TY  - JOUR
AU  - Doherty,Neil
AU  - Smetters,Kent
TI  - Moral Hazard in Reinsurance Markets
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 9050
PY  - 2002
Y2  - July 2002
UR  - http://www.nber.org/papers/w9050
L1  - http://www.nber.org/papers/w9050.pdf
N1  - Author contact info:
Neil Doherty
Wharton School
University of Pennsylvania
3641 Locust Walk
Philadelphia, PA 19104
E-Mail: doherty@wharton.upenn.edu

Kent Smetters
University of Pennsylvania
SH-DH 3303
3620 Locust Walk
Philadelphia, PA 19104
Tel: 215/898-9811
Fax: 215/898-0310
E-Mail: smetters@wharton.upenn.edu
AB  - 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.
ER  -