Catastrophe Risk Transfer

46 Pages Posted: 7 Sep 2013 Last revised: 11 Dec 2015

See all articles by Ajay Subramanian

Ajay Subramanian

Georgia State University

Jinjing Wang

University of Akron - College of Business Administration

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

Suggested Citation

Subramanian, Ajay and Wang, Jinjing, Catastrophe Risk Transfer (December 10, 2015). Available at SSRN: https://ssrn.com/abstract=2321415 or http://dx.doi.org/10.2139/ssrn.2321415

Ajay Subramanian

Georgia State University ( email )

Depts. of Finance & Risk Management and Insurance
P.O. Box 4050
Atlanta, GA 30303
United States
404-413-7483 (Phone)

HOME PAGE: http://robinson.gsu.edu/profile/ajay-subramanian/

Jinjing Wang (Contact Author)

University of Akron - College of Business Administration ( email )

Akron, OH 44325-4803
United States

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