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Adverse Selection and Moral Hazard in the Corporate Insurance Market: Evidence from the 2011 Thailand floods

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Listed:
  • ADACHI Daisuke
  • NAKATA Hiroyuki
  • SAWADA Yasusyuki
  • SEKIGUCHI Kunio

Abstract

We examine the existence of adverse selection and moral hazard in the corporate insurance market empirically. While natural disasters hit households and firms alike, corporate insurance against disasters have been under-investigated in the literature. To bridge this gap, we employ a unique firm dataset on the 2011 Thailand floods exclusively collected for this study. We aim to uncover how insurance subscription is geographically diversified before and after the floods and how insurance subscription and payment are associated with firms' production and employment levels after the floods. We find that the property insurance subscription before the floods was systematically higher amongst firms located in the areas directly affected by the floods than amongst others, indicating adverse selection, while the market is missing after the floods. Also, both insurance subscription and payment of business interruption insurance are negatively associated with firms' production and employment after the floods, suggesting the existence of moral hazard.

Suggested Citation

  • ADACHI Daisuke & NAKATA Hiroyuki & SAWADA Yasusyuki & SEKIGUCHI Kunio, 2016. "Adverse Selection and Moral Hazard in the Corporate Insurance Market: Evidence from the 2011 Thailand floods," Discussion papers 16025, Research Institute of Economy, Trade and Industry (RIETI).
  • Handle: RePEc:eti:dpaper:16025
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    File URL: https://www.rieti.go.jp/jp/publications/dp/16e025.pdf
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    References listed on IDEAS

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    1. Greenwald, Bruce C & Stiglitz, Joseph E, 1990. "Asymmetric Information and the New Theory of the Firm: Financial Constraints and Risk Behavior," American Economic Review, American Economic Association, vol. 80(2), pages 160-165, May.
    2. Aunon-Nerin, Daniel & Ehling, Paul, 2008. "Why firms purchase property insurance," Journal of Financial Economics, Elsevier, vol. 90(3), pages 298-312, December.
    3. SAWADA Yasuyuki & NAKATA Hiroyuki & SEKIGUCHI Kunio, 2014. "Natural Disasters, Land Price, and Location of Firms: Evidence from Thailand," Discussion papers 14029, Research Institute of Economy, Trade and Industry (RIETI).
    4. Arthur Hau, 2006. "The Liquidity Demand for Corporate Property Insurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 73(2), pages 261-278.
    5. Nance, Deana R & Smith, Clifford W, Jr & Smithson, Charles W, 1993. " On the Determinants of Corporate Hedging," Journal of Finance, American Finance Association, vol. 48(1), pages 267-284, March.
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