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Financing and the Demand for Corporate Insurance

Author

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  • Martin F. Grace

    (College of Business Administration, Georgia State University, GA 30303, Atlanta)

  • Michael J. Rebello

    (College of Business Administration, Georgia State University, GA 30303, Atlanta)

Abstract

In this paper we examine the insurance decision of a firm with private information regarding its cash flows and insurable losses. We show that, even in the absence of bankruptcy costs and information production by insurers, the firm's attempts to hedge its information risk can induce it to demand insurance. If higher operating revenues are accompanied by a lower insurance risk, the firm will choose to self-insure. In contrast, if higher operating revenues are accompanied by a higher insurance risk, the firm will demand insurance. In fact, if its insurable losses are relatively small, the firm will fully insure its losses. Further, if there exists considerable uncertainty regarding the firm's insurance risk, the level of coverage demanded by the firm is dependent on its private information, with higher levels of coverage signaling favorable information regarding the firm's future operations. The Geneva Papers on Risk and Insurance Theory (1993) 18, 147–171. doi:10.1007/BF01111467

Suggested Citation

  • Martin F. Grace & Michael J. Rebello, 1993. "Financing and the Demand for Corporate Insurance," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 18(2), pages 147-171, December.
    • Handle: RePEc:pal:genrir:v:18:y:1993:i:2:p:147-171
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