Research Handbooks in Financial Law series
Edited by Julian Burling and Kevin Lazarus
Chapter 21: Alternative Risk Transfer: Risk Transfer Solutions at the Margins of Insurability – The Legal and Regulatory Challenges
Patrick Salve and Douglas Simpson 1. INTRODUCTION For much of the twentieth century the principal instrument of transferring risk was the conventional insurance contract with a conventional insurer. In the typical transaction one of the parties, the insured, pays a sum of money, the premium, to the other, the insurer, as compensation for the transfer of identiﬁed risk of a speciﬁed possible occurrence. If the speciﬁed possible occurrence actually occurs, the insurer becomes obligated to compensate the insured for the monetary loss caused by that occurrence. Insurance companies engage in numerous such transactions in order to take advantage of the law of large numbers so as to assure that although the risk so transferred may actually result in loss with respect to a small number of insureds, such losses will not occur with respect to most within the larger universe of insureds. The premiums and the earnings generated by the accumulation of all such premiums will, in a healthy market, be sufﬁcient to pay the losses with enough money left over to generate a proﬁt for the insurer. This system worked well for much of the century, but as the economies of the world developed and matured and as the asset bases of businesses and individuals grew correspondingly, risks became more complex and potential losses became larger. This caused two major developments in the insurance marketplace. Insurance companies have, in some cases, concluded that, for any of a number of reasons, they cannot insure large...
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