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Optimal Reinsurance: A Risk Sharing Approach
Risks 2013, 1(2), 57-80; doi:10.3390/risks1020057

A Welfare Analysis of Capital Insurance

Belk College of Business, University of North Carolina at Charlotte, Charlotte, NC 28223, USA
* Author to whom correspondence should be addressed.
Received: 26 July 2013 / Revised: 29 August 2013 / Accepted: 6 September 2013 / Published: 17 September 2013
(This article belongs to the collection Systemic Risk and Reinsurance)
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This paper presents a welfare analysis of several capital insurance programs in a rational expectation equilibrium setting. We first explicitly characterize the equilibrium of each capital insurance program. Then, we demonstrate that a capital insurance program based on aggregate loss is better than classical insurance, when big financial institutions have similar expected loss exposures. By contrast, classical insurance is more desirable when the bank’s individual risk is consistent with the expected loss in a precise way. Our analysis shows that a capital insurance program is a useful tool to hedge systemic risk from the regulatory perspective.
Keywords: capital insurance; welfare; equilibrium capital insurance; welfare; equilibrium
This is an open access article distributed under the Creative Commons Attribution License (CC BY 3.0).

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Panttser, E.; Tian, W. A Welfare Analysis of Capital Insurance. Risks 2013, 1, 57-80.

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