The Design of Private Reinsurance Contracts
Eslyn Jean Baptiste and Anthony M. Santomero, November 1998

Abstract: This paper examines the role of reinsurance relationships in the trading of underwriting risk when this trade takes place in an environment that is characterized by asymmetric information and in which information is revealed only over time. It begins by explaining how information problems affect the efficiency of the allocation of risk between insurer and reinsurer, and how long-term implicit contracts between insurers and reinsurers allow the inclusion of new information in the pricing of both future and past reinsurance coverage. Because of these features, the ceding company purchases a more efficient quantity of reinsurance. Specifically, such arrangements lead to more reinsurance coverage, higher insurer profits, and lower expected distress in the industry. It is, in short, Pareto improving.

Download the paper.

home | agenda | advisory board | faculty | conferences | papers | links | contact us | members

Copyright ©1995-2002 The Wharton Financial Institutions Center and The Wharton Risk Management and Decision Processes Center. All rights reserved.