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Bodoff, Neil. 2023. “The Roulette Wheel and the Drunken Sailor: Principal-Agent Theory and Its Ramifications for Insurance and Reinsurance Risk Management.” Variance 16 (2).


Current paradigms for insurance risk derive primarily from financial and mathematical models of risk and ignore the role of human motivations. This paper investigates key ideas of Principal-Agent Theory. Applying to insurance the framework of Principal-Agent Theory unlocks new insights that differ from prior paradigms and better explains observable phenomena in the insurance market. Non-systemic risk and non-tail risk nevertheless manifest principal-agent costs that ought to be incorporated into the cost of insurance risk.

Accepted: February 17, 2023 EDT