The recipient of the 2006 Mehr Award was David W. Sommer, University of Georgia, for his article “The Impact of Firm Risk on Property-Liability Insurance Prices,” 1996, The Journal of Risk and Insurance, 63(3): 501-514.
This article examines the impact of an insurer’s level of insolvency risk on the prices the insurer obtains for its products in the property-liability insurance market. The measures of insolvency risk used are those implied by the option pricing model of insurance. The key finding is the existence of a negative relation between insolvency risk and insurance prices. This implies that property-liability insurers are penalized for default risk through lower prices, despite the existence of guaranty funds. Other firm-specific determinants of insurance prices are also identified. The results have significant implications for insurance researchers and regulators.