| Essay One examines the asymmetric information problem between primary insurers and reinsurers in the reinsurance industry and contributes uniquely to the separation of adverse selection from moral hazard, if both are present. A two-period principal-agent model is set up to identify the signals of adverse selection and moral hazard generated by the actions of the primary insurer and to provide a basis for corresponding hypotheses for empirical testing. Using data from the National Association of Insurance Commissioners (NAIC) and A.M. Best Company, the empirical tests show that the problem of adverse selection exists in the reinsurance market between the affiliated insurers and non-affiliated reinsurers, and even between closely related affiliated insurers and reinsurers. There is no evidence indicating the presence of moral hazard in the reinsurance market.;To address the issue of soaring property insurance premiums and coverage availability in states that are subject to hurricane risks, state and federal governments have not only regulated the private insurance market but have also intervened directly into markets by establishing government-funded insurance programs. With coexisting public and private insurance mechanisms and price regulation, the risk of cross subsidization and a subsequent moral hazard problem may arise. By using data from the Florida Citizens Insurance Corporation, the Florida Hurricane Catastrophe Fund, the Flood Insurance and the private homeowner insurance market in Florida from 1998 to 2007, the second essay examines the moral hazard problems arising from government regulation and involvement in the private insurance sector. In sum, the provision of national flood insurance is found to be positively related to the population growth in the state of Florida, which shows that state immigrants can take advantage of the lower cost of flood insurance when relocating in higher-risk areas. Further, we find that national flood insurance and the catastrophe fund complement the development of the private insurance sector, while the residual market hinders the development of private property insurance market. |
