Table-5: Risk-Transfer Strategies Strategy Advantages/Disadvantages Role of Government Direct risk transfer Contracts are transferred directly from insurers to reinsurers. No basis risk. Pooling occurs at reinsurer level. If spatial diversification opportunities exist, reinsurance premium rates will likely be higher than if risks were pooled at insurer level (even if the reinsurer offers portfolio adjusted reinsurance premiums. Reinsurer will need to perform extensive due diligence on index but little due diligence on insurer. Government is not involved in facilitating risk transfer.
