A Dynamic Model of Extreme Risk Coverage : Resilience and Efficiency in the Global Reinsurance Market
This paper presents a dynamic model of the reinsurance market for catastrophe risks. The model is based on the classical capacity-constraint assumption. Reinsurers choose every year the quantity of risk they cover and the level of external capital...
| Main Authors: | , , |
|---|---|
| Format: | Policy Research Working Paper |
| Language: | English |
| Published: |
2012
|
| Subjects: | |
| Online Access: | http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20110922160728 http://hdl.handle.net/10986/3571 |
| Summary: | This paper presents a dynamic model of
the reinsurance market for catastrophe risks. The model is
based on the classical capacity-constraint assumption.
Reinsurers choose every year the quantity of risk they cover
and the level of external capital they raise to cover these
risks. The model exhibits time dependency and reproduces a
market dynamics that shares many features with the real
market. In particular, market price increases and
reinsurance coverage decreases after large shocks, and a
series of smaller losses may have a deeper impact than one
larger loss. There is a significant oligopoly effect
reducing reinsurance supply, and the market is segregated
into strategic large actors that influence market prices and
price-taker smaller firms. A regulation trade-off between
market efficiency and resilience is identified and
quantified: improving the ability of the market to cope with
exceptional events increases the cost of reinsurance. This
model provides an interesting basis to analyze further
capacity needs for the insurance industry in view of growing
worldwide exposure to catastrophic risks and climate change. |
|---|