Financial Risk Management In the Insurance Industry - forthcoming

This chapter has two objectives. The first is to provide a survey of the literature on corporate hedging and financial risk management with an emphasis on how the general literature applies in insurance. We begin by reviewing the theoretical rationales for risk-neutral, profit-maximizing firms to practice risk management and then go on to discuss the empirical literature on corporate hedging. The second objective is to develop a new theoretical model to explain why the managers of risk-neutral insurance companies engage in risk management. Insurers are hypothesized to invest in multiple period, private assets where the payoffs are not fully realized if the assets have to be liquidated prior to their expiration. Avoiding adverse shocks to capital that would trigger a liquidation provides the motivation for risk management in our model.