ART versus reinsurance : the disciplining effect of information insensitivity

We provide a novel benefit of "Alternative Risk Transfer" (ART) products with parametric or index triggers. When a reinsurer has private information about his client's risk, outside reinsurers will price their reinsuranc
We provide a novel benefit of "Alternative Risk Transfer" (ART) products with parametric or index triggers. When a reinsurer has private information about his client's risk, outside reinsurers will price their reinsurance offer less aggressively. Outsiders are subject to adverse selection as only a high-risk insurer might find it optimal to change reinsurers. This creates a hold-up problem that allows the incumbent to extract an information rent. An information-insensitive ART product with a parametric or index trigger is not subject to adverse selection. It can therefore be used to compete against an informed reinsurer, thereby reducing the premium that a low-risk insurer has to pay for the indemnity contract. However, ART products exhibit an interesting fate in our model as they are useful, but not used in equilibrium because of basis-risk. Klassifikation: D82, G22
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Metadaten
Author:Silke Brandts, Christian Laux
URN:urn:nbn:de:hebis:30-18119
Parent Title (German):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 2005,21
Series (Serial Number):CFS working paper series (2005, 21)
Document Type:Working Paper
Language:English
Year of Completion:2005
Year of first Publication:2005
Publishing Institution:Univ.-Bibliothek Frankfurt am Main
Release Date:2005/10/07
Tag:Adverse Selection; Cat Bonds; Index Trigger; Risk Transfer
SWD-Keyword:Aktienmarkt; Gewinn
HeBIS PPN:195625803
Institutes:Center for Financial Studies (CFS)
Dewey Decimal Classification:330 Wirtschaft
Sammlungen:Universitätspublikationen
Licence (German):License Logo Veröffentlichungsvertrag für Publikationen

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