IDEAS home Printed from https://ideas.repec.org/p/hal/wpaper/hal-00567263.html

Optimal risk financing in large corporations through insurance captives

Author

Listed:
  • Pierre Picard

    (X-DEP-ECO - Département d'Économie de l'École Polytechnique - X - École polytechnique - IP Paris - Institut Polytechnique de Paris)

  • Jean Pinquet

    (X-DEP-ECO - Département d'Économie de l'École Polytechnique - X - École polytechnique - IP Paris - Institut Polytechnique de Paris)

Abstract

A captive is an insurance or reinsurance company established by a parent group to finance its own risks. Captives mix internal risk pooling between the business units of the parent group and risk transfer toward the reinsurance market. We analyze captives from an optimal insurance contract perspective. The paper considers the vertical contractual chain that links firstly business units to insurance captives or to "fronters" through insurance contracts, secondly fronters to reinsurance captives through the cession of risks and thirdly insurance or reinsurance captives to reinsurers through cessions or retrocessions. In particular, the risk cession by fronters to a reinsurance captive trades o¤ the benefits derived from recouped premiums and from the risk sharing advantage of an "umbrella reinsurance policy", against the risks that result from the captive liabilities. The optimal captive scheme depends on the price of coverage in insurance and reinsurance markets and on the parent group's corporate capital. Since these variables fluctuate across time, the analysis developed in this paper corroborates the intertemporal variability of captives activity.

Suggested Citation

  • Pierre Picard & Jean Pinquet, 2011. "Optimal risk financing in large corporations through insurance captives," Working Papers hal-00567263, HAL.
    • Handle: RePEc:hal:wpaper:hal-00567263
    Note: View the original document on HAL open archive server: https://hal.science/hal-00567263
    as

    Download full text from publisher

    File URL: https://hal.science/hal-00567263/document
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. L. Eeckhoudt & C. Gollier & H. Schlesinger, 2005. "Economic and financial decisions under risk," Post-Print hal-00325882, HAL.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Sandrine Spaeter, 2023. "How to Reconcile Pandemic Business Interruption Risk With Insurance Coverage," Revue d'économie politique, Dalloz, vol. 133(2), pages 177-201.
    2. Jean-François Outreville, 2014. "The Meaning of Risk? Insights from The Geneva Risk and Insurance Review," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 39(4), pages 768-781, October.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Nakamura, Yutaka, 2015. "Mean-variance utility," Journal of Economic Theory, Elsevier, vol. 160(C), pages 536-556.
    2. Massimiliano Amarante & Mario Ghossoub & Edmund Phelps, 2012. "Contracting for Innovation under Knightian Uncertainty," Cahiers de recherche 18-2012, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
    3. H. Peter Boswijk & Jeroen Dalderop & Roger J. A. Laeven & Niels Marijnen, 2025. "Semiparametric Estimation of Probability Weighting Functions Implicit in Option Prices," Tinbergen Institute Discussion Papers 25-022/III, Tinbergen Institute.
    4. Irina Georgescu & Jani Kinnunen, 2013. "A risk approach by credibility theory," Fuzzy Information and Engineering, Springer, vol. 5(4), pages 399-416, December.
    5. Esposito, Federico, 2022. "Demand risk and diversification through international trade," Journal of International Economics, Elsevier, vol. 135(C).
    6. Gabriele Cardullo & Luca Beltrametti, 2025. "Monitoring and prudence," Journal of Economics, Springer, vol. 146(2), pages 221-235, October.
    7. Ahsan, Md. Nazmul & Emran, M. Shahe & Jiang, Hanchen & Shilpi, Forhad, 2022. "What the Mean Measures of Mobility Miss: Learning About Intergenerational Mobility from Conditional Variance," GLO Discussion Paper Series 1097, Global Labor Organization (GLO).
    8. Federico Esposito, 2017. "Entrepreneurial Risk and Diversification through Trade," Working Papers w201714, Banco de Portugal, Economics and Research Department.
    9. Loubergé, Henri & Malevergne, Yannick & Rey, Béatrice, 2020. "New Results for additive and multiplicative risk apportionment," Journal of Mathematical Economics, Elsevier, vol. 90(C), pages 140-151.
    10. Drechsler, Martin, 2021. "On the cost-effective temporal allocation of credits in conservation offsets when habitat restoration takes takes time and is uncertain," MPRA Paper 108209, University Library of Munich, Germany.
    11. David W. Shanafelt & Brian Danle & Jesse Caputo & Marielle Brunette, 2024. "More forest more problems? Understanding family forest owners’ concerns in the United States," Working Papers of BETA 2024-32, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    12. Danau, Daniel, 2020. "Prudence and preference for flexibility gain," European Journal of Operational Research, Elsevier, vol. 287(2), pages 776-785.
    13. Corneo, Giacomo, 2015. "Volkswirtschaftliche Bewertung öffentlicher Investitionen," Discussion Papers 2015/12, Free University Berlin, School of Business & Economics.
    14. Louis R. Eeckhoudt & Roger J. A. Laeven, 2021. "Probability Premium and Attitude Towards Probability," Papers 2105.00054, arXiv.org.
    15. Irina Georgescu & Louis Aimé Fono, 2019. "A Portfolio Choice Problem in the Framework of Expected Utility Operators," Mathematics, MDPI, vol. 7(8), pages 1-16, July.
    16. Eichner, Thomas & Wagener, Andreas, 2014. "Insurance demand and first-order risk increases under (μ,σ)-preferences revisited," Finance Research Letters, Elsevier, vol. 11(4), pages 326-331.
    17. Antoine Gervais, 2021. "Global sourcing under uncertainty," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 54(3), pages 1103-1135, November.
    18. Munoz, Francisco D. & van der Weijde, Adriaan Hendrik & Hobbs, Benjamin F. & Watson, Jean-Paul, 2017. "Does risk aversion affect transmission and generation planning? A Western North America case study," Energy Economics, Elsevier, vol. 64(C), pages 213-225.
    19. Hongyu Wan, 2024. "Impact of risk aversion attitude on tax morale: insights from a context of low risk of tax evasion," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 71(1), pages 75-97, March.
    20. Mankan M. Koné & Carl Gaigné & Lota Tamini, 2017. "Duopolistic Competition and Optimal Switching Time from Export to FDI in Uncertainty," CIRANO Working Papers 2017s-23, CIRANO.

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hal:wpaper:hal-00567263. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: CCSD (email available below). General contact details of provider: https://hal.archives-ouvertes.fr/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.