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Does Reinsurance Need Reinsurers?

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  • Guillaume Plantin

Abstract

The reinsurance market is the secondary market for insurance risks. It has a very specific organization. Direct insurers rarely trade risks with each other. Rather, they cede part of their primary risks to specialized professional reinsurers who have no primary business. This article offers a model of equilibrium in reinsurance and capital markets in which professional reinsurers arise endogenously. Their role is to monitor primary insurers credibly, so that insurers can raise capital more easily. In equilibrium, the financial structure of primary insurers consists of a mix of reinsurance and outside capital. The comparative statics yield empirical predictions which are broadly in line with a number of stylized facts from the reinsurance market. Copyright The Journal of Risk and Insurance, 2006.

Suggested Citation

  • Guillaume Plantin, 2006. "Does Reinsurance Need Reinsurers?," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 73(1), pages 153-168.
  • Handle: RePEc:bla:jrinsu:v:73:y:2006:i:1:p:153-168
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    References listed on IDEAS

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    1. Neil Doherty & Kent Smetters, 2005. "Moral Hazard in Reinsurance Markets," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 72(3), pages 375-391.
    2. Mathias Dewatripont & Jean Tirole, 1994. "The prudential regulation of banks," ULB Institutional Repository 2013/9539, ULB -- Universite Libre de Bruxelles.
    3. Bengt Holmstrom & Jean Tirole, 1997. "Financial Intermediation, Loanable Funds, and The Real Sector," The Quarterly Journal of Economics, Oxford University Press, vol. 112(3), pages 663-691.
    4. Doherty, N A & Tinic, S M, 1981. "Reinsurance under Conditions of Capital Market Equilibrium: A Note," Journal of Finance, American Finance Association, vol. 36(4), pages 949-953, September.
    5. Innes, Robert D., 1990. "Limited liability and incentive contracting with ex-ante action choices," Journal of Economic Theory, Elsevier, vol. 52(1), pages 45-67, October.
    6. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 393-414.
    7. Mayers, David & Smith, Clifford W, Jr, 1990. "On the Corporate Demand for Insurance: Evidence from the Reinsurance Market," The Journal of Business, University of Chicago Press, vol. 63(1), pages 19-40, January.
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    Cited by:

    1. repec:bla:jrinsu:v:83:y:2016:i:4:p:1007-1043 is not listed on IDEAS
    2. John Lewis, 2010. "Reinsurers as financial intermediaries in the market for catastrophic risk," DNB Occasional Studies 802, Netherlands Central Bank, Research Department.
    3. Sabine Lemoyne de Forges & Ruben Bibas & Stéphane Hallegatte, 2001. "A dynamic model of extreme risk coverage : Resilience and e fficiency in the global reinsurance market," CIRED Working Papers halshs-00800460, HAL.
    4. Mathieu Gatumel & Sabine Lemoyne de Forges, 2013. "Understanding and Monitoring Reinsurance Counterparty Risk," Post-Print hal-00946934, HAL.
    5. Selim Mankaï & Aymen Belgacem, 2013. "Interactions Between Risk-Taking, Capital, and Reinsurance for Property-Liability Insurance Firms," EconomiX Working Papers 2013-23, University of Paris Nanterre, EconomiX.
    6. van Lelyveld, Iman & Liedorp, Franka & Kampman, Manuel, 2011. "An empirical assessment of reinsurance risk," Journal of Financial Stability, Elsevier, vol. 7(4), pages 191-203, December.
    7. Adams, Mike & Jiang, Wei, 2016. "Do outside directors influence the financial performance of risk-trading firms? Evidence from the United Kingdom (UK) insurance industry," Journal of Banking & Finance, Elsevier, vol. 64(C), pages 36-51.

    More about this item

    JEL classification:

    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance
    • J1 - Labor and Demographic Economics - - Demographic Economics

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