The Design of Private Reinsurance Contracts

Posted: 28 Jul 2000

See all articles by Eslyn L. Jean-Baptiste

Eslyn L. Jean-Baptiste

Columbia Business School

Anthony M. Santomero

University of Pennsylvania - The Wharton School

Abstract

This paper examines the effect of asymmetric information on the trading of underwriting risk between insurers and reinsurers and how it is mitigated in a context of long-term relationships. It begins by explaining how information problems affect the efficiency of the allocation of risk between insurers and reinsurers, and how long-term implicit contracts allow the inclusion of new information in the pricing of reinsurance coverage. A key feature of these relationships is the reliance on loss-contingent rebates and commissions in the pricing of reinsurance coverage. We argue that when information is revealed only over time, long-term implicit contracts between insurers and reinsurers allow the inclusion of new information in to reinsurance pricing. Because of this feature, the allocation of risk between insurers and reinsurers is more efficient. Specifically, such arrangements lead to more reinsurance coverage, higher insurer profits, and lower expected distress in the industry.

JEL Classification: G22, G13, L15, D81

Suggested Citation

Jean-Baptiste, Eslyn L. and Santomero, Anthony M., The Design of Private Reinsurance Contracts. Journal of Financial Intermediation, Vol. 9, No. 3. Available at SSRN: https://ssrn.com/abstract=228766

Eslyn L. Jean-Baptiste

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States
212-854-9155 (Phone)
212-662-8474 (Fax)

HOME PAGE: http://www.columbia.edu/~ns38/

Anthony M. Santomero (Contact Author)

University of Pennsylvania - The Wharton School

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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