<scp>Does Reinsurance Need Reinsurers?</scp>

TLDR

The reinsurance market is a specialized secondary market where primary insurers cede risk to professional reinsurers that have no primary business. The article develops an equilibrium model in which professional reinsurers arise endogenously in reinsurance and capital markets. The model posits that reinsurers credibly monitor insurers, enabling insurers to raise capital more easily, resulting in a financial structure that blends reinsurance and outside capital. Comparative statics produce predictions that align broadly with stylized facts observed in the reinsurance market.

Abstract

Abstract The reinsurance market is the secondary market for insurance risks. It has a very specific organization. Direct insurers rarely trade risks with each other. Rather, they cede part of their primary risks to specialized professional reinsurers who have no primary business. This article offers a model of equilibrium in reinsurance and capital markets in which professional reinsurers arise endogenously. Their role is to monitor primary insurers credibly, so that insurers can raise capital more easily. In equilibrium, the financial structure of primary insurers consists of a mix of reinsurance and outside capital. The comparative statics yield empirical predictions which are broadly in line with a number of stylized facts from the reinsurance market.