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Arbitrage and Viability in Insurance Markets

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  • Anja De Waegenaere

    (CentER for Economic Research and Department of Econometrics, Tilburg University, P.O. Box 90153, 5000 LE Tilburg, The Netherlands, e-mail: a.m.b.deWaegenaere@kub.nl)

Abstract

Insurance markets are subject to transaction costs and constraints on portfolio holdings. Therefore, unlike the frictionless asset markets case, viability is not equivalent to absence of arbitrage possibilities. We use the concept of unbounded arbitrage to characterize viable prices on a complete and an incomplete insurance market. In the complete market, there is an insurance contract for every possible event. In the incomplete market, risk can be insured through proportional and excess of loss like insurance contracts. We show how the the structure of viable prices is affected by the portfolio constraints, the transaction costs, and the structure of marketed contracts. The Geneva Papers on Risk and Insurance Theory (2000) 25, 81–99. doi:10.1023/A:1008701608588

Suggested Citation

  • Anja De Waegenaere, 2000. "Arbitrage and Viability in Insurance Markets," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 25(1), pages 81-99, June.
    • Handle: RePEc:pal:genrir:v:25:y:2000:i:1:p:81-99
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    Citations

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    Cited by:

    1. Knut K. Aase, 2007. "Equilibrium in Marine Mutual Insurance Markets with Convex Operating Costs," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 74(1), pages 239-268, March.
    2. John A. Major & Stephen J. Mildenhall, 2020. "Pricing and Capital Allocation for Multiline Insurance Firms With Finite Assets in an Imperfect Market," Papers 2008.12427, arXiv.org.
    3. De Waegenaere, Anja & Kast, Robert & Lapied, Andre, 2003. "Choquet pricing and equilibrium," Insurance: Mathematics and Economics, Elsevier, vol. 32(3), pages 359-370, July.

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