Risk Transfer and Moral Hazard: An Examination on the Market for Insurance-Linked Securities

46 Pages Posted: 31 Oct 2018

See all articles by Tobias Götze

Tobias Götze

Technische Universität Braunschweig - Institute of Finance

Marc Gürtler

University of Braunschweig - Institute of Technology, Department of Finance

Date Written: October 8, 2018

Abstract

Evidence on the existence of moral hazard on the market for insurance-linked securities is ambiguous. This study examines whether the sponsors of CAT bonds with indemnity trigger – the currently most prominent type of insurance-linked security – are susceptible to ex ante moral hazard (i.e., before the occurrence of a catastrophic event) and ex post moral hazard (i.e., after a catastrophic event). Therefore, we apply panel regression and matching techniques to a comprehensive data set comprising US insurers’ annual statements and information on their activities as CAT bond sponsors. We propose a novel approach to measure moral hazard using the insurers’ loss adjustment expenses. Controlling for the unobserved heterogeneity and time-variant insurer characteristics, we find that sponsors using CAT bonds with indemnity trigger are exposed to ex ante moral hazard, but not affected by ex post moral hazard.

Keywords: CAT Bonds, Indemnity Trigger, Insurance-Linked Securities, Moral Hazard

JEL Classification: G22, G23, G32

Suggested Citation

Götze, Tobias and Gürtler, Marc, Risk Transfer and Moral Hazard: An Examination on the Market for Insurance-Linked Securities (October 8, 2018). Available at SSRN: https://ssrn.com/abstract=3262669 or http://dx.doi.org/10.2139/ssrn.3262669

Tobias Götze (Contact Author)

Technische Universität Braunschweig - Institute of Finance ( email )

Abt-Jerusalem-Str. 7
Braunschweig, 38106
Germany
00495313912893 (Phone)
00495313912899 (Fax)

Marc Gürtler

University of Braunschweig - Institute of Technology, Department of Finance ( email )

Abt-Jerusalem-Str. 7
Braunschweig, 38106
Germany

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