TY  - UNPD
A1  - Nell, Martin
A1  - Richter, Andreas
T1  - Catastrophe index-linked securities and reinsurance as substituties
T2  - Universität Frankfurt am Main. Fachbereich Wirtschaftswissenschaften: [Working paper series / Finance and accounting] Working paper series, Finance & Accounting ; No. 56
N2  - The use of catastrophe bonds (cat bonds) implies the problem of the so called basis risk, resulting from the fact that, in contrast to traditional reinsurance, this kind of coverage cannot be a perfect hedge for the primary’s insured portfolio. On the other hand cat bonds offer some very attractive economic features: Besides their usefulness as a solution to the problems of moral hazard and default risk, an important advantage of cat bonds can be seen in the presumably lower transaction costs compared to (re)insurance products. Insurance coverage usually incurs costs of acquisition, monitoring and loss adjustment, all of which can be reduced by making use of the financial markets. Additionally, cat bonds are only weakly correlated with market risk, implying that in perfect financial markets these securities could be traded at a price including just small risk premiums. Although these aspects have been identified in economic literature, to our knowledge there has been no publication so far that formally addresses the trade-off between basis risk and transaction cost. In this paper, therefore, we introduce a simple model that enables us to analyze cat bonds and reinsurance as substitutional risk management tools in a standard insurance demand theory environment. We concentrate on the problem of basis risk versus transaction cost, and show that the availability of cat bonds affects the structure of optimal reinsurance contract design in an interesting way, as it leads to an increase of indemnity for small losses and a decrease of indemnity for large losses.
T3  - Working paper series / Johann-Wolfgang-Goethe-Universität Frankfurt am Main, Fachbereich Wirtschaftswissenschaften : Finance & Accounting - 056 
KW  - Insurance
KW  - Financial Markets
KW  - Decision Making und Risk
Y1  - 2000
UR  - http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/3818
UR  - https://nbn-resolving.org/urn:nbn:de:hebis:30-16690
IS  - August 2000
PB  - Univ., Fachbereich Wirtschaftswiss.
CY  - Frankfurt am Main
ER  -