In the course, Culp tries to show how deft ART-buying choices can help companies make more efficient use of such scarce capital. Normally, he notes, a corporation short on funds might issue stock or corporate bonds, for instance. But if the shortfall is triggered by a negative event like a drop in product demand, it might be hard to find willing investors or lenders.
In such cases, companies might more wisely have tapped the ART market beforehand and bought "contingent capital," according to Culp. Offered by insurers and reinsurers, the product enables a company to pick up quick capital by selling securities to the insurer at a preset price if a specified bad event happens.
That could make raising capital a whole lot cheaper. "Instead of having to issue common stock, you get it from a contingent-capital insurer that knows you better than the investor community does — and thus gives you a better price," he explains.
Hacking Through the Hype
To make such moves, however, finance executives need to know what the various ART products actually do. That's tricky, says Culp, since the products are often ill-named.
Among his examples of flashy, though unhelpful, terms of ART: "earnings-per-share insurance" (a policy including a number of different kinds of coverage) and "adverse-development coverage" (insurance for that part of a loss that exceeds what the buyer has self-insured).
Indeed, Culp thinks that much of his task in teaching the course is to help executives sort through puffery. To be astute consumers, they need to be able to "look at what the product itself is," he says, "rather than what somebody calls it in the marketing department."
"Alternative Risk Transfer: The Convergence of Corporate Finance and Risk Management" will be presented at University of Chicago's Graduate School of Business on October 4-6, 2004 and April 18-20, 2005, and at Singapore Management University on September 1-3, 2004.
Reader Comments» Post a comment