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Article
Publication date: 22 February 2022

Heike Bockius and Nadine Gatzert

The purpose of this article is to investigate the impact of counterparty risk on the basis risk of industry loss warranties as well as on reinsurance with and without collateral…

277

Abstract

Purpose

The purpose of this article is to investigate the impact of counterparty risk on the basis risk of industry loss warranties as well as on reinsurance with and without collateral under different dependence structures. The authors additionally compare the solvency and Sharpe ratio for different premium loadings and contract parameters.

Design/methodology/approach

The authors propose a model framework extension to account for the counterparty risk of risk transfer arrangements. Copulas are used to also take into account non-linear dependencies between risk factors, and Monte Carlo simulation is employed to derive numerical results and to conduct sensitivity analyses.

Findings

The authors show that the impact of counterparty risk is particularly pronounced for higher degrees of dependencies and tail dependent losses, i.e. in cases of basis risk levels that appear low if counterparty risk is not considered. With respect to counterparty risk management, the authors find that already partial collateralization limits counterparty and basis risk to more acceptable levels.

Practical implications

The study results are particularly relevant to practitioners, as insurers may not only underestimate the “true” basis risk of index-linked instruments, but also the effect of counterparty risk of reinsurance contracts along with the consequences for solvency and profitability.

Originality/value

The authors extend existing literature by allowing for the (partial) default of industry loss warranties and reinsurance under different dependence structures. Furthermore, the authors include profitability in addition to risk considerations. The interaction effects between counterparty risk and the basis risk of index-based alternative risk transfer instruments are largely unstudied, despite their considerable relevance in practice.

Details

The Journal of Risk Finance, vol. 23 no. 3
Type: Research Article
ISSN: 1526-5943

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Article
Publication date: 20 June 2019

Christian Eckert and Nadine Gatzert

Financial firms announcing large operational losses have empirically been shown to cause significant negative spillover effects in other non-announcing firms in case of the…

608

Abstract

Purpose

Financial firms announcing large operational losses have empirically been shown to cause significant negative spillover effects in other non-announcing firms in case of the banking and insurance industry. The purpose of this paper is 1) to model such spillover effects in a network from a portfolio perspective and 2) to holistically assess operational risk, reputational risk and the risk of spillover effects, taking into account the dependencies between these risk types.

Design/methodology/approach

The authors propose different approaches to model spillover effects with different complexity, including stochasticity and influencing factors within the industry network. They then calibrate the model based on information from previous empirical literature.

Findings

The results emphasize that spillover effects can represent a considerable (non-diversifiable) risk, especially in portfolios, and that neglecting them may lead to a severe underestimation of the actual impact of single operational loss events.

Originality/value

This study is relevant not only for a firm’s risk management strategy but also for investors holding a portfolio of firms potentially subject to spillover effects.

Details

The Journal of Risk Finance, vol. 20 no. 2
Type: Research Article
ISSN: 1526-5943

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Article
Publication date: 2 October 2018

Sarah Krömer and Nadine Gatzert

The purpose of this paper is to study investments in renewable energy projects which are jointly operated with an energy storage system, with particular focus on risk-return…

500

Abstract

Purpose

The purpose of this paper is to study investments in renewable energy projects which are jointly operated with an energy storage system, with particular focus on risk-return characteristics from the perspective of private and institutional investors, taking into account resource risk, energy price risk, inflation risk and policy risk.

Design/methodology/approach

To this end, this paper presents a stochastic discounted cash flow model which is then applied to a wind farm with a pumped hydro storage system.

Findings

The results show that energy storage systems have the potential to increase the expected present value of future investment cash flows and to hedge (downside) risk. However, to realize this potential, storage systems have to be cost-effective in terms of fixed operation, maintenance, staffing and insurance costs. Also, several key factors are identified which have a considerable influence on the performance of the operation strategy.

Originality/value

The paper contributes to the literature by conducting an analysis of (downside) risk and return of renewable energy investments with a storage system taking into account stochastic policy, resource, inflation and energy price risk.

Details

International Journal of Energy Sector Management, vol. 12 no. 4
Type: Research Article
ISSN: 1750-6220

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Article
Publication date: 3 April 2017

Nadine Gatzert and Thomas Kosub

Policy or regulatory risks represent one of the major barriers for renewable energy investments, especially against the background of several retrospective reductions of support…

2445

Abstract

Purpose

Policy or regulatory risks represent one of the major barriers for renewable energy investments, especially against the background of several retrospective reductions of support schemes in Europe. This paper aims to contribute to the literature by offering a categorization of major risk drivers and determinants of policy risk associated with renewable energy projects in developed countries.

