Journal ArticleDOI
Insurance Supply with Capacity Constraints and Endogenous Insolvency Risk
Reads0
Chats0
TLDR
In this paper, the authors developed a model of insurance supply with capacity constraints and endogenous insolvency risk that incorporates limited liability and potential loss of insurer intangible capital, and 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.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 cost 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.read more
Citations
More filters
Journal ArticleDOI
Price, Financial Quality, and Capital Flows in Insurance Markets
TL;DR: In this article, the authors developed a model of price determination in insurance markets, which predicts that the price of insurance, measured by the ratio of premiums to discounted losses, is inversely related to insurer default risk.
Journal ArticleDOI
Risk Management, Capital Budgeting, and Capital Structure Policy for Insurers and Reinsurers
TL;DR: In this paper, a framework for analyzing the risk allocation, capital budgeting, and capital structure decisions facing insurers and reinsurers is developed, which incorporates three key features: (i) value-maximizing insurers face product-market as well as capital-market imperfections that give rise to well-founded concerns with risk management and capital allocation; (ii) some, but not all, of the risks they face can be frictionlessly hedged in the capital market; and (iii) the distribution of their cash flows may be asymmetric, which alters the demand for
Journal ArticleDOI
Pricing and capital allocation in catastrophe insurance
TL;DR: In this article, multi-line pricing and capital allocation by insurance companies when solvency matters to consumers, capital is costly to hold, and the average loss is uncertain is studied.
Posted Content
Risk Management, Capital Budgeting and Capital Structure Policy for Insurers and Reinsurers
TL;DR: In this article, a framework for analyzing the risk allocation, capital budgeting, and capital structure decisions facing insurers and reinsurers is presented. But the model does not consider the impact of product market imperfections on risk management and capital allocation.
Posted Content
Catastrophic Shocks in the Property-Liability Insurance Industry: Evidence on Regulatory and Contagion Effects
TL;DR: This article examined the impact of Hurricane Andrew and a subsequent change in the regulatory environment on the stock prices of 48 publicly-traded property-liability insurers and found that Andrew had a large negative effect on insurance stocks that was ameliorated to some extent by a smaller positive effect.
References
More filters
Journal ArticleDOI
Corporate financing and investment decisions when firms have information that investors do not have
TL;DR: In this paper, a firm that must issue common stock to raise cash to undertake a valuable investment opportunity is considered, and an equilibrium model of the issue-invest decision is developed under these assumptions.
Journal ArticleDOI
Determinants of corporate borrowing
TL;DR: In this article, the authors predict that corporate borrowing is inversely related to the proportion of market value accounted for by real options and rationalize other aspects of corporate borrowing behavior, such as the practice of matching maturities of assets and debt liabilities.
Posted Content
Corporate Financing and Investment Decisions When Firms Have Informationthat Investors Do Not Have
TL;DR: In this paper, a firm that must issue common stock to raise cash to undertake a valuable investment opportunity is considered, and an equilibrium model of the issue-invest decision is developed under these assumptions.
Journal ArticleDOI
The Credit Crunch
TL;DR: A notable lack of consensus about the importance of a credit crunch in the banking sector, its causes, and even the meaning of the term has emerged as mentioned in this paper, although it is too early to say whether the credit crunch played a role in the 1990s economic crisis.
Journal ArticleDOI
Contagion and competitive intra-industry effects of bankruptcy announcements
TL;DR: The authors investigated the effect of bankruptcy announcements on the equity value of the bankrupt firm's competitors and found that bankruptcy announcements decrease the value of a value-weighted portfolio of competitors by 1%.