Home | Contact Us | Sitemap

Author(s)

Session

Title

  • Vijay Aseervatham- LMU Munich
  • Patricia Born- Florida State University
  • Dominik Lohmaier-*LMU Munich
  • Andreas Richter- LMU Munich
1C

Putting Everything under the Same Umbrella – Hazard-Specific Supply Reactions in the Aftermath of Natural Disasters

Abstract
Prior studies on the impact of catastrophes on insurance markets have either focused on one specific type of hazard or pooled several natural disasters. In contrast, we analyze insurers’ hazard-specific supply reactions. We analyze U.S. property insurers’ supply decisions between 1991-2012 and find that insurers’ responses with respect to reduction of business volume and exit decisions differ across hazards, even after controlling for the damage size. The negative effects of catastrophes on underwriting performance and subsequent supply decisions are more pronounced for hurricanes than for the other hazards. We argue that supply distortions in the aftermath of unprecedented catastrophes are driven primarily by correlated losses. Our results show that the size and predictability of catastrophe losses pose less severe threats to insurers. Thus, we propose that first of all insurers and regulators should focus on measures that encourage diversification.

Click here to view the paper.

  • Carolyn Kousky- Resources for the Future
  • Erwann O. Michel-Kerjan The Wharton School, University of Pennsylvania
  • Paul A. Raschky Department of Economics, Monash University
1C

Does Federal Assistance Crowd Out Private Demand for Insurance?

Abstract:
We undertake an empirical analysis of the effect of disaster aid on the demand for insurance using a unique panel dataset from Florida. We address endogeneity using instrumental variables that exploit political influence over aid amounts. In zip-codes that receive individual assistance grants, the average insurance coverage decreases by about $17,000. When the average grant given increases by $1,000, average insurance coverage declines by about $6,400. This crowding out is on the intensive margin; we find no impact on take-up rates. We control for low interest government loans and find that they have no effect on insurance demand.

Click here to view the paper.

  • Jimin Hong- Business School Seoul National University
  • S. Hun Seog-Business School Seoul National University
1D

Life Insurance Settlement and the Monopolistic Insurance Market

Abstract:
We analyze the effects of life insurance settlement on the insurer’s profit and the consumer and social welfare. We consider a one-period model in which the insurance market is monopolistic and the settlement market is competitive. Policyholders face heterogeneous liquidity risks in addition to mortality risks. Liquidity risks are introduced to address the case in which policyholders need urgent cash, leading them to surrender or settle the policies. It is assumed that the insurer cannot observe the liquidity risks nor discriminate among policyholders based on liquidity risk. It is further assumed that no costs are incurred in policy surrender or settlement. We find that introduction of the life settlement market lowers monopolistic rent and insurer’s profit, and raises the insurance premium. The effects on consumer welfare and social welfare are mixed. Consumer welfare increases only when demand increases sufficiently. This finding implies that social welfare, as measured by the sum of consumer welfare and the insurer's profit, can increase if the increase in consumer welfare is greater than the decrease in insurer's profit. This finding contrasts with the existing literature, in which the settlement market lowers consumer and social welfare.

Click here to view the paper.

  • Daniel Bauery- Georgia State University
  • Jochen Russ- Institut f¨ur Finanz- und Aktuarwissenschaften and Ulm University
  • Nan Zhu- Illinois State University
2B

Adverse Selection in Secondary Insurance Markets: Evidence from the Life Settlement Market

We use data from a large US life expectancy provider to test for asymmetric information in the secondary life insurance—or life settlement—market. We compare the average difference between realized lifetimes and estimated life expectancies for a sub-sample of settled policies relative to the entire sample. We find a significant positive difference indicating private information on mortality prospects. Using non-parametric estimates for the excess mortality and survival regressions, we show that the informational advantage is temporary and wears off over five to six years. We argue this is in line with adverse selection on an individual’s condition, which has important economic consequences for the life settlement market and beyond. JEL classification: D12; G22; J10

Click here to view the paper.

