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Reinsurers as financial intermediaries in the market for catastrophic risk

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  • John Lewis

Abstract

In a world of perfect markets, primary insurers could hedge catastrophic risks using financial instruments. In practice however, most primary insurers deal with catastrophic risk by the use of a financial intermediary - a reinsurer. This paper uses insights gained from the institutional economics literature on the existence of banks, to motivate the existence of reinsurers as financial intermediaries. Reinsurers n be motivated by the information acquired by the act of reinsuring, by their role as an efficient form of delegated monitoring, their ability to bear basis risk and to provide liquidity in the aftermath of a catastrophe.

Suggested Citation

  • John Lewis, 2010. "Reinsurers as financial intermediaries in the market for catastrophic risk," DNB Occasional Studies 802, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbocs:802
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    File URL: https://www.dnb.nl/en/binaries/os0802_tcm47-238311.pdf
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    References listed on IDEAS

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    1. Diamond, Douglas W, 1991. "Monitoring and Reputation: The Choice between Bank Loans and Directly Placed Debt," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 689-721, August.
    2. 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.
    3. Guillaume Plantin, 2006. "Does Reinsurance Need Reinsurers?," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 73(1), pages 153-168.
    4. Benston, George J & Smith, Clifford W, Jr, 1976. "A Transactions Cost Approach to the Theory of Financial Intermediation," Journal of Finance, American Finance Association, vol. 31(2), pages 215-231, May.
    5. David M. Cutler & Richard J. Zeckhauser, 1999. "Reinsurance for Catastrophes and Cataclysms," NBER Chapters,in: The Financing of Catastrophe Risk, pages 233-274 National Bureau of Economic Research, Inc.
    6. Dwight M. Jaffee & Thomas Russell, 1996. "Catastrophe Insurance, Capital Markets and Uninsurable Risks," Center for Financial Institutions Working Papers 96-12, Wharton School Center for Financial Institutions, University of Pennsylvania.
    7. Robert E. Hoyt & Kathleen A. McCullough, 1999. "Catastrophe Insurance Options: Are They Zero-Beta Assets?," Journal of Insurance Issues, Western Risk and Insurance Association, vol. 22(2), pages 147-163.
    8. Cummins, J. David & Lalonde, David & Phillips, Richard D., 2004. "The basis risk of catastrophic-loss index securities," Journal of Financial Economics, Elsevier, vol. 71(1), pages 77-111, January.
    9. Froot, Kenneth A. & O'Connell, Paul G.J., 2008. "On the pricing of intermediated risks: Theory and application to catastrophe reinsurance," Journal of Banking & Finance, Elsevier, vol. 32(1), pages 69-85, January.
    10. Anil K. Kashyap & Raghuram Rajan & Jeremy C. Stein, 2002. "Banks as Liquidity Providers: An Explanation for the Coexistence of Lending and Deposit-Taking," Journal of Finance, American Finance Association, vol. 57(1), pages 33-73, February.
    11. Giovanni Dell'Ariccia & Ezra Friedman & Robert Marquez, 1999. "Adverse Selection as a Barrier to Entry in the Banking Industry," RAND Journal of Economics, The RAND Corporation, vol. 30(3), pages 515-534, Autumn.
    12. Niehaus, Greg, 2002. "The allocation of catastrophe risk," Journal of Banking & Finance, Elsevier, vol. 26(2-3), pages 585-596, March.
    13. Black, Fischer, 1975. "Bank funds management in an efficient market," Journal of Financial Economics, Elsevier, vol. 2(4), pages 323-339, December.
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    Cited by:

    1. 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.

    More about this item

    Keywords

    Reinsurance; catastrophic risk; financial intermediaries; transaction costs;

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General

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