Adverse Selection in Reinsurance Markets

James R Garven (), James I Hilliard () and Martin Grace
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James R Garven: Department of Finance, Insurance and Real Estate, Baylor University, One Bear Place #98004, Waco, TX 76798-8004, U.S.A.
James I Hilliard: W.A. Franke College of Business, Northern Arizona University, 20 W. McConnell Dr., Flagstaff, AZ 86011, U.S.A.

The Geneva Risk and Insurance Review, 2014, vol. 39, issue 2, 222-253

Abstract: This paper looks for evidence of adverse selection in the relationship between primary insurers and reinsurers. We test the implications of a model in which informational asymmetry—and therefore, its negative consequences—decline over time. Our tests involve a data panel consisting of U.S. property-liability insurance firms that reported to the National Association of Insurance Commissioners during the period 1993–2012. We find that the amount of reinsurance, insurer profitability, and insurer credit quality all increase with the tenure of the insurer–reinsurer relationship.

Date: 2014
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