2B

The Principal-Agent Model When Agents Can Make Mistakes

This paper examines the principal-agent model when the agent can make a mistake by providing the "wrong" effort level. How the contract is affected depends on (1) whether mistakes can be positive or negative or are always negative and (2) whether the cost of effort depends on intended effort or actual effort.

Click here to view the paper.

  • Patricia A. Born
  • Stephanie Meyr
  • Sharon Tennyson
2B

Credible or Biased? An Analysis of Insurance Product Ratings in Germany Preliminary Draft of Work-in-Progress

Although the quality of rating markets has been academically debated for various types of product and credit ratings this is not the case for insurance product ratings. This article provides the first empirical investigation of the quality of insurance product ratings with an emphasis on the potential sources of bias that undermine the credibility of ratings. Rating certificates for certain insurance products (e.g., life and disability insurance) were established in the German insurance market after deregulation in 1994. These ratings play a potentially important role by increasing customer awareness of differential product quality, thereby encouraging more optimal insurance purchases. However, their capacity for enhancing market transparency and improving consumer protection depends critically on whether they are credible. In this paper, we consider potential conflicts of interest and other common agency problems that might lead to systematic bias and imprecision in ratings. Using prior analysis of other rating types as a guide, we test a series of hypotheses regarding factors that may explain the variation in rating outcomes over time and across rating agencies. The empirical analysis employs a unique panel-data set containing rating data for disability insurance products over a fifteen year period. The product ratings from two rating agencies are combined with additional financial data on the supplying insurance companies. Our initial results suggest that the market structure and governance of the German market avert major concerns regarding the credibility of insurance product ratings.

Click here to view the paper.

  • Paul Hudson- VU University
  • W.J. Wouter Botzen- VU University
  • Jeffrey Czajkowski- University of Pennsylvania
  • Heidi Kreibich- GFZ German Research Centre for Geosciences
2C

Adverse Selection and Moral Hazard in Natural Disaster Insurance Markets: Empirical evidence from Germany and the United States

Adverse selection and moral hazard are commonly expected to cause market failures in natural disaster insurance markets. However, such problems may not occur if individuals mainly buy insurance based on risk preferences. Advantageous selection can occur if individuals with insurance are highly risk averse and seek to reduce risk. This is the first empirical study of adverse selection and moral hazard effects in natural disaster insurance markets. Statistical analyses are based on survey data of individual purchases of disaster insurance and risk mitigation activities in Germany and the United States. Consistent results are obtained in both countries supporting advantageous selection.

Click her to view the paper.

  • Vijay Aseervatham- LMU Munich
  • Patricia Born- Florida State University
  • J. Tyler Leverty- University of Wisconsin - Madison
2C

The Impact of Uncovered Flood Events on the Demand for Homeowners Insurance

Abstract:
Flood coverage is excluded from the standard homeowners insurance policy, but many American homeowners are not aware of this exclusion. As a result, flood events may provide new information to policyholders and allow them to update the probability of homeowners insurance losses. We model this possibility and find that floods decrease the demand for homeowners insurance coverage as policyholders switch to higher deductible policies. Using a nationwide panel dataset of flood events and total homeowners insurance premiums by state, we find flood events decrease homeowners insurance premiums. We postulate that homeowners use the savings on the homeowners insurance to purchase flood coverage in the aftermath of flood events, supporting budget considerations. All-hazards insurance might provide a solution for the problems arising with these reactions.

Click here to view the paper.

  • James M. Carson- University of Georgia
  • Pei-Han Chen- University of Georgia
  • J. Francois Outreville- HEC Montreal
2D

Does Foreign Direct Investment Affect the Supply of Life Insurance in Developing Countries?

