ARM - 56 Chapter 10: Capital Market Risk Financing Plan

Insurance Option

A specialized type of option that derives its value from insurable losses either an organization actual insurable losses or an insurance industry index of losses.

Insurance Securitization

A form of securitization that creates a marketable insurance linked security based on the cash flows that arise from insuring loss exposures.

Forward Contract

A contract that obligates one party to buy and another party to sell a specific financial instrument or physical commodity at a specified future date and price.

Special Purpose Vehicle

A facility established for the purpose of purchasing income producing assets from an organization holding title to them and then using those assets to collateralize securities that will be sold to investors.

Objective Trigger

A measurement that determines the value of an insurance-related capital market product based on a parameter that is not within the control of the organization transferring the risk.

Catastrophe Equity Put Option

A right to sell equity at predetermined price in the event of a catastrophic loss.

Catastrophe Bond

A type of insurance-linked security that is specifically designed to transfer insurable catastrophe risk to investors.

Swap

An agreement between two organizations to exchange payments based on changes in the value of an asset yield or index over a specific period.

Contingent Capital Arrangements

An agreement entered into before losses occur that enables an organization to raise cash by selling stock or issuing debt at prearranged terms after a loss occurs that exceeds a certain threshold.

Option

An agreement that gives its holder the right but not the obligation to buy or sell an asset at a specific price over a period of time.

Standby Credit Facility

An arrangement in which a bank or another financial institution agrees to provide a loan to an organization in the event the organization suffers a loss.

Insurance Derivative

Financial contract whose value is based on the level of insurable losses that occur during a specific time period.

Surplus Notes

Notes sold to investors that are counted as policyholders' surplus rather than a liability on an insurer's statutory balance sheet.

Contingent Surplus Notes

Surplus notes that have been designed so that an insurer at its option can immediately obtain funds by issuing the notes at pre-arranged rate of interest.

Put Option

The option that gives the holder right to sell an asset.

Call Option

The option that gives the holder the right to buy an asset.

Securitization

The process of creating a marketable investment security based on the expected cash flows from a financial transaction.

Basis Risk

The risk that the amount the organization receives to offset its losses may be greater than or less than its actual losses.

Strike Price

The specific price at which the holder of an option can buy or sell the asset associated with the option.