 Insurance Supply with Capacity Constraints and Endogenous Insolvency RiskJulie A B Cagle and Scott E Harrington Journal of Risk and Uncertainty, 1995, vol. 11, issue 3, 219-32 Abstract: Negative shocks to industry capital and significant capital adjustment costs have been offered as an explanation of periodic "crises" in the property-liability insurance market. According to these capacity constraint models, in which post-shock production must meet a solvency constraint, increases in price can cause some or perhaps all of the costs of a negative shock to capital to be shifted to policyholders. This article develops a model of insurance supply with capacity constraints and endogenous insolvency risk that incorporates limited liability and potential loss of insurer intangible capital. If industry demand is inelastic with respect to price and capital, the model predicts that price will increase following a negative shock to capital, but by less than the amount needed to fully offset the shock. Equity value and the expected recovery by policyholders for post-shock production are predicted to decline. Elastic demand mitigates shock-induced price increases. Copyright 1995 by Kluwer Academic Publishers Date: 1995 There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:kap:jrisku:v:11:y:1995:i:3:p:219-32 Ordering information: This journal article can be ordered from Access Statistics for this article Journal of Risk and Uncertainty is currently edited by W. Kip Viscusi More articles in Journal of Risk and Uncertainty from Springer |
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