ARM 56 - Chapter 10: Capital Market Risk Financing Plans

Insurance securitization

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

Objective trigger

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

Insurance derivative

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

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.

Insurance option

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

Call option

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

Put option

An option that gives the holder the right to sell and asset.

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 (SPV)

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.

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.

Option

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

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.

Surplus notes

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

Securitization

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

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 a pre-agreed rate of interest.

Catastrophe equity put option

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

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.