Informational Asymmetries in Retroactive Insurance: 1. Introduction

On November 21, 1981 the MGM Grand Hotel in Las Vegas Nevada suffered a conflagration in which 85 people were killed and over 700 were injured. The estimated liabilities substantially exceeded MGM's insurance coverage. Within a few weeks MGM had purchased a liability insurance policy to cover retroactively its exposure from the incident. Since that time several authors: Hedges [6], Smith and Witt [13], and Walker and Thompson [14] have examined the incentives a firm would have for purchasing and an insurer would have for writing this type of contract and whether the contract should...