Pricing Double-Trigger Reinsurance Contracts: Financial Versus Actuarial Approach
Goethe University Frankfurt - House of Finance; International Center for Insurance Regulation
University of Muenster - Faculty of Economics
The Journal of Risk & Insurance, Vol. 69, pp. 449-468, 2002
This article discusses various approaches to pricing double-trigger reinsurance contracts - a new type of contract that has emerged in the area of "alternative risk transfer." The potential coverage from this type of contract depends on both underwriting and financial risk. We determine the reinsurer's reservation price if it wants to retain the firm's same safety level after signing the contract, in which case the contract typically must be backed by large amounts of equity capital (if equity capital is the risk management measure to be taken). We contrast the financial insurance pricing models with an actuarial pricing model that has as its objective no lessening of the reinsurance company's expected profits and no worsening of its safety level. We show that actuarial pricing can lead the reinsurer into a trap that results in the failure to close reinsurance contracts that would have a positive net present value because typical actuarial pricing dictates the type of risk management measure that must be taken, namely, the insertion of additional capital. Additionally, this type of pricing structure forces the reinsurance buyer to provide this safety capital as a debtholder. Finally, we discuss conditions leading to a market for double-trigger reinsurance contracts.
Number of Pages in PDF File: 20Accepted Paper Series
Date posted: February 15, 2003
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo7 in 0.313 seconds