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Advisor(s)
Abstract(s)
We study the design of optimal insurance contracts when the insurer can default
on its obligations. In our model default arises endogenously from the interaction
of the insurance premium, the indemnity schedule and the insurer’s assets. This
allows us to understand the joint effect of insolvency risk and background risk on
efficient contracts. The results may shed light on the aggregate risk retention sched-
ules observed in catastrophe reinsurance markets, and can assist in the design of
(re)insurance programs and guarantee funds.
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Keywords
Insurance demand, Default risk Catastrophe risk Limited liability Incomplete markets