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Probability Updating and the Market for Directors’ and Officers’ Insurance

28 Pages Posted: 18 Dec 2009 Last revised: 4 Oct 2012

Stephen G. Fier

University of Mississippi - School of Business Administration

Kathleen A. McCullough

Florida State University - College of Business

Joan T. A. Gabel

Florida State University - Department of Risk Management/Insurance, Real Estate and Business Law

Nancy Mansfield

Georgia State University - Risk Management & Insurance Department

Multiple version iconThere are 2 versions of this paper

Date Written: July 1, 2012

Abstract

Over the past decade, much attention has been given to the topics of corporate governance and corporate risk management. One increasingly important insurance product associated with each of these issues is directors’ and officers’ (D&O) liability insurance. Given the interconnectedness that exists between D&O insurance, corporate risk management, and corporate governance, we exploit industry-specific D&O data to explain how industries most associated with the corporate scandals of the early 2000’s adjusted demand patterns during periods of certainty and uncertainty. The rich dataset coupled with dramatic changes in the marketplace allows for the testing of insurance demand patterns and enables us to offer insight into the market’s response to a unique type of loss shock. The results of this study suggest evidence in favor of demand-side probability updating, whereby those industries most associated with the corporate scandals of the early 2000s adjusted the demand for D&O insurance during periods of greater uncertainty.

Keywords: directors and officers insurance, probability updating, loss shock, rational expectations, institutional intervention

JEL Classification: G22, G34, E32

Suggested Citation

Fier, Stephen G. and McCullough, Kathleen A. and Gabel, Joan T. A. and Mansfield, Nancy, Probability Updating and the Market for Directors’ and Officers’ Insurance (July 1, 2012). Available at SSRN: https://ssrn.com/abstract=1524063 or http://dx.doi.org/10.2139/ssrn.1524063

Stephen G. Fier

University of Mississippi - School of Business Administration ( email )

PO Box 3986
Oxford, MS 38677
United States

Kathleen A. McCullough (Contact Author)

Florida State University - College of Business ( email )

Department of Risk Management and Insurance
150 Rovetta Business Building
Tallahassee, FL 32306-1110
United States
850-644-8358 (Phone)
850-644-4077 (Fax)

Joan T. A. Gabel

Florida State University - Department of Risk Management/Insurance, Real Estate and Business Law ( email )

College of Business
Tallahassee, FL 32306
United States

Nancy R. Mansfield

Georgia State University - Risk Management & Insurance Department ( email )

P.O. Box 4036
Atlanta, GA 30302-4036
United States
404-651-4119 (Phone)
404-651-4219 (Fax)

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