4  No Emergence and no Discount

AKA: Risk Sharing in a One-Period Model

  1. Risk sharing in a one-period model and \(g\)-economies
    • Ins Co. model: identifying investors! Identifying \(g\)
    • Two approaches to \(g\): risk elicitation and observed market prices
    • \(g\)-economy unfettered and with liquidity (limited participation) and transaction expenses (limited layers); low layers map to agents
    • Spreads over \(g_{\min{}}\)
    • Importance of top layer (big, sets pricing for lower layers)
    • Importance of equity layer (residual; only non-fixed cost layer; equity=mgmt)
    • Top = bottom layers when only one layer
    • Role for brokers in structuring
    • Role for reinsurers in risk transformation and accessing risk bearers; non-comonotonic layers
    • Role for management=equity: maximize premium over cost of (other) financing
    • Approximations to average costs
    • Appropriately crediting for the value of “cheap reinsurance”

This section presents a general equilibrium model of an insurance market that prices with a distortion \(g\). Then overlay market realities / distortions

  1. Limited liability - can it emerge naturally
  2. Regulated capital limited liability
  3. Wealth distribution
  4. Transaction costs and limited number of layers
  5. Reinsurance to circumvent limited number of layers
  6. Rating agency debt to total capital limits.

For each of these issues, ask what the difference between the implied solution and the Jouini et al. (2008) optimal solution? Who benefits and who loses out?