Chapter 14

[Avviey]

Hi,

for unit 15 on core reading, under "Special Purpose Vehicles",

1) on page 10, part b), the combined premiums is to purchase credit insurance, the protection purchased could be:

the 2nd bullet point - "against inusrance risk as well as assets risk, so that investors are exposed to the credit risk of the crdit enhancement agency rather than the underlying insurance risk." could anyone tell me what this insurance risk is besides assets risk?


2) the next paragraph talks about total return swap (TRS). what exactly is this? ie. the relationship between TRS and SPV? the functionality of TRS, as it says that it is helped to service the notes. but i dont really understand it.

Thank you very much if anyone can help.

 

[Little Miss Lazy]

Sorry i'm not much help with the second point, but the first point I can help with. (at last trying to sit this exam whilst working in insurance helps!)

Insurance risk is made up of two parts:

- the risk that the insurance company behind the SPV does not price the insurance correctly. Therefore they end up with far more claims, or far greater claims than they anticipated.

-Also they may have priced the risk correctly but underestimate the cost of the claim, for example, an insurance company may have put aside $10m to pay out for the BP oil spill, when in reality they are going to lead a lot more.
Therefore they would have paid out far more in profit than they actually should of.

Hope this makes sense.

Good luck with answering the second point!