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Adverse Selection and Moral Hazard in the Corporate Insurance Market: Evidence from the 2011 Thailand floods

Daisuke Adachi, Hiroyuki Nakata (), Yasuyuki Sawada () and Kunio Sekiguchi

Discussion papers from Research Institute of Economy, Trade and Industry (RIETI)

Abstract: We examine the existence of adverse selection and moral hazard in the corporate insurance market empirically. While natural disasters hit households and firms alike, corporate insurance against disasters have been under-investigated in the literature. To bridge this gap, we employ a unique firm dataset on the 2011 Thailand floods exclusively collected for this study. We aim to uncover how insurance subscription is geographically diversified before and after the floods and how insurance subscription and payment are associated with firms' production and employment levels after the floods. We find that the property insurance subscription before the floods was systematically higher amongst firms located in the areas directly affected by the floods than amongst others, indicating adverse selection, while the market is missing after the floods. Also, both insurance subscription and payment of business interruption insurance are negatively associated with firms' production and employment after the floods, suggesting the existence of moral hazard.

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Date: 2016-03
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