We construct panel data on foreign direct investment and the supply of life insurance in 28 developing countries between 1992 and 2009 to test whether FDI coincides with increases in the supply of life insurance. For the sample period, our results suggest that developing countries with higher foreign direct investment tend to have higher life insurance penetration.

Click here to view the paper.

  • Yijia Lin- University of Nebraska-Lincoln
  • Sheen Liu- Washington State University
  • Jifeng Yu- University of Nebraska-Lincoln
2D

Pension Assets and Liabilities, Cost of Debt, and Debt Maturity

Abstract:
This paper investigates the role of pension obligations in determining corporate debt maturity and spreads. Drawing on the asset substitution theory, we develop three predictions that delineate how short-term debt can mitigate the agency costs of debt for de?ned bene?t (DB) pension ?rms and characterize how pension liabilities and pension investment risk a¤ect bond yield spreads. Consistent with empirical evidence based on longitudinal data from U.S. ?rms sponsoring DB pension plans, we predict an inverse relationship between the pension obligations and debt maturity. Moreover, we ?nd that creditors take into consideration the potential shareholder-bondholder agency problem arising from pension exposures, supporting our predictions regarding yield spreads associated with pension size and risk taking in pension funds.

Click here to view the paper.

  • Vanya Horneff
  • Raimond Maurer
  • Olivia S. Mitchell
  • Ralph Rogalla
NATIONAL BUREAU OF ECONOMIC RESEARCH
2D

Optimal Life Cycle Portfolio Choice With Variable Annuities Offering Liquidity And Investment Downside Protection

Abstract:
We evaluate lifecycle consumption and portfolio allocation patterns resulting from access to Guaranteed Minimum Withdrawal Benefit (GMWB) variable annuities, one of the most rapidly-growing financial innovations over the last two decades. A key feature of these products is that they offer access to equity investments with downside protection, hedging of longevity risk, and partially-refundable premiums. Welfare rises since policyholders exercise the product’s flexibility by taking withdrawals and dynamically adjusting their portfolios and consumption streams. Consistent with observed behavior, differences across individuals’ cash out and annuitization patterns result from variations in realized equity market returns and labor income trajectories.

Click here to view the paper

  • Cassandra R. Cole, PhD- Corresponding Author
  • Robert L. Atkins- College of Business, Florida State University
  • J. Bradley Karl, PhD- Department of Finance, East Carolina University
2E

The Effect of Multidimensional Product Operational Strategies on the Performance of Health Insurance Conglomerates

Abstract:
The conglomerate organizational structure of health insurers suggests two distinct dimensions of product line operations – the first is the product line strategy of the individual affiliates and the second is the product line strategy of the aggregate firm conglomerate. We hypothesize that multidimensional diversification strategies may magnify the costs or benefits of diversification on the financial performance of the conglomerate. Our results confirm this hypothesis and suggest a positive relation between health insurer financial performance and multidimensional product-line diversification. Our results not only contribute to the body of literature related to corporate diversification, but are also important to policymakers and all health insurance market participants as portions of the Affordable Care Act continue to be implemented.

Click here to view the paper.

  • Renate Lange- Universitaet Hohenheim
  • Joerg Schille- Universitaet Hohenheim
  • Petra Steinorth- St. John’s University
2E

Demand for Supplemental Health Insurance in Germany – Improving Quality of Care and Closing Coverage Gaps

Abstract:
We use the German Socio-Economic Panel (GSOEP) to analyze determinants of the demand for sup-plemental health insurance covering hospital and dental in Germany. The GSOP dataset provides doctor diagnosed indicators of the individual’s health state, risk attitude, and demand for medical services and insurance purchases in other lines of insurance as well as rich demographical and socio-economical information. Controlling for a wide range of individual preferences we find evidence of adverse selection for individuals aged 65 and younger for hospital coverage despite initial individual underwriting by insurers. The reverse is true for individuals older than 65, individuals with supple-mental hospital coverage are healthier on average. In addition, insurance affinity and income are the most important drivers for the demand for both types of coverage.

