Health Care Management Papers

Document Type

Journal Article

Date of this Version

10-1994

Publication Source

The Journal of Business

Volume

67

Issue

4

Start Page

511

Last Page

538

Abstract

This article analyzes alleged underpricing of general liability insurance prior to the mid-1980s liability insurance "crisis." The theoretical analysis considers whether moral hazard and/or heterogeneous information for forecasting claim costs can cause some firms to price too low and depress other firms' prices. Cross-sectional analysis of insurer loss forecast revisions (which should be greater for firms with low prices caused by moral hazard or hetero- geneous information) and premium growth provides evidence consistent with low pricing due to moral hazard but not heterogeneous information. The evidence also implies that shifts in the loss distribution produced large industrywide forecast errors.

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Date Posted: 27 November 2017

This document has been peer reviewed.