NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Moral Hazard in Reinsurance Markets

Neil Doherty, Kent Smetters

NBER Working Paper No. 9050
Issued in July 2002
NBER Program(s):   AP   PE

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.

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Document Object Identifier (DOI): 10.3386/w9050

Published: Doherty, Neil and Kent Smetters. "Moral Hazard In Reinsurance Markets," Journal of Risk and Insurance, 2005, v72(3,Sep), 375-391.

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