Optimal Risk Sharing in Society

We consider risk sharing among individuals in a one-period setting under uncertainty that will result in payoffs to be shared among the members. We start with optimal risk sharing in an Arrow–Debreu economy, or equivalently, in a Borch-style reinsurance market. From the results of this model we can infer how risk is optimally distributed between individuals according to their preferences and initial endowments, under some idealized conditions. A main message in this theory is the mutuality principle, of interest related to the economic effects of pandemics. From this we point out some elements of a more general theory of syndicates, where in addition, a group of people are to make a common decision under uncertainty. We extend to a competitive market as a special case of such a syndicate.

CURRENT CHALLENGES ON THE INTERNATIONAL REINSURANCE MARKET

The aim of this paper is to present the analysis of the international reinsurance market. After we have made a literature review, we highlighted a brief history of it and then a brief analysis of the main actors operating in the international reinsurance market. Following this analysis, a top of reinsurance companies was made, then a classification and also the current challenges faced by the global reinsurance market, the Covid-19 crisis, were presented. We have studied the impact of the coronavirus pandemic on the companies mentioned before as being part of the top ranking. The results of the study showed that the crisis had a major impact, destabilizing the reinsurance market. Keywords: reinsurance, international market, pandemic

Insurance in the Eurasian Economic Union (EAEU)

The paper considers the insurance sector of the EAEU countries is analyzed: Russia, Armenia, Kyrgyzstan, Kazakhstan and the Republic of Belarus. The development of insurance markets in the EAEU member states differ significantly. The lowest level of development of the insurance industry is characterized by Armenia and Kyrgyzstan, the highest level of development is in Russia. The paper also examines the restrictions on the reinsurance market in the EAEU countries.

STATISTICAL ANALYSIS AND PREDICTIVE MODELING OF EXTERNAL AND INTERNAL REINSURANCE MARKET STRUCTURES

In the article the authors examine the reinsurance market of the Russian Federation; consider reinsurance premiums for incoming and outgoing external and internal reinsurance; based on statistical data, the authors made a conclusion about the externally oriented ceding market in the period 2013–2019. The authors present the structure of the reinsurance market by major companies and identify the main players in the market of incoming and outgoing reinsurance; consider the ratio of external and internal premiums for incoming and outgoing reinsurance. The authors complied time series models of reinsurance premiums for incoming and outgoing external and internal reinsurance based on retrospective data for 2016–2019. All functions are increasing, which indicates the positive dynamics of the studied market and the possibilities for further expansion and development. Based on the models, forecast values are calculated that allow to draw conclusions about the development and structure of the Russian reinsurance market. The reasons for the dominance of external reinsurance over internal in relation to outgoing contracts, consisting in the retroceding of risks to large international reinsurance companies, are identified, that occupy the most advantageous position in this market in comparison with domestic reinsurers.

Impacts of Climate Change and Remote Natural Catastrophes on EU Flood Insurance Markets

<p>Flood insurance coverage can enhance financial resilience of households to changing flood risk caused by climate change. However, due to increasing risk in many areas, premiums are likely to rise, which may cause insurance to become unaffordable for low-income households. This issue can become especially prominent in high-risk areas, when premiums are risk-reflective. Consequently, increasing premiums can reduce the demand for insurance coverage when this is optional, as individuals often underestimate the flood risk they face. After a flood, uninsured households then have to rely on private savings or ex-post government disaster relief. This situation is suboptimal as households may not save sufficiently to cover the damage, and government compensation can be uncertain. Using a modeling approach we simulate unaffordability and uptake of various forms of flood insurance systems in EU countries. To do this, we build upon and advance the “Dynamic Integrated Flood Insurance” (DIFI) model, which integrates flood risk simulations, with an insurance sector and a consumer behavior model. We compute the results using various climatic- and socio-economic scenarios in order to assess the impact of climate- and socio-economic change for flood insurance in the EU. Furthermore, we assess the impact of remote natural disasters on flood insurance premiums in EU countries, which occurs through the global reinsurance market. More specifically, after large natural disasters or compound events occurring outside the EU, which are likely to occur more often due to climate change, reinsurance premiums can temporarily rise as a result of a global “hard” capital market for reinsurers. The higher cost of capital for reinsurers is then transferred to households in the EU through higher flood insurance premiums. We find that rising average, and higher variance, of flood risk towards the end of the century can increase flood insurance premiums, and cause higher premium volatility resulting from global reinsurance market conditions. The rise in premiums increases unaffordability of insurance coverage and results in declining demand for flood insurance. A proposed policy improvement is to introduce a public reinsurance system for flood risk, as governments can often provide cheaper reinsurance coverage and are less subject to volatility on capital markets. Besides this, we recommend a limited degree of premium cross-subsidization to limit the growth of premiums in high-risk areas, and insurance purchase requirements to increase the level of financial protection against flooding.  </p>

Impacts of Climate Change and Remote Natural Catastrophes on EU Flood Insurance Markets: An Analysis of Soft and Hard Reinsurance Markets for Flood Coverage

The increasing frequency and severity of natural catastrophes due to climate change is expected to cause higher natural disaster losses in the future. Reinsurance companies bear a large share of this risk in the form of excess-of-loss coverage, where they underwrite the most extreme portion of insurers’ risk portfolios. Past experience has shown that after a very large natural disaster, or multiple disasters in close succession, the recapitalization need of reinsurers could trigger a “hard” reinsurance capital market, where a high demand for capital increases the price charged by investors, which is opposed to a “soft” market, where there is a high availability of capital for reinsurers. Consequently, the rising costs of underwriting are transferred to insurers, which ultimately could trigger higher premiums for natural catastrophe (NatCat) insurance worldwide. Here, we study the vulnerability of riverine flood insurance systems in the EU to global reinsurance market conditions and climate change. To do so, we apply the “Dynamic Integrated Flood Insurance” (DIFI) model, and compare insurance premiums, unaffordability, and the uptake for soft and hard reinsurance market conditions under an average and extreme scenario of climate change. We find that a rising average and higher variance of flood risk towards the end of the century can increase flood insurance premiums and cause higher premium volatility resulting from global reinsurance market conditions. Under a “mild” scenario of climate change, the projected yearly premiums for EU countries, combined, are €1380 higher under a hard compared to a soft reinsurance capital market in 2080. For a high-end climate change scenario, this difference becomes €3220. The rise in premiums causes problems with the unaffordability of flood coverage and results in a declining demand for flood insurance, which increases the financial vulnerability of households to flooding. A proposed solution is to introduce government reinsurance for flood risk, as governments can often provide cheaper reinsurance coverage and are less subject to the volatility of the capital markets.