Design/methodology/approach

Based on a narrative (traditional) review of the academic literature and supported by industry studies regarding cases of support scheme cuts in Europe (from the end of 2010 until the end of 2013), the paper derives determinants of policy risks of renewable energy investments.

Findings

As a main result, the paper offers a concise categorization of major risk drivers of policy and regulatory risks associated with renewable energy investments in developed countries along with potential indicators.

Practical implications

The derived categorization of major risk drivers and the set of indicators are of high relevance for risk management and risk assessment of renewable energy investments, where understanding the underlying risk drivers is vital. The findings can thus be applied when establishing a sound risk management for renewable energy investments.

Originality/value

The paper helps (potential) investors, policymakers and regulators to assess policy risks associated with renewable energy investments.

Details

International Journal of Energy Sector Management, vol. 11 no. 1
Type: Research Article
ISSN: 1750-6220

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Article
Publication date: 21 September 2021

Maximilian Bär, Nadine Gatzert and Jochen Ruß

The aim of this paper is to modify the shape of utility functions traditionally used in expected utility theory (EUT) to derive optimal retirement saving decisions. Inspired by…

308

Abstract

Purpose

The aim of this paper is to modify the shape of utility functions traditionally used in expected utility theory (EUT) to derive optimal retirement saving decisions. Inspired by current reference point based approaches, the authors argue that utility functions with jumps or kinks at certain threshold points might very well be rational.

Design/methodology/approach

The authors suggest an alternative to typical utility functions used in EUT, to be applied in the context of retirement saving decisions. The authors argue that certain elements that are used to model biases in behavioral models should–in the context of optimal retirement saving decisions–be considered “rational” and hence be included in a normative setting as well. The authors compare the optimal asset allocation derived under such utility functions with results under traditional power utility.

Findings

The authors find that the considered threshold levels can have a significant impact on the optimal investment decision for some individuals. In particular, the authors show that a much riskier investment than under EUT can become optimal if some level of income is secured by a social security and a significant portion of the distribution of terminal wealth lies below this level.

Originality/value

Contrary to previous work, this model is especially designed to assess the question of optimal product choice/asset allocation in the specific setting of retirement planning and from a normative point of view. In this regard, the authors first motivate the use of several thresholds and then apply this approach in a capital market model with stochastic stocks and stochastic interest rates to two illustrative investment alternatives.

Details

The Journal of Risk Finance, vol. 22 no. 5
Type: Research Article
ISSN: 1526-5943

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Article
Publication date: 5 July 2019

Christian Eckert, Nadine Gatzert and Alexander Pisula

Previous research observed that large internal fraud events in the general financial services industry imply negative spillover effects, whereas internal fraud in investment banks…

504

Abstract

Purpose

Previous research observed that large internal fraud events in the general financial services industry imply negative spillover effects, whereas internal fraud in investment banks can imply significantly positive effects for other banks. This paper aims to shed further light on this contradictory result.

Design/methodology/approach

For this purpose, the authors compare the spillover effects of the three largest cases of rogue trader events in investment banks (Company 1, 1995; Company 2, 2008; Company 3, 2011) on the largest competing non-announcing banks and insurance companies in Europe based on an event study.

Findings

The results show that while the respective announcing firm suffered significant market value losses that even led to bankruptcy in case of Company 1, spillover effects on other banks and insurers were twofold. In particular, in case of Company 2 and Company 3, spillover effects on other financial firms were significantly positive depending on the event window, indicating a dominating competitive effect, whereas the Company 1 event with its resulting bankruptcy led to significantly negative spillover effects and thus contagion.

Originality/value

The results offer a first indication that the severity of the event in terms of its consequences for the announcing firm is crucial, as internal fraud events have the potential to significantly worsen the market values of other financial services firms, which is in contrast to the typically observed positive effects.

Details

The Journal of Risk Finance, vol. 20 no. 3
Type: Research Article
ISSN: 1526-5943

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Article
Publication date: 19 March 2018

Udo Klotzki, Alexander Bohnert, Nadine Gatzert and Ulrike Vogelgesang

Due to the continuing low interest rate environment as well as the increase in acquisition costs, price transparency, cost transparency and competition with banks, the cost of…

697

Abstract

Purpose

Due to the continuing low interest rate environment as well as the increase in acquisition costs, price transparency, cost transparency and competition with banks, the cost of life insurance becomes increasingly important for customers, insurers and shareholders. Against this background, the purpose of this paper is to study the development of insurers’ economies of scale in regard to administrative costs for four of the largest European life insurance markets.

