Testing for moral hazard in reinsurance markets

Yan, Zhiqiang

doi:10.1108/mf-aug-2012-0180

Cited by 2 publications

(5 citation statements)

References 31 publications

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“…If this is the case, the loss ratio may decrease. Yan (2013) also uses this measure as a control variable of loss ratio ceded. This study follows Upreti and Adams (2015) and defines return on assets as the ratio of net income before taxes divided by total assets.…”

Section: B Return On Assetsmentioning

confidence: 99%

“…Aggressive insurers in underwriting tend to experience a rapid growth in premiums written equally imposed to high risk (Yan 2013). Therefore, there exists a positive relationship between premium growth and loss ratios.…”

Section: Insurance Leveragementioning

confidence: 99%

“…The insurance market is no exception to this ( Akerlof 1970;. Prior empirical studies by Hedengren and Stratmann (2016) and Aarbu (2017) have focused on examining the existence of asymmetric information in different insurance markets but very few studies conducted on investigation of the asymmetric information issue in reinsurance markets except for Adams and Diacon (2006), Yan (2013), Garven, Hilliard, and Grace (2014) and Yan and Hong (2015).…”

Section: Introductionmentioning

confidence: 99%

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Test of Asymmetric Information in the Nepalese Reinsurance Market

Maharjan¹

2021

Int. Res. J. Mgt. Sci.

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Background: The imperfect information can cause an imbalance of power which may lead to market failure thus collection of information is very essential in today’s business world therefore, the availability of the correct and accurate information is very crucial for making sound economic decisions. Thus, information asymmetry has been a very pertinent issue where economic transaction takes place insurance market is not far behind. As, reinsurance provides huge indirect capital to the insurance industry, providing correct information’s like premium earned, claim by the insurer to the reinsurer’s for fair pricing of reinsurance premium along ensuring top rated reinsurance company remain in Nepalese insurance industry. Objectives: This study aims to examine whether there remains asymmetric information in Nepalese insurance market with reinsurer’s perspective in different portfolios such as fire, marine, motor, engineering and miscellaneous as well as combining all portfolio in aggregate. Methods: The study uses descriptive and causal relation research design. Further, the study uses secondary data of 14 nonlife insurance from 2008/09 to 2018/19 with 168 firm year observations Result: Results of the study revealed that that only in fire, marine and overall portfolios there exists strong asymmetric information. Rest of the portfolio like motor, engineering and miscellaneous there is no evidence of existence of asymmetric information. Conclusion: Existence of asymmetric information is mostly an inevitable part as one party always tries to avoid information to others for the sake of benefit. However, the existence of asymmetric information to a large extent may lead to unhealthy relations between the parties and may bring the cold war distortion of relations. Thus, the finding of the studies is beneficial to the Nepalese nonlife insurers as insurers need to provide correct and accurate information to the reinsures Implication: To cope with asymmetric information in the Nepalese insurance industry, this study provides strong evidence to provide correct and accurate information’s to the reinsurers else top rated reinsurers might withdraw their presence from the Nepalese market which will have adverse effect in the insurance industry.

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Section: B Return On Assetsmentioning

confidence: 99%

Section: Insurance Leveragementioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Test of Asymmetric Information in the Nepalese Reinsurance Market

Maharjan¹

2021

Int. Res. J. Mgt. Sci.

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“…The [28] results 5 are concerned with limiting distributions of the reinsured amounts under the ECOMOR and LCR schemes, with subexponential, extremal class or regular variation assumptions on the tail of the claim distribution. They illustrate their results with simulations of the distributions.…”

Section: Trimming More Valuesmentioning

confidence: 99%

“…Moral hazard refers to changes in the cedant's behaviour that may occur after having taken out reinsurance; it may lead to less cautious behaviour and consequently to an increase in the potential magnitude and/or probability of a large loss. The work of [4,5], for example, discusses the issues involved in this, and how their effects may be disentangled empirically.…”

Section: Reinsurance Modelsmentioning

confidence: 99%

The Effects of Largest Claim and Excess of Loss Reinsurance on a Company’s Ruin Time and Valuation

Fan

Griffin

Maller

et al. 2017

Risks

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Abstract:We compare two types of reinsurance: excess of loss (EOL) and largest claim reinsurance (LCR), each of which transfers the payment of part, or all, of one or more large claims from the primary insurance company (the cedant) to a reinsurer. The primary insurer's point of view is documented in terms of assessment of risk and payment of reinsurance premium. A utility indifference rationale based on the expected future dividend stream is used to value the company with and without reinsurance. Assuming the classical compound Poisson risk model with choices of claim size distributions (classified as heavy, medium and light-tailed cases), simulations are used to illustrate the impact of the EOL and LCR treaties on the company's ruin probability, ruin time and value as determined by the dividend discounting model. We find that LCR is at least as effective as EOL in averting ruin in comparable finite time horizon settings. In instances where the ruin probability for LCR is smaller than for EOL, the dividend discount model shows that the cedant is able to pay a larger portion of the dividend for LCR reinsurance than for EOL while still maintaining company value. Both methods reduce risk considerably as compared with no reinsurance, in a variety of situations, as measured by the standard deviation of the company value. A further interesting finding is that heaviness of tails alone is not necessarily the decisive factor in the possible ruin of a company; small and moderate sized claims can also play a significant role in this.

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Testing for moral hazard in reinsurance markets

Cited by 2 publications

References 31 publications

Test of Asymmetric Information in the Nepalese Reinsurance Market

Test of Asymmetric Information in the Nepalese Reinsurance Market

The Effects of Largest Claim and Excess of Loss Reinsurance on a Company’s Ruin Time and Valuation

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