Panel Paper: Components of Information Asymmetry, Reverse Signalling and Viability of Insurance Cat Bond Markets

Saturday, March 10, 2018
Room 16 (Burkle Family Building at Claremont Graduate University)

*Names in bold indicate Presenter

Ashu Tiwari and Dr. Kaushal Kishore, Indian Institute of Management, Rohtak

In catastrophic reinsurance markets, prevailing information asymmetry between the insurer and reinsurers, and the temptation of insider reinsurers to earn maximum rent has effectuated Catastrophe Bonds (Cat Bonds). During 1990, with the conceptually information-insensitive trigger, Cat Bonds were considered as an attractive alternative source of reinsurance cover. However, they could hardly meet industry expectations in terms of addressing the problem of the supply-side bottleneck. This paper uniquely studies the impact of angular and scaler components of information asymmetry on the supply-demand economics of extreme events insurance securities and traversing noisy signal dynamism in amplifying the problem at the edge of integrating markets. The paper finds that angular component of information decreases demand elasticity of insurance product while scaler component increases demand elasticity of extreme insurance products. The traversing signal with noise also impacts catastrophic bond demand elasticities in the financial markets and therefore market equilibrium shifts beyond the upper and lower acceptable limits which result in the dysfunctional cat bond markets.