Click here to view the paper.

  3A

Do Insurance Activities Enhance the Performance of Financial Services Holding Companies?

Click here to view the paper.

  • Hong Mao- School of Economics and Management, Shanghai Second Polytechnic University
  • James Carson (contact author)
  • Daniel P. Amos- University of Georgia
  • KrzysztofM. Ostaszewski- Illinois State University
3C

Optimal Insurance Pricing, Reinsurance, and Investment for a Jump Diffusion Risk Process under a Competitive Market

Abstract:
We extend previous research by considering the role of reinsurance in hedging underwriting risk, pricing risk, and investment risk. We consider a stochastic dynamic optimization model applied to the problem of insurance pricing under a competitive insurance market with a jump diffusion risk process. Our model seeks to maximize the expected utility of the insurer’s terminal wealth, incorporating the interaction of a stochastic process for the insurance price evolution, reinsurance, investment strategy, and the possible hedging effect between insurance liabilities and investment risk. We solve this optimization problem by constructing a Hamilton–Jacobi–Bellman (HJB) equation.

Click here to view the paper.

  • Carole Bernard- University of Waterloo
  • Steven Vanduffel
3C

A New Approach to Assessing Model Risk in High Dimensions

Abstract:
A central problem for regulators and risk managers concerns the risk assessment of an aggregate portfolio defined as the sum of d individual dependent risks Xi. This problem is mainly a numerical issue once the joint distribution of (X1,X2, . . .,Xd) is fully specified. Unfortunately, while the marginal distributions of the risks Xi are often known, their interaction (dependence) is usually either unknown or only partially known, implying that any computed risk measure of the portfolio is subject to model uncertainty. Previous academic research has focused on the maximum and minimum possible values of a given risk measure of the portfolio, in the case in which only the marginal distributions are known. This approach leads to wide bounds, as all information on the dependence is ignored. In this paper, we integrate in a natural way available information on the multivariate dependence and provide easy-to-compute bounds for the risk measure at hand. We observe that incorporating the information of a well-fitted multivariate model may, or may not, lead to much tighter bounds, a feature that also depends on the risk measure used. We illustrate this point by showing that the Value-at-Risk at a very high confidence level (as used in Basel II) is typically prone to very high model risk, even if one knows the multivariate distribution almost completely. Our results make it possible to determine which risk measures can benefit from adding dependence information (i.e., leading to narrower bounds when used to assess portfolio risk), and, hence, to identify those models for which it would be meaningful to develop accurate multivariate models.

Click here to view the paper.

  • Christophe Courbage- The Geneva Association
  • Henri Loubergé-University of Geneva and Swiss Finance Institute
  • Richard Peterz-Institute for Risk Management and Insurance, LMU Munich
3C

Optimal Prevention for Correlated Risks

Abstract
This paper analyzes optimal prevention expenditures in a situation of multiple correlated risks. We focus on probability reduction (self-protection). This renders correlation endogenous so that we measure dependence as the relative deviation of the probability of joint losses from the uncorrelated case. If prevention concerns only one risk, introducing a negatively correlated exogenous risk increases the level of prevention expenditures. If prevention expenditures may be invested for both risks, a substitution e ect arises due to the competition for resources. Under decreasing returns on self-protection we nd that increased dependence increases overall prevention expenditures, but not necessarily prevention expenditures for each risk due to di erences in prevention eciency. Similar results are found when considering the impact of more severe losses. We derive policy implications from our results.

Click here to view the paper.

