Asymmetric Information and Insurance Cycles

35 Pages Posted: 22 Mar 2009 Last revised: 26 Jul 2021

See all articles by David L. Dicks

David L. Dicks

Baylor University - Department of Finance, Insurance & Real Estate

James R. Garven

Baylor University - Department of Finance, Insurance & Real Estate

Date Written: July 24, 2021

Abstract

This paper extends the theoretical literature on underwriting cycles by assuming insurers have heterogeneous exposure to a given 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 outside 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

Dicks, David L. and Garven, James R., Asymmetric Information and Insurance Cycles (July 24, 2021). Available at SSRN: https://ssrn.com/abstract=1364705 or http://dx.doi.org/10.2139/ssrn.1364705

David L. Dicks (Contact Author)

Baylor University - Department of Finance, Insurance & Real Estate ( email )

P.O. Box 98004
Waco, TX 76798-8004
United States

James R. Garven

Baylor University - Department of Finance, Insurance & Real Estate ( email )

One Bear Place #98004
Baylor University
Waco, TX 76798-8004
United States

HOME PAGE: http://business.baylor.edu/directory/?id=James_Garven

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