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Price Cutting in Liability Insurance Markets

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Author Info

  • Harrington, Scott E
  • Danzon, Patricia M

Abstract

This article analyzes alleged underpricing of general liability insurance prior to the mid-1980s liability insurance crisis. The theoretical analysis considers whether moral hazard and/or heterogeneous information for forecasting claim costs can cause some firms to price too low and depress other firms' prices. Cross-sectional analysis of insurer loss forecast revisions (which should be greater for firms with low prices caused by moral hazard or heterogeneous information) and premium growth provides evidence consistent with low pricing due to moral hazard but not heterogeneous information. The evidence also implies that shifts in the loss distribution produced large industrywide forecast errors. Copyright 1994 by University of Chicago Press.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Business.

Volume (Year): 67 (1994)
Issue (Month): 4 (October)
Pages: 511-38

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Handle: RePEc:ucp:jnlbus:v:67:y:1994:i:4:p:511-38

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Web page: http://www.journals.uchicago.edu/JB/

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Cited by:
  1. Beaver, William H. & McNichols, Maureen F. & Nelson, Karen K., 2003. "Management of the loss reserve accrual and the distribution of earnings in the property-casualty insurance industry," Journal of Accounting and Economics, Elsevier, vol. 35(3), pages 347-376, August.
  2. Strauss, Jason, 2007. "Price Regulation, Market Exit, and Financial Leverage of Canadian Property-Liability Insurers," MPRA Paper 11212, University Library of Munich, Germany, revised 28 Oct 2008.
  3. Dong, Ming, 2014. "The impact of firm-level transparency on the ex ante risk decisions of insurers: Evidence from an empirical study," ICIR Working Paper Series 14/14, International Center for Insurance Regulation (ICIR), Goethe University Frankfurt.
  4. Grace, Martin & Hotchkiss, Julie L., 1995. "External impacts on the property-liability insurance cycle," MPRA Paper 9825, University Library of Munich, Germany.
  5. emmanuel, mamatzakis & george, christodoulakis, 2010. "Return Attribution Analysis of the UK Insurance Portfolios," MPRA Paper 22516, University Library of Munich, Germany.
  6. Heni Boubaker & Nadia Sghaier, 2014. "How Do the Interest Rate and the Inflation Rate Affect the Non-Life Insurance Premiums ?," Working Papers 2014-282, Department of Research, Ipag Business School.
  7. Jiang, Shi-jie & Nieh, Chien-Chung, 2012. "Dynamics of underwriting profits: Evidence from the U.S. insurance market," International Review of Economics & Finance, Elsevier, vol. 21(1), pages 1-15.
  8. J. David Cummins & Scott E. Harrington & Robert Klein, 1995. "nsolvency Experience, Risk-Based Capital, and Prompt Corrective Action in Property-Liability Insurance," Center for Financial Institutions Working Papers 95-06, Wharton School Center for Financial Institutions, University of Pennsylvania.
  9. Beatty, Anne & Gron, Anne & Jorgensen, Bjorn, 2005. "Corporate risk management: evidence from product liability," Journal of Financial Intermediation, Elsevier, vol. 14(2), pages 152-178, April.
  10. Denis Kessler, 2005. "La fin du cycle traditionnel en assurance et réassurance de dommages ?," Revue d'Économie Financière, Programme National Persée, vol. 80(3), pages 159-170.
  11. Fiordelisi, Franco & Meles, Antonio & Monferrà, Stefano & Starita, Maria Grazia, 2013. "Personal vs. Corporate Goals: Why do Insurance Companies Manage Loss Reserves?," MPRA Paper 47867, University Library of Munich, Germany.

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