Suppose the South's terms of trade is p = [[P.sup.*]/P], Equation (6) that expresses the market equilibrium of Southern goods could be rewritten as
Similarly, applying the balance of trade equilibrium Equation (8), Equation (7) that expresses the market equilibrium of Northern goods could then be rewritten as
In an efficient market equilibrium without bankruptcy risk, the reinsurer can price this contract without a "distribution uncertainty" premium, provided that the insurer promises to compensate the reinsurer by paying higher premiums after a disaster has occurred.
That is, why would a primary insurance company find it advantageous to purchase reinsurance instead of retaining the risk, especially when financial theory tells us that reinsurance is redundant in the conditions of capital market equilibrium for diversified, widely-held firms (Doherty and Tinic, 1981)?