Separation Without Mutual Exclusion in Financial Insurance

Eric Stephens and James Thompson ()

No 2012-8, Working Papers from University of Alberta, Department of Economics

Abstract: In traditional economic models of insurance, sellers typically employ a non-linear pricing scheme to elicit type information from buyers. In financial insurance contracts, such a policy is not possible since contracts are non-exclusive. In addition, counterparty risk in financial contracts can be particularly problematic relative to traditional insurance. Accordingly, we relax the standard assumption of contract exclusivity and allow the insured to contract with many sellers, some of which may be unstable. In contrast to the traditional insurance model, we show that separation of risk types among insured parties can be achieved with linear pricing when there is aggregate counterparty risk. This result is shown to collapse when contracts are cleared through a central counterparty, suggesting that such an arrangement can create opacity.

Keywords: insurance; separation; mutual exclusion; counterparty risk (search for similar items in EconPapers)
JEL-codes: D82 G21 G22 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2012-04-01
New Economics Papers: this item is included in nep-cta and nep-ias
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:ris:albaec:2012_008

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