Pricing Double-Trigger Reinsurance Contracts: Financial versus Actuarial Approach
Journal
Journal of Risk and Insurance
ISSN
0022-4367
ISSN-Digital
1539-6975
Type
journal article
Date Issued
2002-12-01
Author(s)
Abstract
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. The study determines 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. The financial insurance pricing models are contrasted 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. It is shown 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.
Language
English
HSG Classification
contribution to scientific community
Refereed
Yes
Publisher
Blackwell
Publisher place
Malden, Mass.
Volume
69
Number
4
Start page
449
End page
468
Pages
20
Subject(s)
Division(s)
Eprints ID
16544