Alternative Risk Transfer (ART) Market
Categories: Insurance, Derivatives
Generally speaking, "risk transfer" is a way of making sure that you're not the only one hurt if something bad happens to you. You are literally transferring some of your risk onto someone else.
The most common form of risk transfer is insurance. For a fee, the insurance company agrees to take on some of the liability if certain bad things happen, like a car accident or a robbery. But there are other forms of risk transfer. These can be found on the Alternative Risk Transfer Market.
Now before you start imagining a place like Seattle's Pike Place Fish Market for insurance-like products (aisles and aisles of middle-aged people in suits tossing thick stacks of paper to each other), the market isn't a real place. It just describes the industry of ART, which can include things like self-insurance (a company insuring itself) or captives (multiple companies insuring themselves together, though they might want to consider a friendlier name).
There's also things like the derivatives market, where companies can buy options that hedge themselves against risk. An example would include weather derivatives, which allow companies to buy contracts that pay off if certain weather events happen, like if snowfall in a particular place is a above a certain level, or if rainfall comes in below a certain mark.
Let's look at an example on this last one. You own a ski resort. If you don't get enough snow, you'll have to shut down for the winter and lose tons of revenue because of the bad (for you) weather. As a way to transfer risk in this scenario - get ready for some A-R-T baby! - you can buy weather derivatives that pay off if snow levels turn out lower than expected. Then, you'll get revenue from the derivatives if there isn't enough snow for skiing, making up for at least some of the money you'll lose for having to close the resort.
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Finance: What are Systematic and Unsyste...14 Views
finance a la shmoop what are systemic and unsystematic risk systemic risks are
just endemic to the market want to invest in the stock market and compound [Plate of vegetable appear]
return your way into great wealth great but then you'll suffer the normal risk
of the system that risk specifically is this yeah best of times worst of times
but up over time the market goes up you just have to embrace the notion that [Man hugging a tree]
there is systemic risk in that in the short run you can buy an S&P 500 index
fund here then lose like a third or whatever of your money in not too many
years but if you don't panic and sell just at the wrong time here right out
the storm and keep going well then you should be just fine by the time you
arrive here so that's risk that is always in the system equities rise and [Equity in the ocean]
fall like the tides or something like that but generally they rise and if you
want to swim in this bathtub well you get used to the turbulence and have an [Girl swimming against the tide]
airsick bag handy all right that systemic risk or systemic risk
what's unsystematic risk well it's bad investors or rather bad investing it's
panicking and selling your stock just when you should be doubling down its
buying lousy companies thinking that they're cheap today but not realizing [Woman runs away from smelly girl]
that they will always be cheap because they're lousy or in a lousy industry or
run by lousy management it's buying into lousy industries that also look cheap
but are dying hello paper and pulp is yeah anyone really think that's gonna be [Paper printing]
around in 20 years all right well it's believing the dreamy hopes and prayers
of future earnings and trusting that there really will be 5 million [Traffic on the highway]
driverless cars on the road in 3 years you know good luck with that we'd love
it to be true but ain't gonna be unsystematic risk is also investing in
bonds for the long-term taking very little risk when taking little risk is
the opposite of what you should be doing when you're a young investor so yeah
systematic and unsystematic risk both exist plentifully and both can bite you [Dog bites portfolio from woman]
right in the portfolio so you got to know what both are and embrace them
for what they're worth