Market Discipline in Property/Casualty Insurance: Evidence from Premium Growth Surrounding Changes in Financial Strength Ratings
46 Pages Posted: 19 Jul 2005
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: Suggested Citation
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