Reinsurance Market Research Articles

Insurance Markets Risk Affects Global Reinsurance Market Risk? Evidence from USA and Europe Insurance Markets

Insurance Markets Risk Affects Global Reinsurance Market Risk? Evidence from USA and Europe Insurance Markets

“Divide et impera”? A financial assessment of the (de)concentration in the Brazilian reinsurance market

AbstractThis study aims to shed light on the relatively obscure landscape of industrial organization within the reinsurance sector, particularly in Brazil, which was among the last nations to dismantle state monopoly. Our objective is to assess the impact of concentration in the Brazilian reinsurance market on reinsurer performance. Employing traditional indexes from Industrial Organization literature and utilizing regression models for panel data, we examine the elasticity of revenues from reinsurers as a reflection of the sector's competitive structure. The data set comprises 78,190 observations from 164 reinsurers across 22 lines of business (LOB) monthly spanning from 2008 to 2022. The findings reveal a pronounced market concentration, with higher industry concentration correlating with diminished premium revenues across most LOBs. Additionally, Local reinsurers enjoy substantial advantages over Admitted and Occasional counterparts. Notably, factors such as portfolio diversification and economic group affiliation prove significant, particularly concerning the category of reinsurer.

The optimal reinsurance strategy with price-competition between two reinsurers

We study optimal reinsurance for an insurer and two reinsurers in the market through stochastic game theory. The relationship between the insurer and reinsurers is described by a Stackelberg model, where reinsurers, as market leaders, set prices for reinsurance treaties, and the insurer, as a price taker, determines reinsurance demand. Furthermore, we employ a Nash game to model the price competition between the two reinsurers who adopt different premium principles: the variance premium principle and the expected value premium principle. Both the insurer and reinsurers aim to maximize their respective mean-variance cost functions, leading to a time inconsistency control problem. This issue is resolved using a corresponding extended Hamilton-Jacobi-Bellman equation in the game-theoretic framework. We find that the insurer will adopt propositional and excess-of-loss reinsurance strategies with two reinsurers, respectively. Moreover, under an exponential claim size distribution, there exists a unique equilibrium reinsurance premium strategy. Our numerical analysis illuminates the effects of claim size, risk aversion, and the interest rates of the insurer and reinsurers on the equilibrium reinsurance and premium strategies, enhancing the understanding of competition in the reinsurance market.

SARIMA Model-Based Monte Carlo Simulation of Option Contract Design for Maize Seasonal Heavy Precipitation in Shenyang

Agricultural production is highly dependent on weather conditions such as temperature, light, water and heat. The huge loss caused by extreme disaster weather makes the global insurance and reinsurance market overwhelmed, and seriously affects the enthusiasm of agricultural investment and the development of agricultural economy. With unique topography and vast territory, China is vulnerable to complex and diverse climate disasters. In recent years, the annual average economic loss caused by extreme weather disasters has reached about 200-300 billion yuan, among which floods caused by extreme heavy rainfall are the main agricultural disasters in China. In order to enhance the "farmer - insurance company - government" interest association to resist the risk of flood disaster caused by extreme heavy rainfall, financial hedging derivatives of weather disaster risk have gradually become a new hedging tool besides traditional insurance and reinsurance. This paper takes Shenyang, the main grain producing area in northeast China, as the sample of the study area, and uses the SARIMA model to obtain the distribution characteristics of seasonal rainfall time series. Different seasonal rainfall index option products (call option and put option contracts) are designed respectively, and the final option pricing is obtained by Monte Carlo stochastic simulation. The seasonal rainfall call option and put option contracts have opened up a new hedging model of agricultural extreme weather catastrophe outside the insurance and reinsurance market, which has enriched the varieties of weather financial derivatives market in China, reduced the severe impact of extreme weather disasters on agriculture, and enhanced the ability of agricultural stakeholders to resist the risk of extreme weather disasters.

재보험계약원칙(PRICL) version 1.0에 대한 약간의 검토

In 2010, the European Principle of Insurance Contracts (PEICL) stipulated that PEICL did not apply to reinsurance contracts. The reason was that the insurance contract law of most EU member states completely excluded the application of the insurance contract law to reinsurance contracts. Accordingly, the project group led by the private sector began to write the Reinsurance Contract Law Principles (PRICL). The goal of this work is to provide a unified soft law for contract law to the reinsurance market. This project has a similar purpose to the restatement promoted by the American Legal Association (ALI) and has a similar writing format. ALI's restatement is intended to enhance the clarity and simplification of the law, accommodate social needs, and encourage the performance of academic and scientific legal work useful in trials. Project Group published its achievements so far in 2019. It was named PRICL version 1.0. PRICL Project Group planned to complete the work until the end of 2023, but failed to complete it due to COVID-19 pandemic and other reasons. Korea occupies a significant portion of the global insurance(and reinsurance)market. Nevertheless, the author regret the lack of research on PRICL in Korean academia. This paper briefly introduces the basic matters of PRICL's preparation process and version 1.0. As well as the provisions to be added in the future, a detailed review of the entire article is required.

