| Liquidity crunch in global financial market, Long-term | | | | Second, SPV issues notes to investor in capital |
| security food supply, disruptive supply chain and | | | | market, and securities offering are invested in high |
| energy security are main global risks that need to be | | | | quality securities and held in a collateral trust. Third, |
| resolved. To reduce risk effectively, risk assessment, | | | | investment returns are swapped by counterparties. |
| risk transfer and risk mitigation must be taken into | | | | In some transaction, principle and interest of the |
| account. The issue is how can we reduce the risk in | | | | notes maybe guaranteed. On the other hand, |
| global financial market and what action should be | | | | insurance-link financial instrument is also used to |
| taken? | | | | transfer insurance risks, yet this method is used in |
| First, we need to assess and identify the risks so | | | | some severe cases, exceptional or extreme weather |
| that we need to improve the understanding of | | | | for instance. Risk transfer is usually done by private |
| national risk exposures and indentify the clusters of | | | | sector such as insurance company, bank or other |
| countries that are exposed to the same risks in | | | | financial institution. |
| similar level. Then we can create a framework which | | | | Third is risk mitigation which is required the |
| is compatible with the global approach taken in | | | | involvement and action by the government or public |
| previous risks. Individual countries might have their | | | | sector. Government bodies should play 4 crucial |
| specific set of risks, and an aggregate risks measure | | | | functions. First, in addition to risk identification and |
| can be derived from the model's capability to | | | | assessment, government also manages the risk. To |
| integrate a wealth of data, account for | | | | demonstrate, government can subsidize the gasoline |
| cross-correlations among risks, analyze specific | | | | price or food price if the price of these commodities |
| vulnerabilities, and identify country clusters that | | | | is so high. Besides, government also has to |
| engage in similar scenario to alleviate risk. For | | | | communicate to mass carefully because it can make |
| example, United Kingdom set up the Civil | | | | the situation worse especially some risks assessment |
| Contingencies Secretariat in 2001 to improve the | | | | that need to be kept confidential. Mass media |
| effectiveness of post-crisis management, and to | | | | sometimes helps a lot if government can |
| identify and assess prospective risk to national | | | | communicate in a proper way, not to make people |
| resilience. Therefore UK has been improving their | | | | scare and create chaos, but create the trust. Second, |
| consistency across governments concerning with | | | | government must regulate the legislation to help |
| assessment, roles and responsibilities clarification and | | | | prevent the emergence of risks and protect the |
| basis for effective risk management. | | | | effect of risks. To illustrate, government can increase |
| Second is risk transfer by securitization, | | | | the interest rate in order to decrease the bank loan |
| insurance-linked securities, and insurance-linked financial | | | | in case of liquidity crunch. However, legislation |
| instrument. Securitization is the process of pooling risk | | | | sometimes also can cause bad effect to investment |
| and dividing that pool into portions sold to wide range | | | | and economic growth so that we need to study |
| of investors on the secondary market. The | | | | carefully before we set up the rule and regulation. For |
| consequence will be a diversification of risk for insurer | | | | example, Cambodia just released regulation that all |
| to an increase in the pool of capital available to cover | | | | constructors need to reserve 2% of their total |
| insurance risk. Securitization grows more cost | | | | expenditure in any banks in Cambodia. As a result, |
| effective, insurer will be able to increasingly share | | | | investors complained it harshly and threatened to |
| cost benefit. To illustrate, it shares one-third of the | | | | withdraw their investment, thus this regulation must |
| US fixed income market. Other method is | | | | be put aside; otherwise investors will run away. Third, |
| Insurance-linked securities which are able to fulfill the | | | | government should boost economic continuity by |
| insurer capital requirement by diversifying the | | | | using some specific measure such as the release of |
| increasingly broad set of risks. To cover some | | | | financial reserves or strategic energy reserve. A good |
| traditional peak risks like natural disaster, the price of | | | | example is America released their oil reserve when |
| catastrophe risk is considerably high so that the | | | | the oil price reached the peak in 2008. Forth, |
| coverage is insufficient. Therefore, we need to link | | | | government must play a role of insurer of last resort |
| security covering catastrophe by issuing the bond or | | | | owing to build the trust and motivation for investor |
| note. For example, Hurricane Katrina or earthquake in | | | | and citizens. |
| Japan is traditional peak risk, so that we can issue | | | | In brief, to reduce risk successfully both private and |
| "cat" bond to provide additional capital to the | | | | public sector must take the plunge. However, we |
| insurance industry. In "cat" bond process, at first, the | | | | need to identify and assess the risk clearly so that |
| sponsor enters into a financial contract with a Special | | | | we can transfer and mitigate it in a proper way. |
| Purpose Vehicle such as bank or financial institution. | | | | |