Optimal Insurance with Counterparty Default Risk

41 Pages Posted: 6 Jul 2010 Last revised: 30 Apr 2012

See all articles by Enrico Biffis

Enrico Biffis

Imperial College Business School

Pietro Millossovich

City University London - Sir John Cass Business School

Date Written: April 15, 2012

Abstract

We study the design of optimal insurance contracts when the insurer can default on its obligations. In our model default arises endogenously from the interaction of the insurance premium, the indemnity schedule and the insurer's assets. This allows us to understand the joint effect of insolvency risk and background risk on optimal contracts. The results may shed light on the aggregate risk retention schedules observed in catastrophe reinsurance markets, and can assist in the design of (re)insurance programs and guarantee funds.

Keywords: insurance demand, default risk, catastrophe risk, limited liability, incomplete markets

JEL Classification: D52, D81, G22

Suggested Citation

Biffis, Enrico and Millossovich, Pietro, Optimal Insurance with Counterparty Default Risk (April 15, 2012). Available at SSRN: https://ssrn.com/abstract=1634883 or http://dx.doi.org/10.2139/ssrn.1634883

Enrico Biffis (Contact Author)

Imperial College Business School ( email )

Imperial College London
South Kensington campus
London, SW7 2AZ
United Kingdom

Pietro Millossovich

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

HOME PAGE: http://www.cass.city.ac.uk/experts/P.Millossovich

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