Pareto and Bowley Reinsurance Games in Peer-to-Peer Insurance
New research uses game theory to design smarter, more stable insurance pools.
Deep Dive
A new arXiv paper proposes two game-theoretic designs for peer-to-peer (P2P) insurance schemes involving a risk-sharing pool and a reinsurer. The 'Pareto' design fosters cooperation for multiple optimal contracts, while the 'Bowley' design uses a leader-follower framework for a single unique contract. The research proves the Bowley contract is never Pareto optimal and typically yields lower total welfare. Numerical analysis shows reinsurance improves welfare, especially with Pareto designs and a less risk-averse reinsurer.
Why It Matters
This framework could lead to more efficient and stable decentralized insurance products, impacting fintech and DeFi.