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Adverse Selection and the Opaqueness of Insurers

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  • Tao Zhang
  • Larry A. Cox
  • Robert A. Van Ness

Abstract

While adverse selection problems between insureds and insurers are well known to insurance researchers, few explore adverse selection in the insurance industry from a capital markets perspective. This study examines adverse selection in the quoted prices of insurers' common stocks with a particular focus on the opacity of both asset portfolios and underwriting liabilities. We find that more opaque underwriting lines result in greater adverse selection costs for property‐casualty (P‐C) insurers. A similar effect is not apparent for life‐health (L‐H) insurers and we find no effect of asset opaqueness on adverse selection for either L‐H or P‐C insurers.

Suggested Citation

  • Tao Zhang & Larry A. Cox & Robert A. Van Ness, 2009. "Adverse Selection and the Opaqueness of Insurers," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 76(2), pages 295-321, June.
    • Handle: RePEc:bla:jrinsu:v:76:y:2009:i:2:p:295-321
    DOI: 10.1111/j.1539-6975.2009.01300.x
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