NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Neil Doherty

Wharton School
University of Pennsylvania
3641 Locust Walk
Philadelphia, PA 19104

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NBER Working Papers and Publications

July 2002Moral Hazard in Reinsurance Markets
with Kent Smetters: w9050
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.

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

 
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