Insurance companies have already refused to pay
up on specific Enron-related credit derivatives - claiming not to have
insured against a particular insurance events. The insurance pertained
to global pools linked and overall default rates - they protested.
This excursion of the insurance industry into the financial market was
long in the making. Though treated very differently by accountants -
financial folk see little distinction between an insurance policy and
equity capital. Both are used to offset business risks.
To recoup losses incurred due to arson, or embezzlement, or accident -
the firm can resort either to its equity capital (if it is uninsured)
or to its insurance. Insurance, therefore, serves to leverage the
firm's equity. By paying a premium, the firm increases its pool of
equity.
The funds yielded by an insurance policy, though, are encumbered and
contingent. It takes an insurance event to "release" them. Equity
capital is usually made immediately and unconditionally available for
any business purpose. Insurance companies are moving resolutely to
erase this distinction between on and off balance sheet types of
capital. They want to transform "contingent equity" to "real equity".
Pages:
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87