In finance the existence of corporate risk management is due to imperfections in financial markets. One of the main imperfections is associated with the cost of corporate risk that firms assume. Costly corporate risk creates a set of frictional costsand thereby decreases corporate value. Financial corporations manage their riskto reduce the expected value of frictional costs and enhance shareholders' value,and do so using a wide variety of tools. This dissertation primarily considers aninsurance company as a special type of financial corporation leveraged by riskydebt, and investigates the existence of risk management incentives in insurance inthe presence of frictional costs such as financial distress costs and costs caused bythe convexity of the corporate tax rate. Here one of the main tool of risk hedgingis reinsurance, a classical tool for risk transfer in insurance, and this dissertationinvestigates demand for reinsurance in insurer value creation. Insurer risk management problems are also investigated here in a dynamic setting, where the main objective is to find optimal reinsurance and dividend payments under which theexpected present value of future dividends is maximised. This dissertation alsogeneralizes some classic actuarial results of reinsurance optimization under themean-variance criterion. In this work optimal reinsurance is found endogenouslyfor different reinsurance premium principle using standard methods of convexanalysis. Finally this work considers an integrated market consisting of insureds,insurers and reinsurers, and studies the effect of the presence of reinsurance inthis market on insurance price.
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