Liquid insurance contracts

Abstract

A liquid insurance contract (LIC) comprises a security which is traded or tradable and which has cash flows to the issuer based upon a liability whose exact value is unknown at the time of issuance. A method for creating and trading these LICs, as well as other financial products derived from LICs, may include any of the following steps: writing at least one LIC; preparing regulatory filings for at least two LICs; issuing the two LICs; preparing regulatory filings for a financial product which includes at least one detachable LIC provision; issuing the financial product; creating at least one underwriter as a closed end fund owned by a parent company; placing ownership of at least a portion of an issue of the financial product in an underwriter owned by a parent company; spinning off the underwriter from the parent company using at least one stock dividend; trading shares of the underwriter; reporting information on trades and positions of the underwriter; and valuing the underwriter using analytic modeling, sensitivity testing, portfolio analysis, and / or investment analysis.

Description

CROSS REFERENCE TO RELATED APPLICATION[0001]The present invention claims priority from U.S. Application No. 60 / 238,798 filed Oct. 6, 2000 entitled “Liquid Insurance Contracts”, which is incorporated herein by reference.FIELD OF THE INVENTION [0002]The present invention relates to a mechanisms and methods for creating and trading and otherwise managing financial risk.BACKGROUND OF THE INVENTION[0003]The need of individuals, businesses, government agencies and other entities to transfer risk from time to time is well known. Many financial instruments transfer financial risk, each in its own way. Insurance is a particular class of financial instruments in which risks are defined by contract and explicitly transferred from one party (the insured) to another (the insurer). Reinsurance is a particular class of financial instruments in which risks are defined by contract and explicitly transferred from an insurer to another party (the reinsurer). By general and common interpretation, these...

AI Technical Summary

Benefits of technology

[0025]The present invention overcomes these deficiencies in existing systems of risk transfer between entities, insurers, reinsurers, and the capital markets. Firstly, the invention enables investors to know every asset and liability of each of the Underwriters in which they invest or might invest. Secondly, it enables investors to rapidly bid up the value of such underwriters when events favor them, and bid down the value of such underwriters when events are unfavorable to them. Thirdly, it enables investors to employ computational algorithms in computer workstations and hand-held devices to value the relative advantage or disadvantage of making a change in the holdings they have in individual Underwriters. Fourthly, it enables Underwriters to employ computational algorithms in computer workstations and hand-held devices to value the relative advantage or disadvantage of making a change in their portfolios of assets and liabilities in light of changes in the trading prices of Liquid Insurance Contracts and the trading prices of shares in Underwriters. Fifthly, it enables Underwriters to raise capital from investors by making changes in their portfolios transparent to the investors.

[0026]The invention can be used to create responses to events such as, but not limited to, hurricanes, floods, fires, earthquakes, terrorism and changes in law. In the case of terrorism, for example, the invention could be employed to create Liquid Insurance Contracts covering various kinds of loss from terrorism; these Liquid Insurance Contracts would be underwritten by the Underwriters; the risks thus underwritten would be transferred in turn to the world-wide capital markets through investors' ongoing investments in the Underwriters. In this way, entities would be spared the problems created by exclusions of loss arising from terrorism, and Congress would be spared the need to enact a special solution to each new risk-creating problem.

[0027]The invention applies the lessons of the capital markets to the structure of the risk-transfer process. In capital markets, capital can move quickly in response to events. The invention brings this quick movement of capital to the risk-transfer process. The capital markets use trading floors to reduce transaction costs. The invention brings this low-cost mechanism to the risk-transfer process. The capital markets use prices as proxies for the combined effects of expected payoff, uncertainty of payoff, and timing of payoff. As a direct result, in the capital markets, prices change in response to changes in information and trading floors nearly always clear. The invention brings these benefits to the risk-transfer process.

[0028]The invention gives to investors the information needed to determine if underwriting decisions are profitable. Thus it gives investors a way to measure the performance of the underwriting function and separate out financial loss due to the realization of insured contingencies from those that are due to bad management including excessive underwriting leverage.

[0029]The invention gives the investors the information investors need to determine if underwriting decisions are profitable because it separates the risk-transfer function from the claims management function. By subtraction, it provides performance management information regarding the claims management function. In this way the invention promotes operating efficiencies and facilitates investments in new and useful technologies for underwriting and for claims management.

[0030]The invention provides a means for capital to flow to support new types of coverage and coverage of new types of risks. Both by separating out the suretyship function (so that insurance regulators know that insurance contracts can be trusted) and by making portfolios transparent (so that investors can see their total exposure to one hazard across a range of Underwriters), the invention facilitates the rapid creation of new insurance solutions.

Problems solved by technology

Secondly, it enables investors to rapidly bid up the value of such underwriters when events favor them, and bid down the value of such underwriters when events are unfavorable to them.

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