Title

The liquidity demand for corporate property insurance

Document Type

Journal article

Source Publication

Journal of Risk and Insurance

Publication Date

6-1-2006

Volume

73

Issue

2

First Page

261

Last Page

278

Abstract

This article suggests that liquidity may be an important reason for a corporation to purchase property insurance. A model of a risk-neutral producer facing an endogenously determined risk of property damage under an output contract that penalizes underproduction is formulated to exemplify such a real need of liquidity. Under the output contract, the producer may purchase full unfavorable property insurance even when postloss financing is available. Surprisingly, the conclusion may still hold when the cost of postloss financing equals that of long-term capital, provided that the rate of underproduction penalty is sufficiently high. Similar conclusions apply when postloss financing is replaced by planned internal reserve (self-insurance) that may be invested in the short run at an interest rate that is lower than the long-term cost of capital. When the capital market is perfect, however, the holding of planned internal reserve eliminates the purchase of actuarially unfavorable property insurance.

DOI

10.1111/j.1539-6975.2006.00173.x

Print ISSN

00224367

Publisher Statement

Copyright © The Journal of Risk and Insurance. Access to external full text or publisher's version may require subscription.

Full-text Version

Publisher’s Version

Recommended Citation

Hau, A. (2006). The liquidity demand for corporate property insurance. Journal of Risk and Insurance, 73(2), 261-278. doi: 10.1111/j.1539-6975.2006.00173.x

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