A Note on a "Square-Root Rule" for Reinsurance

Michael R. Powers () and Martin Shubik

No 1521, Cowles Foundation Discussion Papers from Cowles Foundation, Yale University

Abstract: In previous work, the current authors derived a mathematical expression for the optimal (or "saturation") number of reinsurers for a given number of primary insurers (see Powers and Shubik, 2001). In the current paper, we show analytically that, for large numbers of primary insurers, this mathematical expression provides a "square-root rule"; i.e., the optimal number of reinsurers in a market is given asymptotically by the square root of the total number of primary insurers. We note further that an analogous “fourth-root rule” applies to markets for retrocession (the reinsurance of reinsurance).

Keywords: Primary insurance; Reinsurance; Market size; Square-root rule (search for similar items in EconPapers)
JEL-codes: C72 G22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin and nep-ias
Date: Written

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