Combining insurance, contingent debt, and self-retention in an optimal corporate risk financing strategy
AbstractThe authors provide a conceptual framework for designing a comprehensive risk financing strategy for a firm, using an optimal combination of three instruments: self-retention, contingent debt, and insurance. Using an original conceptual model, the risk management decisions of the firm are first decomposed into two sets-choosing attachment points for each layer of financing used in the overall risk financing structure, and, then determining optimal risk allocation arrangements within each layer of risk. This model allows the authors to show how these optimal risk financing arrangements are driven by the costs of risk management instruments, the risk characteristics, and the firm's borrowing constraints. Finally, the authors provide an original perspective to think about optimal ex ante risk management strategies, based on a combination of insurance, savings, and credit at the microeconomic or macroeconomic levels.
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Bibliographic InfoPaper provided by The World Bank in its series Policy Research Working Paper Series with number 3167.
Date of creation: 30 Nov 2003
Date of revision:
Insurance&Risk Mitigation; Banks&Banking Reform; Financial Intermediation; Payment Systems&Infrastructure; Environmental Economics&Policies; Insurance&Risk Mitigation; Banks&Banking Reform; Financial Intermediation; Environmental Economics&Policies; Insurance Law;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-08-16 (All new papers)
- NEP-FIN-2004-09-12 (Finance)
- NEP-RMG-2004-09-12 (Risk Management)
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