Advanced Search
MyIDEAS: Login to save this paper or follow this series

The Moral Hazard of Insuring the Insurers

Contents:

Author Info

  • James G. Bohn
  • Brian J. Hall
Registered author(s):

    Abstract

    State guaranty funds are quasi-governmental agencies that provide insurance to policyholders against the risk of insurance company failure. But insurance provided by guaranty funds, like all insurance, creates moral hazard problems, especially for companies that are insolvent or near-insolvent. The key insight of this paper is that because of the time lag between premium payments and losses (which is especially lengthy in long-tail lines), writing policies is one way for insurance companies to borrow money (i.e., from policyholders). Moreover, the existence of guaranty fund insurance enables insurance companies, even very risky ones, to borrow from policyholders at rates that do not reflect the insurer's default risk. Thus, one way for insurance companies to game the guaranty fund system is to engage in excessive premium writing. Consistent with this idea, we find that insolvent P&C insurance companies tended to have very high premium growth before they failed. More than one-third of the failed insurance companies had premium growth of more than 50 percent in the two years before failure. Moreover, this excessive premium growth was more pronounced in long-tail lines than in short-tail lines. We also find evidence that greater regulatory resources are associated with less gaming of the system.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.nber.org/papers/w5911.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5911.

    as in new window
    Length:
    Date of creation: Jan 1997
    Date of revision:
    Publication status: published as Bohn, James G. and Brian J. Hall. "The Costs of Insurance Company Failures" . The Economics of Property-Casualty Insurance. Edited by David F. Bradford, Chicago: The University of Chicago Press, 1998, pp. 139-166.
    Handle: RePEc:nbr:nberwo:5911

    Note: PE
    Contact details of provider:
    Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
    Email:
    Web page: http://www.nber.org
    More information through EDIRC

    Related research

    Keywords:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, American Economic Association, vol. 71(3), pages 393-410, June.
    2. James, Christopher, 1991. " The Losses Realized in Bank Failures," Journal of Finance, American Finance Association, American Finance Association, vol. 46(4), pages 1223-42, September.
    3. Cummins, J David, 1988. " Risk-Based Premiums for Insurance Guaranty Funds," Journal of Finance, American Finance Association, American Finance Association, vol. 43(4), pages 823-39, September.
    4. Brian J. Hall, 1996. "Regulatory Free Cash Flow and the High Cost of Insurance Company Failure," Harvard Institute of Economic Research Working Papers 1782, Harvard - Institute of Economic Research.
    5. Merton, Robert C., 1977. "An analytic derivation of the cost of deposit insurance and loan guarantees An application of modern option pricing theory," Journal of Banking & Finance, Elsevier, Elsevier, vol. 1(1), pages 3-11, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. Brian J. Hall, 1998. "Regulatory Free Cash Flow and the High Cost of Insurance Company Failures," NBER Working Papers 6837, National Bureau of Economic Research, Inc.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:5911. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.