Reinsurance and the liability insurance crisis

Abstract

Insurance-industry accounts of the liability insurance crisis of the mid-1980s often cite disruption of supply in reinsurance markets as an important contributing factor. Economic theories of the crisis have not explored this explanation for the severity of the crisis. This article investigates the extent to which events in reinsurance markets affected liability insurance market outcomes. It documents significant shocks to reinsurance supply in the early 1980s and finds evidence of subsequent disruptions to the price and availability of reinsurance. Regression analysis of liability insurance profitability over the time period supports the hypothesis that problems in reinsurance markets played an important role in the crisis.

This is a preview of subscription content, log in to check access.

References

  1. A.M. Best Company. (Various years).Best's Aggregates and Averages. Oldwick, NJ.

  2. Cummins, J.D. and P. Danzon. (1991). “Price Shocks and Capital Flows in Liability Insurance”, working paper, Wharton School, University of Pennsylvania.

  3. Cummins, J.D. and E. Grace. (1991). “The Demand for Tax Exempt Bonds by Property-Liability Insurance Companies”, working paper, Wharton School, University of Pennsylvania.

  4. Doherty, N. and S., Tinic. (1981). “Reinsurance Under Conditions of Capital Market Equilibrium: A Note”,Journal of Finance 36, 949–953.

    Google Scholar 

  5. Garven, J.R. (1990). “The Demand for Reinsurance: Theory and Empirical Tests”, working paper, Department of Finance, University of Texas at Austin.

  6. Gerber, H. (1979).An Introduction to Mathematical Risk Theory. Huebner Foundation, University of Pennsylvania: Philadelphia.

    Google Scholar 

  7. Greenwald, B. and J., Stiglitz. (1990). “Asymmetric Information and the New Theory of the Firm: Financial Constraints and Risk Behavior”,American Economic Review 80, 160–165.

    Google Scholar 

  8. Harrington, S.E. and P. Danzon. (1990). “Price Cutting in Liability Insurance Markers”, working paper, Department of Insurance and Risk Management, the Wharton School, University of Pennsylvania.

  9. Hoerger, T., F., Sloan, and M., Hassan. (1990). “Loss Volatility, Bankruptcy, and the Demand for Reinsurance”.Journal of Risk and Uncertainty 3, 221–245.

    Google Scholar 

  10. Hogarth, R. and H., Kunreuther. (1989). “Risk, Ambiguity, and Insurance”,Journal of Risk and Uncertainty 2, 5–35.

    Google Scholar 

  11. Lemaire, J. (1990). “Borch's Theorem: A Historical Survey of Applications”. In H., Loubergé, (ed.),Risk, Information and Insurance. Kluwer: Boston.

    Google Scholar 

  12. Mayers, D. and C., Smith. (1982). “On the Corporate Demand for Insurance”,Journal of Business 55, 281–296.

    Google Scholar 

  13. Mayers, D. and C., Smith. (1990). “On the Corporate Demand for Insurance: Evidence from the Reinsurance Market”,Journal of Business 63, 19–40.

    Google Scholar 

  14. Patrik, Gary S. (1990). “Reinsurance”. InFundamentals of Casualty Actuarial Science. New York: Casualty Actuarial Society.

    Google Scholar 

  15. Reinsurance Association of America (RAA). (Various years).Reinsurance Underwriting Review: Premiums and Losses. Washington, D.C.

  16. Reinsurance Association of America (RAA). (Various years).Loss Development Study. Washington, DC.

  17. Reinsurance Offices Association (ROA). (1990).Reinsurance Statistics: 1982–1989. London, England.

  18. Shapiro, A. and S., Titman (1986). “An Integrated Approach to Corporate Risk Management”. In J.M., Stern and D.H., ChewJr. (eds.),The Revolution in Corporate Finance. New York: Basil Blackwell.

    Google Scholar 

  19. Winter, R. (1989). “The Dynamics of Competitive Insurance Markets”, working paper, Institute for Policy Analysis, University of Toronto.

  20. Zech, J.R. “U.S. Re Premiums, Surplus Risk, Underwriting Results Deteriorate”.National Underwriter: Property-Casualty Edition, August 26, 1983.

Download references

Author information

Affiliations

Authors

Rights and permissions

Reprints and Permissions

About this article

Cite this article

Berger, L.A., Cummins, J.D. & Tennyson, S. Reinsurance and the liability insurance crisis. J Risk Uncertainty 5, 253–272 (1992). https://doi.org/10.1007/BF00057882

Download citation

Key words

  • reinsurance
  • liability insurance
  • liability crisis