An Equilibrium Model of Catastrophe Insurance Futures Contracts

Posted: 13 Jul 1998

See all articles by Knut K. Aase

Knut K. Aase

Norwegian School of Economics (NHH) - Department of Business and Management Science

Date Written: Undated

Abstract

This paper presents a valuation theory of futures contracts and derivatives on such contracts when the underlying delivery value follows a stochastic process containing jumps of random claim sizes at random time points of accident occurrence. Applications of the theory are made on insurance futures, a new risk-management instrument launched by the Chicago Board of Trade in 1992, anticipated to start soon in Europe, and perhaps also in other parts of the world in the near future. The welfare loss in ordinary insurance markets due to moral hazard and adverse selection is likely to be reduced due to this new market. Several closed pricing formulas are derived, both for futures contracts and for futures derivatives, such as caps, call options and spreads. The framework is that of general and partial economic equilibrium theory under uncertainty.

JEL Classification: G13, G22, G12

Suggested Citation

Aase, Knut K., An Equilibrium Model of Catastrophe Insurance Futures Contracts (Undated ). Available at SSRN: https://ssrn.com/abstract=7107

Knut K. Aase (Contact Author)

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

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