An Analysis of Pricing and Basis Risk for Industry Loss Warranties
Gatzert N, Schmeiser H, Toplek D (2011)
Publication Language: English
Publication Type: Journal article, Original article
Publication year: 2011
Journal
Publisher: Springer Verlag
Book Volume: 100
Pages Range: 517-537
Journal Issue: 4
DOI: 10.1007/s12297-011-0152-4
Abstract
In recent years, industry loss warranties (ILWs) have become increasingly popular in the reinsurance market. The defining feature of ILW contracts is their dependence on an industry loss index. The use of an index reduces moral hazard and generally results in lower prices compared to traditional, purely indemnitybased reinsurance contracts. However, use of the index also introduces basis risk since the industry loss and the reinsured company's loss are usually not fully correlated. The aim of this paper is to simultaneously examine basis risk and pricing of an indemnity-based industry loss warranty contract, which is done by comparing actuarial and financial pricing approaches for different measures of basis risk. Our numerical results show that modification of the contract parameters to reduce basis risk can either raise or lower prices, depending on the specific parameter choice. For instance, basis risk can be reduced by decreasing the industry loss trigger, which implies higher prices, or by increasing the reinsured company attachment, thus inducing lower prices.
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APA:
Gatzert, N., Schmeiser, H., & Toplek, D. (2011). An Analysis of Pricing and Basis Risk for Industry Loss Warranties. Zeitschrift für die gesamte Versicherungswissenschaft, 100(4), 517-537. https://doi.org/10.1007/s12297-011-0152-4
MLA:
Gatzert, Nadine, Hato Schmeiser, and Denis Toplek. "An Analysis of Pricing and Basis Risk for Industry Loss Warranties." Zeitschrift für die gesamte Versicherungswissenschaft 100.4 (2011): 517-537.
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