Abstract This paper develops a model of price determination in insurance markets.
Insurance is provided by firms that are subject to default risk.
Demand for insurance is inversely related to insurer default risk and is imperfectly price elastic because of information asymmetries and private information in insurance markets. The model predicts that the price of insurance, measured by the ratio of premiums to discounted losses, is inversely related to insurer default risk and that insurers have optimal capital structures. Price may increase or decrease following a loss shock that depletes the insurer's capital, depending on factors such as the effect of the shock on the price elasticity of demand. Abstract This paper investigates the empirical significance of underwriter reputation capital by analyzing the impact of initial returns of IPO's on lead-underwriter market value. Consistent with reputation costs, overpriced offerings are associated with a decrease in lead- underwriter market value, significantly in excess of estimated direct costs.