The recipients of the 2006 Witt Award were:
Neil Doherty, Wharton School, U. of Pennsylvania, and Kent Smetters, Wharton School, U. of Pennsylvania, for “Moral Hazard in Reinsurance Markets,” September 2005, Volume 72, Issue 3, pages 375-391; and
David S. Loughran, Rand Corporation, for “Deterring Fraud: The Role of General Damage Awards in Automobile Insurance Settlements,” December 2005, Volume 72, Issue 4, pages 551-575.
Moral Hazard in Reinsurance Markets
Neil Doherty and Kent Smetters
This article attempts to identify moral hazard in the traditional reinsurance market. We build a multiperiod principal–agent model of the reinsurance transaction from which we derive predictions on premium design, monitoring, loss control, and insurer risk retention. We then use panel data on U.S. property liability reinsurance to test the model. The empirical results are consistent with the model’s predictions. In particular, we find evidence for the use of loss-sensitive premiums when the insurer and reinsurer are not affiliates (i.e., not part of the same financial group), but little or no use of monitoring. In contrast, we find evidence for the extensive use of monitoring when the insurer and reinsurer are affiliates, where monitoring costs are lower.
Deterring Fraud: The Role of General Damage Awards in Automobile Insurance Settlements
David S. Loughran
Awards for pain and suffering and other noneconomic losses account for over half of all damages awarded under third-party auto insurance bodily injury settlements. This article hypothesizes that third-party insurers use general damage awards to reduce the incentive to submit exaggerated claims for specific damages for injuries and lost wages. Consistent with this hypothesis, the article finds evidence using data on over 17,000 closed bodily injury claims that special damage claims that exceed their expected value receive proportionally lower general damage awards than claims that do not. Among the implications of this research is the possibility that insurers will be less zealous in challenging fraudulent special damage claims under a third-party insurance regime than they will be under a first-party insurance regime in which access to general damages is limited.