Raising capital in an insurance oligopoly market

We consider an oligopoly of firms that compete on price. Firms produce a non-stochastic output, insurance coverage, which is sold before the true cost is known. They behave as if they were risk-averse for a standard reason of costly external finance. The model consists in a two-stage game. At stage 1, each firm chooses its internal capital level. At stage 2, firms compete on price. We characterize the conditions for Nash equilibria and analyze the strategic impact of capital choice on the market. We discuss the model with regard to insurance industry specificity and regulation.Price Competition; Risk-averse Firms; Insurance Market; Capital Choice.

A dynamic model of extreme risk coverage : resilience and efficiency in the global reinsurance market

This paper presents a dynamic model of the reinsurance market for catastrophe risks. The model is based on the classical capacity-constraint assumption. Reinsurers choose every year the quantity of risk they cover and the level of external capital they raise to cover these risks. The model exhibits time dependency and reproduces a market dynamics that shares many features with the real market. In particular, market price increases and reinsurance coverage decreases after large shocks, and a series of smaller losses may have a deeper impact than one larger loss. There is a significant oligopoly effect reducing reinsurance supply, and the market is segregated into strategic large actors that influence market prices and price-taker smaller firms. A regulation trade-off between market efficiency and resilience is identified and quantified: improving the ability of the market to cope with exceptional events increases the cost of reinsurance. This model provides an interesting basis to analyze further capacity needs for the insurance industry in view of growing worldwide exposure to catastrophic risks and climate change.Markets and Market Access,Insurance&Risk Mitigation,Climate Change Economics,Debt Markets,Emerging Markets

A dynamic model of extreme risk coverage : Resilience and e fficiency in the global reinsurance market

This paper presents a dynamic model of the reinsurance market for catastrophe risks. The model is based on the classical capacity-constraint assumption. Reinsurers choose every year the quantity of risk they cover and the level of external capital they raise to cover these risks. The model exhibits time dependency and reproduces a market dynamics that shares many features with the real market. In particular, market price increases and reinsurance coverage decreases after large shocks, and a series of smaller losses may have a deeper impact than one larger loss. There is a significant oligopoly effect reducing reinsurance supply, and the market is segregated into strategic large actors that influence market prices and price-taker smaller firms. A regulation trade-off between market efficiency and resilience is identified and quantified: improving the ability of the market to cope with exceptional events increases the cost of reinsurance. This model provides an interesting basis to analyze further capacity needs for the insurance industry in view of growing worldwide exposure to catastrophic risks and climate change

Understanding and Monitoring Reinsurance Counterparty Risk

International audienceWe introduce a new measure of risk appetite in financial markets, based on the cross sectional behavior of excess returns. Turning them into probabilities through a Markov Switching model, we define one global risk appetite measure as the cross-sectional average of the individual probabilities for each asset to be in a "risk appetite" regime. Given the probabilistic approach that comes naturally with this Markov Switching framework, we present various tests to gauge the interest of the risk appetite measure that is presented here. Using these tests we show that our index behaves well vs. various competitors, especially in out-of-sample results. We test for the information content of various assets and find that a core of asset allocation-related assets provide the best possible choice over various competing specifications

La réassurance face aux nouvelles problématiques de couverture des risques de catastrophes naturelles

Le secteur de la réassurance joue un rôle clé dans la couverture des catastrophes naturelles, nombreuses en ce début de XXIe siècle et, pour certaines d'entre elles, très coûteuses en termes économiques ou humains. Mais sa capacité à faire face à la forte demande en couverture attendue dans les années à venir peut être discutée : dans quelle mesure sera-t-il capable d'offrir une capacité suffisante pour répondre à la croissance de la demande ? ...Cette interrogation est renforcée par les incertitudes liées au changement climatique

Raising capital in an insurance oligopoly market

We consider an oligopoly of firms that compete on price. Firms produce a non-stochastic output, insurance coverage, which is sold before the true cost is known. They behave as if they were risk-averse for a standard reason of costly external finance. The model consists in a two-stage game. At stage 1, each firm chooses its internal capital level. At stage 2, firms compete on price. We characterize the conditions for Nash equilibria and analyze the strategic impact of capital choice on the market. We discuss the model with regard to insurance industry specificity and regulation

Raising Capital in an Insurance Oligopoly Market

We consider an oligopoly market where firms offer insurance coverage against a risk characterised by aggregate uncertainty. Firms behave as if they were risk averse for a standard reason of costly external finance. The model consists in a two-stage game where firms choose their internal capital level at stage one and compete on price at stage two. We characterise the subgame perfect Nash equilibria of this game and focus attention on the strategic impact of insurers capital choice. We discuss the model with regard to the insurance industry specificities and regulation.

The Flood Issue: Uniform Insurance and Collective Prevention with Risk Externalities

Prevention policies against flood, such as dams or levees, are commonly designed by local jurisdictions and for most they exert externalities on neighboring jurisdictions. Each jurisdiction chooses its collective prevention effort depending on the insurance system that covers its inhabitants. As uniform insurance depends on all insureds’ risk, it enables a partial integration of prevention externalities by jurisdictions. We determine under which condition uniform insurance Pareto dominates actuarial insurance.no

Policy Tenure Under the U.S. National Flood Insurance Program (NFIP)

In the United States, insurance against flood hazard (inland flooding or storm surge from hurricanes) has been provided mainly through the National Flood Insurance Program (NFIP) since 1968. The NFIP covers $1.23 trillion of assets today. This article provides the first analysis of flood insurance tenure ever undertaken: that is, the number of years that people keep their flood insurance policy before letting it lapse. Our analysis of the entire portfolio of the NFIP over the period 2001–2009 reveals that the median tenure of new policies during that time is between two and four years; it is also relatively stable over time and levels of flood hazard. Prior flood experience can affect tenure: people who have experienced small flood claims tend to hold onto their insurance longer; people who have experienced large flood claims tend to let their insurance lapse sooner. To overcome the policy and governance challenges posed by homeowners ’ inadequate insurance coverage, we discuss policy recommendations that include for banks and government-sponsored enterprises (GSEs) strengthening their requirements and the introduction of multiyear flood insurance contracts attached to the property, both of which are likely to provide more coverage stability and encourage investments in risk-reduction measures. KEY WORDS: Catastrophes; flood insurance; individual decision making; multiyear insurance; NFIP 1