Reinsurers as financial intermediaries in the market for catastrophic risk
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 can 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.
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