Design/methodology/approach

The analysis on economies of scale is based on a comprehensive set of 477 life insurers in Germany, Italy, Spain and the UK, yearly data between 2000 and 2014, and regression calculations that are based on 4,855 observations.

Findings

The results show that economies of scale exist for all considered markets and for most of the considered years. However, the extent of economies of scale varies considerably across countries.

Originality/value

Overall, the existing academic literature on costs and corresponding economies of scale in life insurance primarily deals with analyses of total costs instead of administrative costs, a single year or a single market. This paper contributes to the existing literature by conducting an analysis of recent market dynamics and economies of scale in regard to administrative costs for the period from 2000 and 2014 for four of the largest European life insurance markets for which the respective data were available (Germany, Italy, Spain and the UK) and 477 life insurers in total. This is done by means of a log-log transformation of premiums and costs and a fixed effects model based on these transformed figures for 4,855 observations. In addition, for each market, the authors analyze the development of administrative costs for a total of 477 insurers.

Details

The Journal of Risk Finance, vol. 19 no. 2
Type: Research Article
ISSN: 1526-5943

Keywords

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Article
Publication date: 19 July 2021

Felicitas Hoppe, Nadine Gatzert and Petra Gruner

This article aims to gain insights on the current state of small- and medium-sized enterprises’ (SMEs’) cyber risk management process and to derive future research directions.

2415

Abstract

Purpose

This article aims to gain insights on the current state of small- and medium-sized enterprises’ (SMEs’) cyber risk management process and to derive future research directions.

Design/methodology/approach

This is done by collecting market insights from 37 recent industry surveys and structuring them based on the steps of the risk management process. From this analysis, major challenges are derived and future fields of research identified.

Findings

The results indicate that deficiencies in risk culture as well as the strained market for IT experts are the major obstacles with respect to the implementation of cyber risk management in SMEs, and that these challenges are similar across countries. The findings suggest that especially the relationship between cyber security culture and cyber risk management should be investigated further, and that a stronger link between the research streams on enterprise risk management and cyber risk management would be desirable.

Originality/value

This paper contributes to the literature by providing a systematic overview on the current state of SMEs' cyber risk management from a market perspective. The findings provide support for the existing academic literature by emphasizing the central role of cyber security culture (perception, knowledge, attitude) for a successful cyber risk management, which however should be addressed in more depth in future (empirical) research.

Details

The Journal of Risk Finance, vol. 22 no. 3/4
Type: Research Article
ISSN: 1526-5943

Keywords

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Article
Publication date: 28 January 2014

Nadine Gatzert

132

Abstract

Details

The Journal of Risk Finance, vol. 15 no. 1
Type: Research Article
ISSN: 1526-5943

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Article
Publication date: 18 January 2016

Nadine Gatzert and Joan Schmit

The purpose of this paper is to present a coherent and effective enterprise risk management (ERM) framework that includes necessary steps and processes for integrating reputation…

6049

Abstract

Purpose

The purpose of this paper is to present a coherent and effective enterprise risk management (ERM) framework that includes necessary steps and processes for integrating reputation risk management into an organization’s overall ERM approach which is intended to support corporate strategic success. In particular, reputation creation, enhancement, and protection are critical to an organization’s success, yet highly challenging given the wide ranging and somewhat opaque nature of the concept. These qualities call for a strong ERM approach to reputation that is holistic and integrative, yet existing knowledge of how to do so is limited.

Design/methodology/approach

The paper evaluates and synthesizes existing reputation literature in developing an enterprise-wide reputation risk management framework incorporating necessary steps, processes, and considerations. We address risk strategy, risk assessment, risk governance, and risk culture as key elements of ERM and conclude with suggestions for future research.

Findings

The results suggest several important ideas which are of great relevance when integrating reputation risk management into an ERM framework. Among these are the importance of: identifying and understanding the purpose of key stakeholders, appreciating the multidimensional and layered effect of events on organizational reputation and monitoring the influence of technological advances.

Originality/value

The authors contribute to the literature by developing a framework for enterprise-wide reputation risk management that applies across industries. In contrast to previous work, the authors offer a broader perspective on the underlying causes and consequences of reputation damage based on empirical evidence and insight from the academic literature and provide additional detail in identification of reputation determinants, antecedents, and drivers. While much of this information exists in various places in the literature, it has not been organized into a cohesive framework nor used in developing an ERM strategy.

Details

The Journal of Risk Finance, vol. 17 no. 1
Type: Research Article
ISSN: 1526-5943

Keywords

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