@article{Thompson:273612,
      recid = {273612},
      author = {Thompson, James R.},
      title = {Counterparty Risk in Insurance Contracts: Should the  Insured Worry about the Insurer?},
      address = {2007-10},
      number = {2110-2018-4261},
      series = {Working Paper No. 1136},
      pages = {44},
      year = {2007},
      abstract = {We analyze the effect of counterparty risk on insurance  contracts using the case of credit risk transfer in  banking. In addition to the familiar moral hazard problem  caused by the insuree’s ability to influence the  probability of a claim, this paper uncovers a new moral  hazard problem on the other side of the market. We show  that the insurer’s investment strategy may not be in the  best interests of the insuree. The reason for this is that  if the insurer believes it is unlikely that a claim will be  made, it is advantageous for them to invest in assets which  earn higher returns, but may not be readily available if  needed. This paper models both of these moral hazard  problems in a unified framework. We find that instability  in the insurer can create an incentive for the insuree to  reveal superior information about the risk of their  “investment”. In particular, a unique separating  equilibrium may exist even in the absence of any signalling  device. We extend the model and show that increasing the  number of insurers with which the insuree contracts can  exacerbate the moral hazard problem and may not decrease  counterparty risk. Our research suggests that regulators  should be wary of risk being offloaded to other, possibly  unstable parties, especially in newer financial markets  such as that of credit derivatives.},
      url = {http://ageconsearch.umn.edu/record/273612},
      doi = {https://doi.org/10.22004/ag.econ.273612},
}