  • Martin Grace- Georgia State University
  • Shinichi Kamiya- Nanyang Business School
  • Robert Klein- Georgia State University
  • George Zanjani- Georgia State University
3D

Market Discipline and Guaranty Funds in Life Insurance

Abstract
This paper studies the effects of company risk and guaranty funds on life insurance in force using company-by-state level data during the 1985-2010 period. Consistent with market discipline, it finds a negative relation between company risk (measured by changes in financial ratings) and changes in life insurance in force and annuity considerations. Effects are especially large for annuity considerations. The paper finds some evidence of a decline in market discipline following the creation of government-backed guaranty funds in 15 states during the sample period, with the most significant effects being observed at downgraded firms with low financial ratings.

Click here to view the paper

  • Jill Bisco-University of Akron
3D

Retained Asset Accounts And The Risk Reward Trade-Off

Abstract:
Increased competition from banks and other financial institutions has forced life insurers to find new and innovative ways to obtain and retain capital. Retained asset accounts are a newer form of life insurance settlement option in which the insurer holds death proceeds in its general account until the beneficiaries are ready to withdrawal the funds. While beneficiaries are compensated with interest on the accounts, the funds are subject to the financial risk of the insurer and are only partially covered by state guaranty funds. Given the characteristics of the retained accounts, primary interest is the examination of whether the interest rate paid to the owners of retained asset accounts is related to the insurer’s level of risk. In order to better understand these issues, first, one must understand the characteristics associated with an insurer’s decision to obtain capital through this method as well as the level of use of retained asset accounts. In this context, the potential relation of interest paid to beneficiaries and firm risk is discussed. Results show that those insurers associated with greater financial risk compensate the owners of retained asset accounts through the payment of increased interest payment on the funds held in the account. In addition, larger and more financially stable insurers are more likely to utilize retained asset accounts as a life insurance settlement option.

Click here to view the paper.

  • Gregor N.F. Weiß- Technische Universität Dortmund
  • Felix Irresberger-Technische Universität Dortmund
  • Fee Elisabeth König-Technische Universität Dortmund
3E

Crisis Sentiment and Insurer Performance

Abstract:
We propose two simple metrics to proxy for crisis sentiment, i.e., the bearish investor sentiment affecting stocks which was brought on by the recent financial crisis. We first estimate a measure of market-level crisis sentiment by using Google Trends search volume data on crisis-related queries. Second, we estimate the correlation between search request volumes on Google for insurer ticker symbols and crisis-related search terms as a proxy for idiosyncratic crisis sentiment. We then test whether the bad stock performance of insurers during the crisis was due to such negative investor sentiment accounting for the insurer’s actual exposure to systemic risk. We find that market-level crisis sentiment was a highly significant predictor of stock performance between 2004 and 2012. During the financial crisis, market-level crisis sentiment affected the performance of all insurers while idiosyncratic crisis sentiment (negatively) influenced the stock performance of large insurers.

Click here to view the paper.

  • Muhammed Altuntas- University of Cologne
  • Jannes Rauch- University of Cologne
  • Sabine Wende- University of Cologne
3E

Strategic Orientation and Group Identity in the German Property-Liability Insurance Market: A Dynamic Strategic Group Analysis

Abstract:
We analyze Strategic Groups in the German insurance market. We use cluster analysis to subdivide the Insurance Groups into Strategic Groups and examine if performance differences between the Insurance Groups can be attributed to Strategic Group affiliation. Furthermore, we analyze if Strategic Group affiliation can also affect the performance of the Insurance Groups’ property-liability subsidiaries. In addition, we examine the consequences of the financial crisis of 2008 on the competitive situation in the German insurance sector and examine if changes in Strategic Group affiliation can be considered as a consequence of the financial crisis. Using a dataset of 994 firm year observations for the years 2004 until 2012 and regression analyses, we find that performance differences on Insurance Group- and subsidiary-level can be attributed to Strategic Group affiliation. Furthermore, our results indicate that the factors related to the consequences of the financial crisis are not related to changes in Strategic Group affiliation in the aftermath of the crisis.