Применение финансовых инноваций в системе перестраховочной защиты: опыт развитых стран и перспективы для России

The article examines the prospects for the application of financial innovations in the reinsurance protection system in Russia, taking into account global experience. The growing need to modernize the Russian reinsurance market in the context of financial globalization and increased external constraints is noted. The characteristics of the current state of the national reinsurance system are analyzed, key problems and imbalances are identified. It is shown that traditional forms of reinsurance do not reduce systemic risks in the industry, and dependence on foreign capacity is vulnerable to sanctions pressure. The successful experience of developed countries in using innovative reinsurance tools is considered. A set of measures is proposed for the introduction of financial innovations in Russia through the infrastructural reform of the reinsurance system and the establishment of international cooperation. It is concluded that financial innovations have high potential for increasing the sustainability and competitiveness of the Russian insurance sector.

Catastrophe (CAT) bonds:

Catastrophe bonds, a relatively new entry into the bond market, are a form of reinsurance in which insurance firms are able to offset the financial risks from both natural and man-made catastrophes. Although the primary offset is within the reinsurance market, starting in the 1990s insurance firms started using the financial markets to offset catastrophe risks. Anecdotal evidence shows that the entry of CAT bonds made the reinsurance market more efficient and allowed investors an opportunity to participate in what has been a very profitable investment opportunity. Our analysis shows that on average, CAT bonds have generated high returns but with the advantage of diversification when compared with similarly rated corporate debt. Thus, CAT bonds are a viable investment option withina diversified portfolio.

Equilibria and efficiency in a reinsurance market

We study equilibria in a reinsurance market with multiple reinsurers that are endowed with heterogeneous beliefs, where preferences are given by distortion risk measures, and pricing is done via Choquet integrals. We construct a model in the form of a sequential economic game, where the reinsurers have the first-mover advantage over the insurer, as in the Stackelberg setting. However, unlike the Stackelberg setting, which assumes a single monopolistic reinsurer on the supply side, our model accounts for strategic price competition between reinsurers. We argue that the notion of a Subgame Perfect Nash Equilibrium (SPNE) is the appropriate solution concept for analyzing equilibria in the reinsurance market, and we characterize SPNEs using a set of sufficient conditions. We then examine efficiency properties of the contracts induced by an SPNE, and show that these contracts result in Pareto-efficient allocations. Additionally, we show that under mild conditions, the insurer realizes a strict welfare gain, which addresses the concerns of Boonen and Ghossoub (2022) with the Stackelberg model and thereby ultimately reflects the benefit to the insurer of competition on the supply side. We illustrate this point with a numerical example.

Reinsurance games with variance-premium reinsurers: from tree to chain

AbstractThis paper studies dynamic reinsurance contracting and competition problems under model ambiguity in a reinsurance market with one primary insurer and n reinsurers, who apply the variance premium principle and who are distinguished by their levels of ambiguity aversion. The insurer negotiates reinsurance policies with all reinsurers simultaneously, which leads to a reinsurance tree structure with full competition among the reinsurers. We model the reinsurance contracting problems between the insurer and reinsurers by Stackelberg differential games and the competition among the reinsurers by a non-cooperative Nash game. We derive equilibrium strategies in semi-closed form for all the companies, whose objective is to maximize their expected surpluses penalized by a squared-error divergence term that measures their ambiguity. We find that, in equilibrium, the insurer purchases a positive amount of proportional reinsurance from each reinsurer. We further show that the insurer always prefers the tree structure to the chain structure, in which the risk of the insurer is shared sequentially among all reinsurers.

