NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

James G. Bohn

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NBER Working Papers and Publications

January 1999The Moral Hazard of Insuring the Insurers
with Brian Hall
in The Financing of Catastrophe Risk, Kenneth A. Froot, editor
January 1998The Costs of Insurance Company Failures
with Brian Hall
in The Economics of Property-Casualty Insurance, David F. Bradford, editor
January 1997The Moral Hazard of Insuring the Insurers
with Brian J. Hall: w5911
State guaranty funds are quasi-governmental agencies that provide insurance to policyholders against the risk of insurance company failure. But insurance provided by guaranty funds, like all insurance, creates moral hazard problems, especially for companies that are insolvent or near-insolvent. The key insight of this paper is that because of the time lag between premium payments and losses (which is especially lengthy in long-tail lines), writing policies is one way for insurance companies to borrow money (i.e., from policyholders). Moreover, the existence of guaranty fund insurance enables insurance companies, even very risky ones, to borrow from policyholders at rates that do not reflect the insurer's default risk. Thus, one way for insurance companies to game the guaranty fund syst...

Published:

  • Bohn, James G. and Brian J. Hall. "The Costs of Insurance Company Failures" . The Economics of Property-Casualty Insurance. Edited by David F. Bradford, Chicago: The University of Chicago Press, 1998, pp. 139-166.
  • (REF) The Financing of Catastrophe Risk. Froot, Kenneth A., ed., Chicago: The University of Chicago Press, 1999, pp. 363-384.
  • The Moral Hazard of Insuring the Insurers, James G. Bohn, Brian Hall. in The Financing of Catastrophe Risk, Froot. 1999

August 1995Property and Casualty Solvency Funds as a Tax and Social Insurance System
with Brian J. Hall: w5206
When a Property and Casualty (P&C) insurance company becomes insolvent, solvent insurance companies are forced to pay assessments (a form of taxation) to state guarantee funds ('solvency funds') in order to protect the policyholders of the failed companies. We produce estimates of the costs to the guarantee funds of resolving P&C insurance company insolvencies. We find that the total net costs (payments by the fund less recoveries by the fund) of resolving insolvencies are remarkably high. We estimate that the mean ratio of net costs to assets is approximately one, implying that insolvent companies have liabilities that are roughly twice as large as assets when they fail. Our cost estimate for resolving insurance company insolvencies is roughly three times higher than similar estimates...
 
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