Working Paper: NBER ID: w9050
Authors: Neil Doherty; Kent Smetters
Abstract: This paper attempts to identify moral hazard in the traditional reinsurance market. We build a multi-period principle agent model of the reinsurance transaction from which we derive predictions on premium design, monitoring, loss control and insurer risk retention. We then use panel data on U.S. property liability reinsurance to test the model. The empirical results are consistent with the model's predictions. In particular, we find evidence for the use of loss sensitive premiums when the insurer and reinsurer are not affiliates (i.e., not part of the same financial group), but little or no use of monitoring. In contrast, we find evidence for the use of monitoring when the insurer and reinsurer are affiliates, where monitoring costs are lower, but little use of price controls.
Keywords: No keywords provided
JEL Codes: D8; G0; L1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| structure of reinsurance contracts (G22) | behavior of primary insurers (G22) |
| lack of close relationship (J12) | greater moral hazard (G52) |
| monitoring (E63) | moral hazard (G52) |
| relationship type between insurer and reinsurer (G22) | strategies employed to control moral hazard (G52) |