Regulation of reinsurance activities in the Republic of Kazakhstan

Reinsurance is important for ensuring the financial stability of the country’s insurance market, which determines the need for sufficiently strict legal control over this segment of the insurance market. The purpose of this article is a critical understanding of modern legislation governing the development of reinsurance activities in the Republic of Kazakhstan and the identification of those norms and requirements that significantly affect the development of the reinsurance market in the country. The results of the study showed that restrictive reinsurance measures, tested by world insurance practice, are applied in the country. The author made an attempt to identify the specifics of regulatory norms in the Republic of Kazakhstan, which impede cooperation in the field of reinsurance with the international community. Attention is drawn to the established high entry barriers for the participation of non-resident reinsurers in the reinsurance market of the Republic of Kazakhstan, which involves the purchase of reinsurance coverage mainly from leading foreign reinsurers. In order to expand the reinsurance capacity and reduce the cost of reinsurance, the author proposes to use the internal reserves of the national insurance market, as well as alternative reinsurance markets, one of which can be considered a single reinsurance space within the integration association of the EAEU countries. In this regard, it is necessary to harmonize the laws of these countries, especially in terms of determining the financial stability of insurance companies and assessing the solvency of reinsurers. The results of the study can be used to bring the legal regulation of reinsurance activities in the Republic of Kazakhstan in line with international practice.

Development of reinsurance market in Georgia

Development of reinsurance market in Georgia

On the economics of the longevity risk transfer market

AbstractWe present a model of a longevity risk transfer market with different market players (primary insurers, reinsurers, and capital market investors) and investigate how market dynamics and the market players' roles evolve with progressing market saturation. We find that reinsurers' appetite for longevity risk is the key driver in the early stage of market development. Since diversification benefits with other businesses decrease with every transaction, the reinsurance market is intrinsically antimonopolistic. With the increasing saturation of the reinsurance sector as a whole, its competitiveness shrinks leading to rising expected risk‐adjusted returns for capital market investors. We show that in a saturated market, reinsurers should assume the entire longevity risk from primary insurers, diversify it within their business mix, and subsequently pass on only specific (nondiversifiable) components of the longevity risk to the capital markets. Our findings provide valuable suggestions on how to make the best use of the market's limited risk absorption capacity.

СУЧАСНИЙ СТАН ТА ПЕРСПЕКТИВИ РОЗВИТКУ ПЕРЕСТРАХУВАННЯ В УКРАЇНІ

The paper examines and emphasizes the need to rethink the concept of reinsurance, focusing on the demands placed on today's insurers, the task of a systematic and comprehensive analysis of the situation and basic indicators describing the current reinsurance market of Ukraine becomes extremely urgent, with the aim of identifying the main trends and features that stand out at the national level. The article reveals the economic necessity of reinsurance as an integral factor that determines the position of the insurance market, and emphasizes the need for its state regulation in Ukraine due to the rather narrow legislative provision, which does not allow to fully cover all the details related to this area. The main indicators related to the activities of reinsurers in Ukraine in 2017–2021 were analyzed, as a result of which it is possible to assert the presence of problems in the trends of the reinsurance market and the need to find and implement optimal ways to increase the financial security and stability of reinsurance participants. As a result of the assessment of the defining elements characterizing the development of the reinsurance market in the insurance market of Ukraine, it was determined that it depends to some extent on the negative factors of economic changes on the state background, as a result of which it is at the stage of uncertainty and periodic fluctuations in terms of the reduction of the number of insurance companies, the deterioration of the volume their received premiums and created reserves. The existing problems related to the imperfection of state regulation and difficulties in the economic and political background are outlined, and the prospects of reinsurance in Ukraine are formed, taking into account the opportunities and available advantages. If we talk about the minimization of the negative consequences that appeared due to the exacerbation of certain phenomena, the need to establish effective ways of overcoming the existing defects, taking into account the formed potential in the long term, becomes quite urgent. In the general summary of all the information presented, it is emphasized that the study of such a component of the insurance market as reinsurance, its role, determination of advantages and disadvantages and directions for its improvement is quite promising in view of the economic need of this category in the development of the activities of insurers and the economy of the country as a whole.

Securitizing pandemic‐risk insurance

AbstractCatastrophe (CAT) bonds are a means to share economic losses resulting from natural disasters including hurricanes, earthquakes, and—more recently, as used by the World Bank—pandemics. Because these pandemic CAT (PCAT) bonds were subsidized by government donations and, absent the occurrence of covered pandemics, were full recourse to the World Bank, this precedent was not market‐tested for the commercial viability of such instruments. This paper examines PCAT bonds as a means of securitization for pandemic risk through the lenses of reinsurers′ unmet capital needs and the requirements for the potential viability of a PCAT‐bond market. Where the reinsurance market has limited capacity to either absorb or spread the risks of global‐level CATs, risk securitization may be effective for layered risk sharing. The authors explore whether pandemic risk may be insurable by increasing reinsurance capacity to handle losses from business interruptions that are due to unintentional pandemics. Are PCAT bonds a potential means to achieving this protection? Historically, insurers were reluctant to enter this market because the required spreads and associated bond‐issuance expenses were considered prohibitively high. The situation has improved, although there remains much room and need for growth in this market.

