https://macropaperwarehouse.com/authors/paul-h-s-kim/Paul H S KimHugo -- gohugo.ioen-ushttps://macropaperwarehouse.com/papers/insurer-risk-and-public-risk-sharing-quantifying-the-value-of-reinsurance/https://macropaperwarehouse.com/papers/insurer-risk-and-public-risk-sharing-quantifying-the-value-of-reinsurance/<p>Kim and Li study how publicly provided reinsurance affects insurer behavior and market outcomes in health insurance markets where firms face substantial cost uncertainty. The central question is whether standard expected-profit models—which predict that reinsurance reducing only cost volatility (not expected cost) should leave prices unchanged—miss an important mechanism: insurers internalizing the implicit financial cost of bearing claims uncertainty through &ldquo;risk charges.&rdquo;</p> <p>The paper develops a stylized monopoly-insurer model in which the insurer&rsquo;s objective includes both expected claims cost and a risk charge term L(S), where S is a risk measure (e.g., standard deviation of total claims). This yields a first-order condition in which effective marginal cost includes both standard expected claims cost and a marginal risk charge. The model predicts that public reinsurance acts through two distinct channels: (1) a cost subsidy—reimbursing a share of high-cost claims reduces expected cost; and (2) risk protection—reducing the variance of claims lowers the risk charge and thus effective marginal cost. When both channels operate, the model predicts pass-through of public reinsurance to premiums can exceed unity, in contrast to the standard less-than-one pass-through under market power.</p>