Braunschweig Institute of Technology Details Findings in Economic Behavior and Organization (Risk Transfer and Moral Hazard: an Examination On the Market for Insurance-linked Securities)

2021 FEB 25 (NewsRx) -- By a News Reporter-Staff News Editor at Insurance Daily News -- New research on Economics - Economic Behavior and Organization is the subject of a report. According to news reporting from Braunschweig, Germany, by NewsRx journalists, research stated, “Insurance-linked securities provide capital market-based insurance against the risk of natural catastrophes. A challenge arising with the use of those instruments is their sponsor’s potential susceptibility towards moral hazard, which has not been studied in the empirical literature.”

Financial support for this research came from Gesamtverband der deutschen Versicherungswirtschaft e.V..

The news correspondents obtained a quote from the research from the Braunschweig Institute of Technology, “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 susceptible to ex-ante moral hazard, but not affected by ex-post moral hazard.”

According to the news reporters, the research concluded: “We further show that vertical loss retention has a positive effect on sponsors’ incentives to contain losses.”

This research has been peer-reviewed.

For more information on this research see: Risk Transfer and Moral Hazard: an Examination On the Market for Insurance-linked Securities. Journal of Economic Behavior & Organization, 2020;180:758-777. Journal of Economic Behavior & Organization can be contacted at: Elsevier, Radarweg 29, 1043 Nx Amsterdam, Netherlands. (Elsevier - www.elsevier.com; Journal of Economic Behavior & Organization - http://www.journals.elsevier.com/journal-of-economic-behavior-and-organization/)

Our news journalists report that additional information may be obtained by contacting Marc Guertler, Braunschweig Institute of Technology, Dept. of Finance, Abt Jerusalem Str 7, D-38106 Braunschweig, Germany.

The direct object identifier (DOI) for that additional information is: https://doi.org/10.1016/j.jebo.2019.06.010. This DOI is a link to an online electronic document that is either free or for purchase, and can be your direct source for a journal article and its citation.

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