Corporate Risk Management and the Insurance Industry

  • Clifford W. SmithJr.
Part of the Huebner International Series on Risk, Insurance, and Economic Security book series (HSRI, volume 17)


There are at least two reasons that corporate risk management is important for firms in the insurance industry: (1) An insurance company’s value depends directly on its risk-management policy. (2) The asset risk in an insurance company’s loan portfolio depends on its customers’ risk-management policies. In this paper, I analyze these implications of corporate risk-management for life insurance companies. In section 2, I suggest that corporate risks can be arrayed along a spectrum. At one extreme are firm-specific risks while at the other are market-wide risks. I note that forwards, futures, options, and swaps are specialized risk-management tools that allow the firm to hedge many sources of market-wide financial risk. In addition to these off-balance-sheet hedging alternatives, financially engineered instruments, such as dual-currency bonds, provide on-balance-sheet hedging alternatives. In section 3, I focus on motives for value-maximizing firms to purchase such specialized risk-management instruments. This section thus identifies the implications of hedging by customers for the insurer’s asset portfolio risk. Section 4 examines the implications of life insurer risk-management policies. In section 5, I present my conclusions.


Interest Rate Financial Distress Insurance Industry Life Insurance Company Exercise Price 
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Copyright information

© Springer Science+Business Media New York 1993

Authors and Affiliations

  • Clifford W. SmithJr.
    • 1
  1. 1.W.E. Simon Graduate School of Business AdministrationUniversity of RochesterUSA

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