Testing for Asymmetric Information in Reinsurance Markets

Zhiqiang Yan () and Liang Hong
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Zhiqiang Yan: Department of Accounting & Finance, Western Illinois University, Stipes Hall 431, 1 University Circle, Macomb, IL 61455, U.S.A.
Liang Hong: Department of Mathematics, Robert Morris University, 6001 University Blvd., Moon Township, PA 15108, U.S.A

The Geneva Papers on Risk and Insurance - Issues and Practice, 2015, vol. 40, issue 1, 29-46

Abstract: Empirical studies on asymmetric information have mainly focused on primary insurance markets, but comparatively little attention has been given to reinsurance markets. This study investigates the existence of asymmetric information by testing for a positive correlation between coverage and ex post risk in three major reinsurance markets for the period 1995–2000 and finds that (1) asymmetric information problems are present in the private passenger auto liability and homeowners reinsurance markets, but not in the product liability reinsurance market; (2) retention limits are widely utilised to mitigate asymmetric information problems; (3) long-term contracting relationships are either rarely used or not effective in controlling asymmetric information problems.

Date: 2015
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