Toward a theory of reinsurance and retrocession

There is a natural tradeoff in insurance markets between the benefits of in creasing the number of competitors, and the drawbacks of weakening the law of large numbers by diminishing the average amount of insurer reserves. In this investigation, we consider the possibility of an optimal number of rei nsurance/retrocession levels - and an optimal configuration of each of thes e levels - in the design of the insurance industry. A general question that may be asked of all financial institutions is: What factors limit the numb er of "layers of paper" to be constructed? (C) 2001 Elsevier Science B.V.. All rights reserved.