Insurance Contracts and Securitization

18 Pages Posted: 16 Jan 2003

See all articles by Neil A. Doherty

Neil A. Doherty

University of Pennsylvania - Insurance & Risk Management Department; University of Pennsylvania - Business & Public Policy Department

Harris Schlesinger

University of Alabama; CESifo (Center for Economic Studies and Ifo Institute)

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Abstract

High correlations between risks can increase required insurer capital and/or reduce the availability of insurance. For such insurance lines, securitization is rapidly emerging as an alternative form of risk transfer. The ultimate success of securitization in replacing or complementing traditional insurance and reinsurance products depends on the ability of securitization to facilitate and/or be facilitated by insurance contracts. The authors consider how insured losses might be decomposed into separate components, one of which is a type of 'systemic risk' that is highly correlated among insureds. Such a correlated component might conceivably be hedged directly by individuals but is more likely to be hedged by the insurer. The authors examine how insurance contracts may be designed to allow the insured a mechanism to retain all or part of the systemic component. Examples are provided that illustrate this methodology in several types of insurance markets subject to systemic risk.

Suggested Citation

Doherty, Neil A. and Schlesinger, Harris, Insurance Contracts and Securitization. Journal of Risk & Insurance, Vol. 69, pp. 45-62, 2002. Available at SSRN: https://ssrn.com/abstract=312747

Neil A. Doherty (Contact Author)

University of Pennsylvania - Insurance & Risk Management Department ( email )

Philadelphia, PA 19104-6365
United States
215-898-7652 (Phone)
215-898-0310 (Fax)

University of Pennsylvania - Business & Public Policy Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6372
United States

Harris Schlesinger

University of Alabama ( email )

P.O. Box 870244
200 Alston Hall, Box 870224
Tuscaloosa, AL 35487
United States
205-348-7858 (Phone)
205-348-0590 (Fax)

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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