Structured Finance and Insurance

Praise for Structured Finance & Insurance

"More and more each year, the modern corporation must decide what risks to keep and what risks to shed to remain competitive and to maximize its value for the capital employed. Culp explains the theory and practice of risk transfer through either balance sheet mechanism such as structured finance, derivative transactions, or insurance. Equity is expensive and risk transfer is expensive. As understanding grows, and, as a result, costs continue to fall, ART will continue to replace equity as the means to cushion knowable risks. This book enhances our understanding of ART."
--Myron S. Scholes, Frank E. Buck Professor of Finance, Emeritus, Graduate School of Business, Stanford University

"A must-read for everyone offering structured finance as a business, and arguably even more valuable to any one expected to pay for such service."
--Norbert Johanning, Managing Director, DaimlerChrysler Financial Services

"Culp's latest book provides a comprehensive account of the most important financing and risk management innovations in both insurance and capital markets. And it does so by fitting these innovative solutions and products into a single, unified theory of financial markets that integrates the once largely separate disciplines of insurance and risk management with the current theory and practice of corporate finance."
--Don Chew, Editor, Journal of Applied Corporate Finance (a Morgan Stanley publication)

"This exciting book is a comprehensive read on alternative insurance solutions available to corporations. It focuses on the real benefits, economical and practical, of alternatives such as captives, rent-a-captive, and mutuals. An excellent introduction to the very complex field of alternative risk transfer (ART)."
--Paul Wohrmann, PhD, Head of the Center of Excellence ART and member of theExecutive Management of Global Corporate in Europe, Zurich Financial Services

"Structured Finance and Insurance transcends Silos to reach the Enterprise Mountaintop. Culp superbly details integrated, captive, multiple triggers and capital market products, and provides the architectural blueprints for enterprise risk innovation."
--Paul Wagner, Director, Risk Management, AGL Resources Inc. Foreword: Wherefore ART Thou? The Importance of Principle-Based Structured Finance (Tom Skwarek, Swiss Re Capital Solutions).

Preface.

PART ONE: Integrated Risk and Capital Management.

Chapter 1: Real and Financial Capital.

Chapter 2: Risk and Risk Management.

Chapter 3: Leverage.

Chapter 4: Adverse Selection and Corporate Financing Decisions.

Chapter 5: Capital Budgeting, Project Selection, and Performance Evaluation.

Chapter 6: Risk Transfer.

Chapter 7: Risk Finance.

PART TWO: Traditional Risk Transfer.

Chapter 8: Insurance.

Chapter 9: Reinsurance.

Chapter 10: Credit Insurance and Financial Guaranties.

Chapter 11: Derivatives.

Chapter 12: Credit Derivatives and Credit-Linked Notes.

PART THREE: Structured Finance.

Chapter 13: The Structuring Process.

Chapter 14: Hybrids, Convertibles, and Structured Notes.

Chapter 15: Contingent Capital.

Chapter 16: Securitization.

Chapter 17: Cash Collateralized Debt Obligations.

Chapter 18: Synthetic Collateralized Debt Obligations.

Chapter 19: Structured Synthetic Hybrids.

Chapter 20: Securitizing Private Equity and Hedge Funds.

Chapter 21: Project and Principal Finance.

PART FOUR: Structured Insurance and Alternative Risk Transfer.

Chapter 22: Risk Securitizations and Insurance-Linked Notes.

Chapter 23: Captives, Protected Cells, and Mutuals.

Chapter 24: Finite Risk.

Chapter 25: Multiline and Multitrigger Insurance Structures.

Chapter 26: Contingent Cover.

PART FIVE: Case and Issue Studies.

Chapter 27: The Emerging Role of Patent Law in Risk Finance (J. B. Heaton, Bartlit Beck Herman Palenchar & Scott).

Chapter 28: Critical Distinctions between Weather Derivatives and Insurance (Andrea S. Kramer, McDermott Will & Emery).

Chapter 29: Is Insurance a Substitute for Capital under the Revised Basel Accord? (Barbara T. Kavanagh).

Chapter 30: Is My SPE a VIE under FIN46R, and, If So, So What? (J. Paul Forrester, Mayer Brown Rowe & Maw, and Benjamin S. Neuhausen, BDO Seidman).

Chapter 31: Credit Derivatives, Insurance, and CDOs: The Aftermath of Enron (Alton B. Harris, Ungaretti & Harris, and Andrea S. Kramer, McDermott Will & Emery).

Chapter 32: Project Finance Collateralized Debt Obligations: What? Why? Now? (J. Paul Forrester, Mayer Brown Rowe & Maw).

Chapter 33: 2004 Review of Trends in Insurance Securitization: Exploring Outside the Cat Box (Morton N. Lane and Roger Beckwith, Lane Financial).

Chapter 34: Enterprise Risk Management: The Case of United Grain Growers (Scott E. Harrington and Greg Niehaus, University of South Carolina, and Kenneth J. Risko, Willis Risk Solutions).

Chapter 35: Representations and Warranties Insurance and Other Insurance Products Designed to Facilitate Corporate Transactions (Theodore A. Boundas and Teri Lee Ferro, Boundas, Skarzynski, Walsh & Black).

