[11] Alternative Risk Funding Solutions for Financial Risk - Part II

By Harry Niederau | August 22, 2009

Part II (to be published soon)

In this contribution we consider alternative risk funding solutions for pension funds as typical representatives of institutions with a strong risk exposure on the fixed asset side. The focus is on financial risk rather than the traditionally insurable part of pension fund risk. We put forward a simple insurance concept against stock market risk, in which the pensions funds and their shareholders are the insureds, the cells of an assumed rent-a-captive facility reinsure part of the the pension funds' exposure and a defined excess portion of asset risk is transferred to the reinsurance market in the wider sense, i.e. including the capital or derivative/OTC market. In particular we develop a dual trigger concept incorporating both an absolute and a relative means of capital protection. The latter benchmarks the investment strategy of the pension funds by means of the (algorithmic) trading vehicle of the core company against a direct "shadow investment" in the Dow Jones Industrial Average.

Topics: macro-economics, pricing in insurance | | Comments