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Research Seminars & Workshops @ IRES

Professor Dwight Jaffee
University of California, Berkeley

Multiline Insurance with Costly Capital and Limited Liability


26 June 2008


3.00 pm


IRES Seminar Room, SDE1 #04-24


We study a competitive multiline insurance industry, in which insurance companies with limited liability choose which insurance lines to cover and the amount of capital to hold. Premiums are determined by no-arbitrage option pricing methods. The results are developed under the realistic assumptions that insurers face friction costs in holding capital and that the losses created by insurer default are shared among policyholders following an ex post, pro rata, sharing rule. We characterize the situations in which monoline and multiline insurance offerings will be optimal. Insurance lines characterized by a large number of essentially independent risks will be offered by very large multiline firms. Insurance lines for which the risks are asymmetric or correlated may be offered by monoline insurers. The results are illustrated with examples.

About The Speaker

Booth Professor of Banking and Finance
Haas School of Business, University of California, Berkeley
Member, Haas Real Estate Group, Haas Finance Group,
Chairman, Haas Real Estate Group
Co-Chair, Fisher Center for Real Estate and Urban Economics

For full paper, download here

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