APPENDIXES.

Appendix A: Capital Structure Irrelevance.

Appendix B: Risk-Based Capital Regulations on Financial Institutions.

Appendix C: Risk Capital.

Commonly Used Abbreviations.

Notes.

References.

Index.

CHRISTOPHER L. CULP, PhD, is Director of Risk Management Consulting Services, Inc., in Chicago and Bern, Switzerland; Senior Fellow in Financial Regulation at the Competitive Enterprise Institute in Washington, D.C., an adjunct professor of finance at The University of Chicago's Graduate School of Business; and an Honorarprofessor (Adjunct Professor) at Unversität Bern in the Institut für Finanzmanagement. He consults actively in the areas of structured finance and insurance for (re)insurance companies and brokers, corporate users of structured products, asset managers, and law firms. Culp's previous books from Wiley include Risk Transfer: Derivatives in Theory & Practice, The Risk Management Process, The ART of Risk Management, and Corporate Aftershock (as coeditor with William Niskanen). Culp holds a PhD in finance from The University of Chicago's Graduate School of Business. The evolution and development of structured finance and structured insurance (a.k.a. alternative risk transfer or ART) have provided increasing numbers of nonfinancial corporations with dynamic new techniques for creating value by integrating the management of capital and risk. A practical obstacle, however, has been the difficulty of structuring efficient, customized solutions to risk and capital management without—intentionally or not—creating even larger problems and pitfalls.

Structured Finance and Insurance explores the develop?ment of this new generation of products and solutions for managing market, credit, operational, legal, and other risks in the context of the broader themes of corporation finance and risk management. Risk managers, treasurers, and CFOs on the corporate side, as well as reinsurers, insurance brokers, and investment bankers on the product side, will gain new insights and knowledge through its well-organized approach:

• Part One provides a theoretical backdrop by reviewing the fundamental principles of capital management, corporation finance, risk transfer, and risk finance
• Part Two presents a review of traditional risk transfer with a strong emphasis on credit risk management—the products and solutions reviewed include insurance, reinsurance and retrocession, financial guarantees, sureties, and credit derivatives
• Part Three provides a detailed look at structured finance products and processes, including structured notes, hybrid and convertible structures, contingent capital, CDOs, and project/principal finance
• Part Four examines techniques of structured insurance and ART, including insurance-linked notes, captives and mutuals, finite risk, multi-line and multi-trigger structures, and contingent cover
• Part Five features valuable chapters written by leading experts on specific issues and topics including the treatment of insurance under the Basel Accord, trends in insurance securitizations, specific examples of the use of structured finance and insurance techniques to facilitate enterprise risk management, new accounting and disclosure requirements, and more

Structured Finance and Insurance provides today's most detailed and well-grounded coverage of the latest alternatives for managing corporate risks by either employing insurance solutions or accessing capital markets. Case studies and examples help practitioners to understand that while insurance and financial solutions are in many ways similar, they often possess critical differences that can explode on the unwary user. By helping capital markets and insurance professionals to speak the same language—the common language of capital management and corporate finance—this essential book will bring structure and precision to an often-cloudy world and help eliminate the confusion that has, in the past, turned the convergence of structured finance and insurance from a financial boon to a headline-making nightmare.

Praise for Structured Finance & Insurance

"More and more each year, the modern corporation must decide what risks to keep and what risks to shed to remain competitive and to maximize its value for the capital employed. Culp explains the theory and practice of risk transfer through either balance sheet mechanism such as structured finance, derivative transactions, or insurance. Equity is expensive and risk transfer is expensive. As understanding grows, and, as a result, costs continue to fall, ART will continue to replace equity as the means to cushion knowable risks. This book enhances our understanding of ART."
—Myron S. Scholes, Frank E. Buck Professor of Finance, Emeritus, Graduate School of Business, Stanford University

"A must-read for everyone offering structured finance as a business, and arguably even more valuable to any one expected to pay for such service."
—Norbert Johanning, Managing Director, DaimlerChrysler Financial Services

"Culp's latest book provides a comprehensive account of the most important financing and risk management innovations in both insurance and capital markets. And it does so by fitting these innovative solutions and products into a single, unified theory of financial markets that integrates the once largely separate disciplines of insurance and risk management with the current theory and practice of corporate finance."
—Don Chew, Editor, Journal of Applied Corporate Finance (a Morgan Stanley publication)

"This exciting book is a comprehensive read on alternative insurance solutions available to corporations. It focuses on the real benefits, economical and practical, of alternatives such as captives, rent-a-captive, and mutuals. An excellent introduction to the very complex field of alternative risk transfer (ART)."
—Paul Wöhrmann, PhD, Head of the Center of Excellence ART and member of theExecutive Management of Global Corporate in Europe, Zurich Financial Services

"Structured Finance and Insurance transcends Silos to reach the Enterprise Mountaintop. Culp superbly details integrated, captive, multiple triggers and capital market products, and provides the architectural blueprints for enterprise risk innovation."
—Paul Wagner, Director, Risk Management, AGL Resources Inc.