Role, scope and operation of a captive insurance company in large technology-based multinationals: A case comparison
The boom of the so-called captive (re-) insurers which has taken place over the recent years is linked directly to the need to respond to the demands of firms for more advanced and sophisticated risk financing instruments which help them to become more efficient and effective in meeting their goals. The real needs and possibilities which each firm has for the utilization of this instrument must be specifically evaluated within the firm's global strategy. When dealing with the decision process leading to the establishment of an insurance captive, it is important to consider experiences and not models, given that these latter are not easily or automatically transferable to the reality of the firm, which is conditioned to an economic, political and legal environment which will not be exactly the same for any two firms. For this reason, a comparison is made of the experiences of two large technology-based multinationals in the establishment of a captive company, including differences in the role assigned to t...
Cost Effectiveness of Risk Management Practices
Despite the increasing importance of risk management in a successful business organization, virtually no research has been undertaken to evaluate the effectiveness of various risk management practices. Through analysis of data obtained from a survey of risk management professionals, such an evaluation has been made and is reported here. Results include the expected effects of lower costs associated with higher levels of retention, increased size, and less risky industries. The relationship of higher costs with the use of a captive, and the ineffectiveness of centralization or use of analytical tools were unexpected.
Risk Management and the Theory of the Firm: Comment
In the past decade, the development of the capital asset pricing model of Sharpe [1964], Lintner [1965] and Mossin [1966] has made a significant contribution to our understanding of how the market values risky securities. Cummins [1976] offered a careful discussion of how this approach might be used by firms in their risk management and, hence, insurance purchasing decisions. While Cummins goes to great lengths to examine the limiting assumptions of the capital asset pricing model, and while he stresses the limited empirical applicability of that model, his paper overlooks a fundamental distinction between the type of risk treated by the capital asset pricing model and the type of risks that are susceptible to insurance cover. This note attempts to amend that omission.