Essays on Adverse Selection and Moral Hazard in Insurance Market

152 Pages·2017·0.67 MB·English

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Risk Management and Insurance Dissertations Department of Risk Management and Insurance
Summer 8-1-2010
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Jian Wen
Central University of Finance and Economics
Follow this and additional works at: https://scholarworks.gsu.edu/rmi_diss
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Wen, Jian, "Essays on Adverse Selection and Moral Hazard in Insurance Market." Dissertation, Georgia
State University, 2010.
doi: https://doi.org/10.57709/1433102
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Student’s Name: Jian Wen
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The author of this dissertation is:

Name: Jian Wen
Address: 39 South College Rd, Haidian District
Beijing, China, 100081

The director of this dissertation is:

His/Her Name: Martin F. Grace
Department: Risk Management and Insurane
Department Address: PO Box 4036, Georgia State University
Atlanta, GA 30302

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ESSAYS ON ADVERSE SELECTION AND MORAL HAZARD IN INSURANCE MARKET

BY

JIAN WEN

A Dissertation Submitted in Partial Fulfillment of the Requirements for the Degree
of
Doctor of Philosophy
in the Robinson College of Business
of
Georgia State University

GEORGIA STATE UNIVERSITY
ROBINSON COLLEGE OF BUSINESS
2010
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Copyright by
Jian Wen
2010
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ACCEPTANCE

This dissertation was prepared under the direction of the candidate’s Dissertation Committee. It
has been approved and accepted by all members of that committee, and it has been accepted in
partial fulfillment of the requirements for the degree of Doctor in Philosophy in Business
Administration in the Robinson College of Business of Georgia State University.

H. Fenwick Huss
Dean
Robinson College of Business

Dissertation Committee:

Dr. Martin F. Grace (Chair)
Dr. Robert W. Klein
Dr. Mary Beth Walker
Dr. Zhiyong Liu
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ABSTRACT

ESSAYS ON ADVERSE SELECTION AND MORAL HAZARD IN INSURANCE MARKET

By

JIAN WEN

July 30, 2010

Committee Chair: Dr. Martin F. Grace

Major Department: Department of Risk Management and Insurance

Essay One examines the asymmetric information problem between primary insurers and
reinsurers in the reinsurance industry and contributes uniquely to the separation of adverse
selection from moral hazard, if both are present. A two-period principal-agent model is set up to
identify the signals of adverse selection and moral hazard generated by the actions of the primary
insurer and to provide a basis for corresponding hypotheses for empirical testing. Using data
from the National Association of Insurance Commissioners (NAIC) and A.M. Best Company,
the empirical tests show that the problem of adverse selection exists in the reinsurance market
between the affiliated insurers and non-affiliated reinsurers, and even between closely related
affiliated insurers and reinsurers. There is no evidence indicating the presence of moral hazard in
the reinsurance market.

To address the issue of soaring property insurance premiums and coverage availability in states
that are subject to hurricane risks, state and federal governments have not only regulated the
private insurance market but have also intervened directly into markets by establishing
government-funded insurance programs. With coexisting public and private insurance
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mechanisms and price regulation, the risk of cross subsidization and a subsequent moral hazard
problem may arise. By using data from the Florida Citizens Insurance Corporation, the Florida
Hurricane Catastrophe Fund, the Flood Insurance and the private homeowner insurance market
in Florida from 1998 to 2007, the second essay examines the moral hazard problems arising from
government regulation and involvement in the private insurance sector. In sum, the provision of
national flood insurance is found to be positively related to the population growth in the state of
Florida, which shows that state immigrants can take advantage of the lower cost of flood
insurance when relocating in higher-risk areas. Further, we find that national flood insurance and
the catastrophe fund complement the development of the private insurance sector, while the
residual market hinders the development of private property insurance market.
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Essay One

Distinguishing Different Effects of Asymmetric Information: Evidence from
Property and Liability Reinsurance Market

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Abstract

This essay examines the asymmetric information problem between primary insurers and
reinsurers in the reinsurance industry and contributes uniquely to the separation of adverse
selection from moral hazard, if both are present. A two-period principal-agent model is set up to
identify the signals of adverse selection and moral hazard generated by the actions of the primary
insurer and to provide a basis for corresponding hypotheses for empirical testing. Using data
from the National Association of Insurance Commissioners (NAIC) and A.M. Best Company,
the empirical tests show that the problem of adverse selection exists in the reinsurance market
between the affiliated insurers and non-affiliated reinsurers, and even between closely related
affiliated insurers and reinsurers. There is no evidence indicating the presence of moral hazard in
the reinsurance market.
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