3.6 Risk Transference Mechanisms
To hedge the overall risk of their portfolios, UK insurance companies actively make active use of private
reinsurance markets such as Lloyd's of London to transfer the risk upstream. It is also the home of
other more novel financial products such as the sale of catastrophe bonds (CAT bonds) and other
sophisticated hedging arrangements (EP, 2013).
Downstream, UK insurance companies, while operating under the industry’s regulatory authority, have
a lot of latitude to include clauses in flood insurance contracts that transfer risk to policyholders. At it
most basic, premium excesses are commonly used to discourage claims making and to share the risk
covered. Other more complicated rules can also be included to make sure that policyholders are
financially motivated to take on a portion of the risk themselves.
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