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Insurance Contracts and Securitization

  • Neil A. Doherty
  • Harris Schlesinger

High correlations between risks can increase required insurer capital and/orreduce the availability of insurance. For such insurance lines, securitizationis rapidly emerging as an alternative form of risk transfer. The ultimatesuccess of securitization in replacing or complementing traditional insuranceand reinsurance products depends on the ability of securitization to facilitateand/or be facilitated by insurance contracts. We consider how insuredlosses might be decomposed into separate components, one of which is atype of “systemic risk” that is highly correlated amongst insureds. Such acorrelated component might conceivably be hedged directly by individuals,but is more likely to be hedged by the insurer. We examine how insurancecontracts may be designed to allow the insured a mechanism to retain all orpart of the systemic component. Examples are provided, which illustrate ourmethodology in several types of insurance markets subject to systemic risk.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2001/wp-cesifo-2001-09/cesifo_wp559.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 559.

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Date of creation: 2001
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Handle: RePEc:ces:ceswps:_559
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  1. Neil A. Doherty, 1997. "Financial Innovation in the Management of Catastrophe Risk," Center for Financial Institutions Working Papers 98-12, Wharton School Center for Financial Institutions, University of Pennsylvania.
  2. Neil A. Doherty, 1997. "Financial Innovation in the Management of Catastrophe Risk," Journal of Applied Corporate Finance, Morgan Stanley, vol. 10(3), pages 84-95.
  3. Edi Karni, 1995. "Non-Expected Utility and The Robustness of the Classical Insurance Paradigm: Discussion," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 20(1), pages 51-56, June.
  4. Doherty, Neil A & Schlesinger, Harris, 1983. "Optimal Insurance in Incomplete Markets," Journal of Political Economy, University of Chicago Press, vol. 91(6), pages 1045-54, December.
  5. Kenneth A. Froot, 2001. "The Market for Catastrophe Risk: A Clinical Examination," NBER Working Papers 8110, National Bureau of Economic Research, Inc.
  6. Doherty, N.A. & Dionne, G., 1987. "Insurance with Undiversifiable Risk," Cahiers de recherche 8710, Universite de Montreal, Departement de sciences economiques.
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