Catastrophe Risk Transfer
46 Pages Posted: 7 Sep 2013 Last revised: 11 Dec 2015
Date Written: December 10, 2015
Abstract
We provide a novel explanation for the low volume of securitization in catastrophe risk transfer. Insurers' risk transfer choices trade off the lower signaling costs of reinsurance against the additional costs of reinsurance stemming from reinsurers' market power, higher costs of capital, and monitoring costs. In equilibrium, the lowest risk insurers choose reinsurance, while intermediate and high risk insurers choose partial and full securitization, respectively. An increase in the loss size increases the average risk of insurers who choose securitization. Consequently, catastrophe risks, which are characterized by low frequency-high severity losses, are only securitized by very high risk insurers.
Keywords: Risk Transfer, Securitization, Reinsurance, Catastrophe Risk, Signaling
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