Article | Risk Management and Insurance Review | fall 2008

The Intermediation of Financial Risks: Evolution in the Catastrophe Reinsurance Market

by Kenneth A. Froot

Abstract

In this paper, I provide evidence concerning the imperfections in the reinsurance market. I try to get at some of the root causes of these imperfections, e.g., the behavior of ratings firms and the agency problems associated with the corporate form of ownership. I also summarize the recent evolution of intermediation for catastrophic risk. A simple framework for an integrated theory of optimal financial policy for insurers and reinsurers is discussed. Finally, policy implications for intermediation of financial risks in view of evolving financial solutions for catastrophic risk are proposed.

Keywords: Catastrophe Risk; corporate finance; Banking and Insurance; Hedging; banking; Financial Markets; Insurance; Policy; Risk Management; Natural Disasters; Cost of Capital; Asset Pricing; Insurance Industry;

Citation:

Froot, Kenneth A. "The Intermediation of Financial Risks: Evolution in the Catastrophe Reinsurance Market." Risk Management and Insurance Review 11, no. 2 (fall 2008): 281–294.