Effort Allocation of Insurance Agent under Asymmetric Information: An Analytical Approach

Kojima Koji and Mahito Okura ()
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Kojima Koji: Kwansei Gakuin University, Japan

Asia-Pacific Journal of Risk and Insurance, 2008, vol. 2, issue 2, 20

Abstract: This study examines the relationship between incentive contracts for managers and the allocation of efforts by the managers as well as the stock market's role in monitoring allocation of the efforts. It also evaluates solvency regulation in Japan and its effects on the compensation of a manager and allocation of the manager's efforts and on the shareholders' profits in a market with asymmetric information. Particularly, we employ a principal-agency model to demonstrate how uncertainty in the insurance market affects the way managers allocate their efforts so that their companies can achieve a higher solvency ratio in order to meet not only regulatory requirements but also stock market expectation. We find presence of a solvency margin ratio that, subject to certain conditions, increases the level of "good" effort, decreases the level of "bad" effort by the manager and increases the expected stock price.

Keywords: Solvency margin ratio regulation; asymmetric information; principal-agency model (search for similar items in EconPapers)
Date: 2008
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DOI: 10.2202/2153-3792.1023

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