High correlations between risks can increase required insurer capital and/or reduce the availability of insurance. For such insurance lines, securitization is rapidly emerging as an alternative form of risk transfer. The ultimate success of securitization in replacing or complementing traditional insurance and reinsurance products depends on the ability of securitization to facilitate and/or be facilitated by insurance contracts. We consider how insured losses might be decomposed into separate components, one of which is a type of "systemic risk" that is highly correlated amongst insureds. Such a correlated component might conceivably be hedged directly by individuals, but is more likely to be hedged by the insurer. We examine how insurance contracts may be designed to allow the insured a mechanism to retain all or part of the systemic component. Examples are provided, which illustrate our methodology in several types of insurance markets subject to systemic risk.
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number
CESifo Working Paper No. 559.
Length: Date of creation: 2001 Date of revision: Handle: RePEc:ces:ceswps:_559
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Find related papers by JEL classification: D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
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