The Nash bargaining solution vs. equilibrium in a reinsurance syndicate

Abstract

We compare the Nash bargaining solution in a reinsurance syndicate to the competitive equilibrium allocation, focusing on uncertainty and risk aversion. Restricting attention to proportional reinsurance treaties, we find that, although these solution concepts are very different, one may just appear as a first order Taylor series approximation of the other, in certain cases. This may be good news for the Nash solution, or for the equilibrium allocation, all depending upon one’s point of view.

Our model also allows us to readily identify some properties of the equilibrium allocation not be shared by the bargaining solution, and vice versa, related to both risk aversions and correlations.