On The Pricing of Intermediated Risks: Theory and Application to Catastrophe Reinsurance
Kenneth Froot and
Paul G. J. O'Connell
No 6011, NBER Working Papers from National Bureau of Economic Research, Inc
Abstract:
We model the equilibrium price and quantity of risk transfer between firms and financial intermediaries. Value-maximizing firms have downward sloping demands to cede risk, while intermediaries, who assume risk, provide less-than-fully-elastic supply. We show that equilibrium required returns will be high' in the presence of financing imperfections that make intermediary capital costly. Moreover, financing imperfections can give rise to intermediary market power, so that small changes in financial imperfections can give rise to large changes in price. We develop tests of this alternative against the null that the supply of intermediary capital is perfectly elastic. We take the US catastrophe reinsurance market as an example, using detailed data from Guy Carpenter & Co., covering a large fraction of the catastrophe risks exchanged during 1970-94. Our results suggest that the price of reinsurance generally exceeds fair' values, particularly in the aftermath of large events, that market power of reinsurers is not a complete explanation for such pricing, and that reinsurers' high costs of capital appear to play an important role.
JEL-codes: F (search for similar items in EconPapers)
Date: 1997-04
Note: AP CF IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (28)
Published as Froot, Kenneth A. & O'Connell, Paul G.J., 2008. "On the pricing of intermediated risks: Theory and application to catastrophe reinsurance," Journal of Banking & Finance, Elsevier, vol. 32(1), pages 69-85, January.
Downloads: (external link)
http://www.nber.org/papers/w6011.pdf (application/pdf)
Related works:
Journal Article: On the pricing of intermediated risks: Theory and application to catastrophe reinsurance (2008) 
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:nbr:nberwo:6011
Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w6011
Access Statistics for this paper
More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().