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Combining Insurance, Contingent Debt, and Self-Retention in an Optimal Corporate Risk Financing Strategy

Author

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  • Eugene Gurenko

    (Independent)

  • Olivier Mahul

Abstract

The 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.

Suggested Citation

  • Eugene Gurenko & Olivier Mahul, 2003. "Combining Insurance, Contingent Debt, and Self-Retention in an Optimal Corporate Risk Financing Strategy," Working Papers hal-01952124, HAL.
  • Handle: RePEc:hal:wpaper:hal-01952124
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    Cited by:

    1. Ghesquiere, Francis & Mahul, Olivier, 2007. "Sovereign natural disaster insurance for developing countries : a paradigm shift in catastrophe risk financing," Policy Research Working Paper Series 4345, The World Bank.
    2. Victor Cardenas, 2009. "Financiamiento de riesgos catastróficos naturales," Research Department Publications 4613, Inter-American Development Bank, Research Department.
    3. Daniel J. Clarke & Olivier Mahul & Richard Poulter & Tse-Ling Teh, 2017. "Evaluating Sovereign Disaster Risk Finance Strategies: A Framework," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 42(4), pages 565-584, October.
    4. Mahul, Olivier & Gurenko, Eugene, 2006. "The macro financing of natural hazards in developing countries," Policy Research Working Paper Series 4075, The World Bank.
    5. Gurenko, Eugene & Olivier, Mahul, 2004. "Enabling productive but asset-poor farmers to succeed : A risk financing framework," Policy Research Working Paper Series 3211, The World Bank.

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    Keywords

    RISQUE;

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