All of an investor’s own operations to preserve the value of a portfolio (a type of self-insurance that investors use to minimize potential losses in a portfolio). – A contract in which an insurer, for a corresponding premium, protects the owner of a portfolio against losses in value, either in whole or in contractually agreed portions (insurance where the insurer takes on a portion of the clients entire portfolio; this can be done across all classes or just in one class of coverage). – In 2007, in the wake of the subprime crisis in the USA, this business resulted in a loss of CHF 1.2 billion for the world’s largest pure reinsurer, Schweizerische Rückversicherungs-Gesellschaft – Schweizer Rück for short; the company trades abroad under the name Swiss Reinsurance Company, but generally operates on the global market under the “Swiss Re” brand. A client had insured against risks in its portfolio, which consisted mainly of collateralized debt obligations from the US subprime business. The securities lost value unexpectedly. American International Group (AIG) lost just over USD 5 billion on portfolio insurance in the same year. – In spring 2007, insuring a USD 10 million portfolio at AIG cost barely USD 10,000; a year later, the premium had risen to just under USD 200,000. The conclusion to be drawn from this is that the precise calculation of risk at AIG – but not only there! – there may have been incorrect valuations with significant consequences. – See actuary, asset-backed securities, CLO funds, credit default swaps, embedded value securitization, equity kicker, first loss tranche, mezzanine tranche, monoliner, mortgage equity withdrawal, originate-to-distribute strategy, residential mortgage-backed securities, collateral crisis, single master liquidity conduit, subprime crisis, securitization structure, true sale securitization, interest rate freeze, lemon trading, special purpose vehicle.
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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
E-mail address: info@ekrah.com
https://de.wikipedia.org/wiki/Gerhard_Ernst_Merk
https://www.jung-stilling-gesellschaft.de/merk/
https://www.gerhardmerk.de/