Testing for Asymmetric Information in Reinsurance Markets
Date Issued
2008
Date
2008
Author(s)
Huang, Yi-Chieh
Abstract
The purpose of this paper is to examine whether asymmetric information exists in reinsurance markets by testing the correlation between the reinsurance coverage and the loss probability of an insurer. For one thing, few papers do empirical research about asymmetric information in reinsurance markets. For another, whether insurance coverage is significantly related to loss probabilities and what the direction is if the correlation exists still don’t reach to a consistent conclusion from empirical literature. If the correlation exists; that is, asymmetric information exists, I further see the direction and try to identify possible types of this asymmetric information. The data used in this paper is from 2004 NAIC property-casualty database and there are 1,192 property and casualty insurers in the sample. After controlling reinsures’ known information, I examine the correlation by performing the conditional dependency test on the residual reinsurance ratio and the residual loss probability. However, I find no evidence for it.
Subjects
Asymmetric information
reinsurance markets
adverse selection
moral hazard
advantageous selection
Type
thesis
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