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Optimal Risk Financing in Large Corporations through Insurance Captives

Author

Listed:
  • Pierre Picard

    (Department of Economics, Ecole Polytechnique, route de Saclay, 91128, Palaiseau Cedex, France.)

  • Jean Pinquet

    (Department of Economics, Ecole Polytechnique, route de Saclay, 91128, Palaiseau Cedex, France.
    Université Paris-Ouest Nanterre La Défense.)

Abstract

A captive is an insurance or reinsurance company established by a parent group to finance its own risks. Captives mix internal risk pooling between the business units of the parent group and risk transfer towards the reinsurance market. We analyse captives from an optimal insurance contract perspective. The paper characterises the vertical contractual chain that links firstly business units to insurance captives or to “fronters” through insurance contracts, secondly fronters to reinsurance captives through the cession of risks and thirdly insurance or reinsurance captives to reinsurers through cessions or retrocessions. In particular, the risk cession by fronters to a reinsurance captive trades off the benefits derived from recouped premiums and from the risk-sharing advantage of an “umbrella reinsurance policy”, against the risks that result from the captive liabilities.

Suggested Citation

  • Pierre Picard & Jean Pinquet, 2013. "Optimal Risk Financing in Large Corporations through Insurance Captives," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 38(1), pages 48-86, March.
    • Handle: RePEc:pal:genrir:v:38:y:2013:i:1:p:48-86
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    References listed on IDEAS

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    1. L. Eeckhoudt & C. Gollier & H. Schlesinger, 2005. "Economic and financial decisions under risk," Post-Print hal-00325882, HAL.
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    Cited by:

    1. Jean-François Outreville, 2014. "The Meaning of Risk? Insights from The Geneva Risk and Insurance Review," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 39(4), pages 768-781, October.

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