Optimal Dynamic Reinsurance Under Heterogeneous Beliefs and CARA Utility

This paper examines the optimal dynamic reinsurance policy for an insurance company under belief heterogeneity. We assume the reinsurance premium is calculated according to the mean-conditional value-at-risk principle and impose the incentive compatibility constraint to rule out moral hazard. Under the objective of maximizing the exponential utility function, we obtain the optimal strategies in closed form via a “relaxation and modification” approach. The optimal contracts have more complicated structures than the standard proportional and excess-of-loss reinsurance widely investigated in the literature. In particular, we demonstrate that the insurer may optimally choose to purchase proportional reinsurance in different layers when the reinsurer is more pessimistic about the underlying loss. Our model lends support to the observation that reinsurance contracts in practice often involve proportional reinsurance in multiple layers. We also demonstrate that belief heterogeneity can explain the inverse relationship between the purchase of reinsurance and the size of the insurer's losses observed in the reinsurance market.

REINSURANCE MANAGEMENT IN THE GLOBAL FINANCIAL MARKET CYCLICITY CONDITIONS

The globalization of economic relations and the integration of Ukraine into the world financial market have significant impact on decision-making in an insurance company in Ukraine. These aspects actualize the study of the insurance companies’ activities in the conditions of world financial market cyclical development, and it determines the purpose of the article. The purpose of the study is to develop theoretical and methodological provisions and practical recommendations for managing reinsurance in conditions of cyclical development of the global financial market. Solving the tasks set in the research was carried out using scientific methods of analysis, synthesis, induction, deduction, and analogy – to study trends in the development of the Ukrainian insurance market; logical generalization – to determine the peculiarities of reinsurance management in conditions of cyclicity of global financial markets; comparative and statistical analysis – for analyzing the share of premiums belonging to non-resident reinsurers; Fourier analysis – for analyzing the cyclicity of the development of the global financial market and the reinsurance market in Ukraine. Global business activity develops cyclically. The first cycle is long-term and consists of 14 quarters. Within the long-term cycle, harmonics of a shorter cycle, namely 1 year, were detected. The reinsurance market in Ukraine also develops cyclically. The length of the cycle is 4 quarters. It was established that the peaks of the harmonic oscillations of the development cycle of domestic reinsurance and the world cycle of business activity are antiphase, that is, the phase of the oscillations differs by half a period. The length of the domestic reinsurance development cycle and the global business activity cycle are equal, and the distance between the extremes of the cycle functions is 2 quarters. The practical value of the obtained results is that the established relationships between the cycles and phases of the global business activity development and the reinsurance market of Ukraine provide a toolkit for making management decisions regarding the modeling of a reinsurance portfolio effective structure in the insurance company

The optimal structure optimal insurance network in China

As an integral part of the economic network, insurance institutions and other institutions not only have equity and creditor's rights relationships, but also, as risk management departments in the economic network, there is a risk exchange network constructed with reinsurance relationships. At the beginning of this paper, we discuss the external and internal risk spread relationship of insurance institutions. Subsequently, using Kanno's(2014) insurance network model analysze the characteristics of China's reinsurance market and its structure.

Optimal Risk Sharing in Society

We consider risk sharing among individuals in a one-period setting under uncertainty that will result in payoffs to be shared among the members. We start with optimal risk sharing in an Arrow–Debreu economy, or equivalently, in a Borch-style reinsurance market. From the results of this model we can infer how risk is optimally distributed between individuals according to their preferences and initial endowments, under some idealized conditions. A main message in this theory is the mutuality principle, of interest related to the economic effects of pandemics. From this we point out some elements of a more general theory of syndicates, where in addition, a group of people are to make a common decision under uncertainty. We extend to a competitive market as a special case of such a syndicate.

Equilibria and Efficiency in a Reinsurance Market

Equilibria and Efficiency in a Reinsurance Market

Optimal reinsurance design under the VaR risk measure and asymmetric information

<abstract><p>This paper analyzes a monopoly reinsurance market in the presence of asymmetric information. Insurers use Value-at-Risk measures to quantify their risks and have different risk exposures and risk preferences, but the type of each insurer is hidden information to the reinsurer. The reinsurer maximizes the expected profit under the constraint of incentive compatibility and individual rationality. We deduce the optimal reinsurance menu under the assumption that a type of insurer thinks he is at greater risks. Some comparative analyses are given for two strategies of separating equilibrium and pooling equilibrium.</p></abstract>