An Industrial Organization Theory of Risk Sharing

M. Martin Boyer () and Charles Nyce

North American Actuarial Journal, 2013, vol. 17, issue 4, 283-296

Abstract: Examining the global reinsurance market, we propose a new theory of optimal risk sharing that finds its inspiration in the economic theory of the firm. Our model offers a theoretical foundation for two empirical regularities that are observed in the reinsurance market: (1) the choice of specific attachment (the deductible) and detachment points (the policy limits or the retrocession); and (2) the vertical and horizontal tranching of reinsurance contracts. Using a two-factor cost model, we show how reinsurance should be optimally layered (with attachment and detachment points) for a given book of business in order to minimize the cost and total premium associated with catastrophic events.

Date: 2013
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Working Paper: An Industrial Organization Theory of Risk Sharing (2011)
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DOI: 10.1080/10920277.2013.839377

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