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Is it true that pricing a reinsurance contact is equivalent to pricing an option. Basically a reinsurance just cuts off the risk exposure of the insured institution to a threshold say $K$. So if we assume that the prospective losses of the risky portfolio of the institution can be modelled by a random variable X, then the price of the insurance should just be the expected value of $(X-K)^+$, right? This however can be viewed as a call option so we can apply the same pricing methods. Is there any literature on that with further examples of this kind?

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You are correct on how you should price reinsurance $E[(X-K)^+]$ and you can view reinsurance as a call option. To this extent, you could price reinsurance with Black-Scholes. However, Black-Scholes is usually used for shorter durations and reinsurance contracts (depending on the product) are typically longer than the 3-6 month horizon used on options. I believe PartnerRe put out a white paper on this (for life reinsurance).

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  • $\begingroup$ thanks for the reply. I will leave the question open a little longer because I am actually looking for other insurance examples of this kind. $\endgroup$ – benev Aug 29 '13 at 12:47
  • $\begingroup$ This comes very late but would it be possible to have a link to the PartnerRe's paper you mention? $\endgroup$ – Daneel Olivaw Aug 18 '17 at 16:47

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