Asymmetric Information and Insurance Cycles
Journal of Risk and Insurance, forthcoming http://doi.org/10.1111/jori.12371
Posted: 22 Mar 2009 Last revised: 18 Jan 2022
Date Written: December 21, 2021
Abstract
This paper extends the theoretical literature on underwriting cycles by assuming insurers have heterogeneous exposure to a catastrophe. Distinct from the existing literature on insurance cycles, we model optimal contracting by competitive insurers. Since losses take time to pay out, and insurers are better informed about their catastrophe exposure than external investors, catastrophes compromise the capital-raising ability of insurers by increasing asymmetric information. Capital is restricted following a catastrophe because investors do not know the catastrophe exposure of each insurer, not because of explicit costs of raising capital. Thus, insurers decide to hold less capital following a catastrophe, giving rise to the insurance cycle.
Keywords: Asymmetric Information, Catastrophe, Insurance Underwriting Cycle, Liquidity Crisis
JEL Classification: D41, D82, G01, G22, G28, G32
Suggested Citation: Suggested Citation
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