ART versus reinsurance: the disciplining effect of information insensitivity

Silke Brandts and Christian Laux

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: 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 informationinsensitive 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.

Keywords: cat bonds; risk transfer; index trigger; adverse selection (search for similar items in EconPapers)
JEL-codes: D82 G22 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2005-03
References: Add references at CitEc
Citations:

Downloads: (external link)
http://eprints.lse.ac.uk/24664/ Open access version. (application/pdf)

Related works:
Working Paper: ART Versus Reinsurance: The Disciplining Effect of Information Insensitivity (2005)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:24664

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().