Click here to view the paper

  • Richard A. Derrig- Temple University
  • Daniel J. Johnston- Insurance Fraud Bureau of Massachusetts (IFB)
4A

BEHAVIORAL EFFECTS OF THE MASSACHUSETTS COMMUNITY INSURANCE FRAUD INITIATIVE (CIFI) ON MEDICAL PROVIDERS IN AUTO INSURANCE CLAIMS

Abstract:
This analysis builds upon prior published studies of the fraud problems in Massachusetts Automobile Insurance (1) by tracing the origin and activities of the statutory IFB since inception in 1991; (2) by providing the rationale and 10 year premium reducing results for the CIFI program that augmented the statewide efforts to investigate insurance company referrals for suspected insurance fraud with town level task forces of District Attorneys, IFB investigators, and local police chiefs; (3) by assembling 10 year 2003-2012 First Party Personal and Commercial Insurance Protection (PIP) and Medical Payments (MedPay) summary medical bill data from the Detailed Claim Data (DCD) collection of closed claims authorized by the Commissioner of Insurance in 1993 beginning with claims closing after January 1, 1994 and (4) by calculating the gross DCD reported medical billings by CIFI Town and year to show the dramatic reductions in both billed medical charges and numbers of active medical providers appearing on Massachusetts auto insurance first party claims.

Click here to view the paper.

  • Christoph Lex- LMU Munich
4A

The Impact of Disclosing Con icts of Interest on Quality of Advice: Experimental Evidence

Abstract:
This study investigates in a laboratory experiment how disclosure of conflicts of interest affects quality of advice. The influence of different levels of incentives as well as the effect of feedback is also analyzed. The experiment is designed to reflect the relationship between an insurance agent and his customer. To best reflect such a setting, choices are made over discrete options, incentives are only partially misaligned, and customers have an outside option. This study provides policy implications for the two currently discussed regulatory measures: disclosing conflicts of interest, and limiting the amount of commissions. In addition, an alternative measure where reputation building is facilitated is analyzed.

Click here to view the paper.

  • Takahiro Fushimi- Keio University
  • Atsuyuki Kogure- Keio University
4C

A Bayesian Approach to Longevity Derivative Pricing under Stochastic Intertest Rates with a Two-factor Lee-Carter Model

Abstract:
Mortality-linked securities such as longevity bonds or survivor swaps typically depend on not only mortality risk but also interest rate risk. However, in the existing pricing methodologies, it is often the case that only the mortality risk is modeled to change in a stochastic manner and the interest rate is kept xed at a pre-speci ed level. In order to develop large and liquid longevity markets, it is essential to incorporate the interest rate risk into pricing mortality-linked securities. In this paper we tackle the issue by considering the pricing of longevity derivatives under stochastic interest rates following the CIR model (Cox, Ingersoll and Ross, 1985). As for the mortality modeling, we use a two-factor extension of the Lee-Carter model by noting the recent studies which point out the inconsistencies of the original Lee-Carter model with observed mortality rates due to its single factor structure. With the issue of parameter uncertainty, we propose using a Bayesian methodology both to estimate the models and to price longevity derivatives in line with Kogure and Kurachi (2010) and Kogure, Li and Kamiya (2013). We investigate the actual effects of the incorporation of the interest rate risk by applying our methodology to price a longevity bond and a longevity cap with Japanese data. The results show signi cant differences according to whether the CIR model is used or the interest rate is kept xed at a certain level.

Click here to view the paper.

