Reinsuring Group Revenue Insurance with Exchange-Provided Revenue Contracts

Bruce A. Babcock, Steven L. Griffin, Dermot J. Hayes
May 1999  [99-WP 212]

Shows that it is feasible to use exchange-based contracts as a substitute for the Standard Reinsurance Agreement. The authors analyze a Group Revenue Contract, which would allow producers to guarantee against reductions in county-level revenues. The insurance company would then purchase put options on an exchange-based revenue contract to protect against statewide revenue shortfalls. The analysis suggests that this reassurance tool would eliminate most though not all of the systemic risk associated with this product.

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