Market Discipline in Property/Casualty Insurance: Evidence from Premium Growth Surrounding Changes in Financial Strength Ratings

46 Pages Posted: 19 Jul 2005

See all articles by Karen Epermanis

Karen Epermanis

University of Mississippi

Scott E. Harrington

University of Pennsylvania - Wharton School

Abstract

We analyze abnormal premium growth surrounding changes in A.M. Best Company financial strength ratings for a large panel of property/casualty insurers during 1992-1999. Control group comparisons and regression estimates generally indicate economically and statistically significant premium declines in the year of and the year following rating downgrades. Consistent with greater risk sensitivity of demand, the premium declines were concentrated among commercial insurance, which has less complete guaranty fund protection than personal insurance. The premium declines were greater for firms with relatively low pre-downgrade ratings, and particularly pronounced for firms falling below an A-rating. We find no evidence of moral hazard in the form of rapid commercial or personal lines premium growth following downgrades of A- or low-rated insurers. There is some evidence that rating upgrades for relatively low-rated insurers were accompanied by increased premium growth. The overall results suggest significant market discipline for rated insurers, in particular for commercial insurance.

Keywords: market discipline, financial strength ratings, property/casualty insurance

JEL Classification: G22, G28

Suggested Citation

Epermanis, Karen and Harrington, Scott E., Market Discipline in Property/Casualty Insurance: Evidence from Premium Growth Surrounding Changes in Financial Strength Ratings. Journal of Money, Credit, and Banking, Forthcoming, Available at SSRN: https://ssrn.com/abstract=762064

Karen Epermanis

University of Mississippi ( email )

PO Box 3986
Oxford, MS 38677
United States

Scott E. Harrington (Contact Author)

University of Pennsylvania - Wharton School ( email )

3641 Locust Walk
Colonial Penn Center
Philadelphia, PA 19104-6358
United States
215-898-9403 (Phone)
215-573-2157 (Fax)

HOME PAGE: http://scottharringtonphd.com/

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