Financing Continuum Insurance Markets Capital Markets Intermediaries Insurers Reinsurers Insurance Risk Structured As Insurance Banks Investors Structured As Securities Financial Risk Insurance Brokers Investment Banks Commercial Banks

  4. Business Risk InsuranceProducts • Residual Value Insurance • Project Finance • Financial Guaranty • Structured Finance • Collateralized Debt Obligations

  5. Residual Value InsuranceDefinition • RVI indemnifies an insured against a loss that might occur if the sales proceeds of an asset are less than insured RV at a specific point in time. • Asset types: autos, rolling stock, airplanes, property. • Forms: Surety bond, insurance, indemnity.

  6. Airline Residual Value Aircraft Manufacturer Aircraft Cost Reinsurance Company Leasing Company Commercial Bank RVI Protection Debt Repayment Premium Loan Term Lease Lease Payments Airline

  7. Airline Residual ValuePrimary Risks • Current Market Value • Depreciation of Asset • Future Inflation • Correlation of Inflation and Depreciation • Default of lessee • Remarketing risk • Scrap value

  8. Airline Residual ValueSecondary Uncertainties • Impact of economy • Condition/aspects of the specific asset • Legal risks, e.g., perfection of security • Lessee behavior during lease and at end of lease • Shocks to value, e.g., 9/11, Gulf War

  9. Collateralized Debt ObligationsDefinition • A structured finance product that securitizes a diversified pool of debt assets into multiple classes of notes from cash flows generated by such assets. • Types of Cash Flow CDO’s • Structure • Issuer Motivation • Asset Class • Country or Region

  10. Collateralized Debt ObligationsTransaction Structure and Mechanics • Periods: pre-closing, ramp-up, reinvestment, amortization. • Parties: asset manager, custodian, hedge, insurer. • Overcollateralization and Subordination • External Credit Enhancement • Priority of Payments (“Waterfall”) • Tests, triggers, and coverage ratios

  11. Collateralized Debt ObligationsOngoing Cash Flows • SPV receives interest payments and principal repayments on asset portfolio. • SPV makes payments based on waterfall to • Trustee, hedge, noteholders, insurer, asset manager, equity investors. • Asset manager manages the SPV assets.

  12. Collateralized Debt ObligationsPrimary Risks • Defaults • Recoveries • Macroeconomic Environment • Correlations • Asset Rating Migration • Waterfall

  13. Collateralized Debt ObligationsSecondary Uncertainty • Deviation from the “average” • Age of the ratings of the individual assets • Current market view of default risk • Shocks to values, e.g., Enron, 9/11 • Correlation among assets • Collapse of manager

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