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Securitization, Insurance, and Reinsurance

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  • J. David Cummins
  • Philippe Trainar

Abstract

This article considers strengths and weaknesses of reinsurance and securitization in managing insurable risks. Traditional reinsurance operates efficiently in managing relatively small, uncorrelated risks and in facilitating efficient information sharing between cedants and reinsurers. However, when the magnitude of potential losses and the correlation of risks increase, the efficiency of the reinsurance model breaks down, and the cost of capital may become uneconomical. At this juncture, securitization has a role to play by passing the risks along to broader capital markets. Securitization also serves as a complement for reinsurance in other ways such as facilitating regulatory arbitrage and collateralizing low‐frequency risks.

Suggested Citation

  • J. David Cummins & Philippe Trainar, 2009. "Securitization, Insurance, and Reinsurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 76(3), pages 463-492, September.
    • Handle: RePEc:bla:jrinsu:v:76:y:2009:i:3:p:463-492
    DOI: 10.1111/j.1539-6975.2009.01319.x
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