An Industrial Organization Theory of Risk Sharing
Examining the global reinsurance market for catastrophic losses, we propose a new theory of optimal risk sharing that finds its inspiration in the economic theory of the firm. Our model offers a theoretical foundation for the vertical and horizontal tranching of insurance contracts (also known respectively as proportional and excess of loss reinsurance contracts). Using a two-factor production model popular in industrial economics, we show how reinsurance should be optimally layered (with attachment and detachment points) for a given book of business. This allows us to find the minimum insurance premium necessary to cover the cost of catastrophic events. We conclude with public policy implications by showing the conditions under which government intervention in the catastrophic loss insurance industry can reduce the cost to society of bearing risk and increase its welfare.
|Date of creation:||01 Dec 2011|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (514) 985-4000
Fax: (514) 985-4039
Web page: http://www.cirano.qc.ca/Email:
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- J. David Cummins & Neil A. Doherty & Anita Lo, 1999. "Can Insurers Pay for the "Big One"? Measuring the Capacity of an Insurance Market to Respond to Catastrophic Losses," Center for Financial Institutions Working Papers 98-11, Wharton School Center for Financial Institutions, University of Pennsylvania.
- J. David Cummins & Christopher M. Lewis & Richard D. Phillips, 1998.
"Pricing Excess-of-loss Reinsurance Contracts Against Catastrophic Loss,"
Center for Financial Institutions Working Papers
98-09, Wharton School Center for Financial Institutions, University of Pennsylvania.
- David Cummins & Christopher Lewis & Richard Phillips, 1999. "Pricing Excess-of-Loss Reinsurance Contracts against Cat as trophic Loss," NBER Chapters, in: The Financing of Catastrophe Risk, pages 93-148 National Bureau of Economic Research, Inc.
- J. David Cummins & Georges Dionne & Robert Gagné & Abdelhakim Nouira, 2006.
"Efficiency of Insurance Firms with Endogenous Risk Management and Financial Intermediation Activities,"
Cahiers de recherche
06-06, HEC Montréal, Institut d'économie appliquée.
- J. Cummins & Georges Dionne & Robert Gagné & A. Nouira, 2009. "Efficiency of insurance firms with endogenous risk management and financial intermediation activities," Journal of Productivity Analysis, Springer, vol. 32(2), pages 145-159, October.
- J. David Cummins & Georges Dionne & Robert Gagné & Abdelhakim Nouira, 2006. "Efficiency of Insurance Firms with Endogenous Risk Management and Financial Intermediation Activities," Cahiers de recherche 0616, CIRPEE.
When requesting a correction, please mention this item's handle: RePEc:cir:cirwor:2011s-78. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Webmaster)
If references are entirely missing, you can add them using this form.