CHAPTER 10

Insurance and Risk Management

Anthony Smith and Dennis Cox

Introduction

Insurance and risk management are always inextricably linked. Recent innovations in the regulatory field, however, have brought this into even sharper focus. In general, the idea of insurance is for the losses of the few to be picked up by the many—as such, it is to cover what might be best described as unexpected losses.

One of the key issues that needs to be considered from the beginning is whether insurance really mitigates risk. The Basel Accord allows for insurance to be a mitigator, but only under narrow regulations. These include that:

  • Coverage must be certain; and
  • Payment must be guaranteed.

The concern from the regulators’ point of view is simple. ...

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