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Corporate Insurance with Safety Loadings: A Note

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  • Lutz G. Arnold
  • Johannes Hartl

Abstract

In a paper in this journal, Schnabel and Roumi (1989) assert that if uninsured debt is risky, a levered firm takes a casualty insurance with a positive safety loading if, and only if, the amount of debt is sufficiently high. This note shows that, in marked contrast to this assertion, the correct conclusion from their model is that the firm generally takes insurance for low levels of risky debt, and it depends on the magnitude of the loading whether it also takes insurance for high levels of debt.

Suggested Citation

  • Lutz G. Arnold & Johannes Hartl, 2011. "Corporate Insurance with Safety Loadings: A Note," Working Papers 110, Bavarian Graduate Program in Economics (BGPE).
    • Handle: RePEc:bav:wpaper:110_arnoldhartl
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    File URL: http://www.bgpe.de/texte/DP/110_ArnoldHartl.pdf
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    References listed on IDEAS

    as
    1. Arthur Hau, 2007. "Insurance, Bond Covenants, and Under‐ or Over‐investment With Risky Asset Reconstitution," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 74(1), pages 3-22, March.
    2. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
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