  • Ming-Hua Hsieh- National Chengchi University
  • Weiyu Kuo- National Chengchi University
  • Yu-Ching Li- National Chengchi University
  • Chenghsien Tsai- National Chengchi University
4C

Generating Economics Scenarios for the Long-Term Solvency Assessment of Life Insurance Companies: The Orthogonal ARMA-GARCH Method

Abstract:
Constructing the models that can generate possible economic scenarios of the returns on major asset classes is essential for solvency assessment. The key issues in establishing a comprehensive ESG models include: how to deal with the large number of risk factors, how to model the dynamics of some chosen factors, and how to incorporate the relations among risk factors. We propose the orthogonal ARMA-GARCH method to tackle these issues. This method includes applying factor analysis to asset class so that modeling dimension can be significantly reduced. Furthermore, we may model the relations among the risk factors within an asset class by common factors in addition to using correlated random shocks. We may also enjoy great flexibilities in establishing the time-series models for individual factors since the retrieved common factors can be orthogonal to each other. Therefore, our O-GARCH modeling is computationally efficient (modeling fewer factors), econometrically appropriate (providing fitness statistics as well as using general time-series models), and economically sound (by using common factors in addition to random shocks).

Click here to view the paper.

  • Rayna Stoyanova- Goethe University Frankfurt
4C

Participating Insurance Contracts as a Risk Management Tool

Abstract:
The aim of this paper is to investigate optimal combinations of risk management mechanisms and pricing strategies in surplus participating insurance and their effects on insurance demand and policyholders’ benefits in the Solvency II regulatory environment. In general, participation rates and price loadings have an impact on insurers’ safety levels, the contracts’ payoffs and policyholders’ utility. To isolate these effects, we calibrate utility-maximizing consumers and their buying decisions with respect to the granted participation rate and the price loading. Under the condition that a monopolistic insurer, exposed to systematic mortality risk, retains a fixed solvency level, we study the sensitivity of insurance demand, the insurer’s optimal risk strategy and the resulting policyholders’ benefits. Our results are important for insurance company managers and regulators in that they provide a better understanding in the tangle of interactions between insurer’s strategies and consumer’s decisions in the participating insurance under a Solvency II regulatory framework

Click here to view the paper.

  • Daniela Laas- University of St. Gallen
  • Caroline Siegel- University of St. Gallen
4D

Basel Accords versus Solvency II: Regulatory Adequacy and Consistency under the Postcrisis Capital Standards

Abstract:
Over the past decade, European banking and insurance regulation has been subject to significant reforms. One of the declared goals of the authorities was the enhancement of market stability through adequate and consistent capital standards. This paper provides a critical analysis of the Basel II, III, and Solvency II capital standards for asset risks in light of these regulatory objectives. Our discussion begins with a detailed overview of the current standard approaches for market and credit risk. Based on a theoretical analysis and a numerical comparison of the capital charges our contribution is twofold: we reveal an inaccurate treatment of risk categories and severe inconsistencies between the capital standards for banks and insurers. Regarding the former, we are able to show that the models’ inaccurate parameter settings do not reflect the specific risk-return characteristics of asset classes and unduly promote government bond holdings. This might lead to severe distortions to the financial institutions’ investment decisions. With respect to the latter, the numerical part of our paper displays considerable differences in required capital for the same type and amount of asset risk, burdening insurers with almost twice as high capital requirements than banks. This not only contradicts the authorities’ goal, but gives also rise to regulatory arbitrage opportunities across financial sectors.

Click here to view the paper.

  • Martin Eling- University of St. Gallen
  • David Pankoke- University of St. Gallen
5C

Costs and Benefits of Insurance Regulation – An Empirical Assessment from the Industry Perspective

Abstract:
We empirically analyze costs and benefits of insurance regulation based on a survey among 76 insurers from Austria, Germany and Switzerland. Our analysis includes established as well as new empirical measures for regulatory costs and benefits. For example, this is the first paper employing a latent class regression with covariates in order to take costs and benefits combined into account. Another innovative feature of this paper is to analyze regulatory costs and benefits not only on an industry level, but also on the level of individual companies. This allows us to empirically test fundamental principles of insurance regulation such as proportionality, i.e. the intensity of regulation should reflect the firm-specific amount and complexity of the risk taken. Empirical evidence does not support the proportionality principle; e.g., regulatory costs cannot be explained by differences in business complexity. One potential policy implication is that the proportionality principle needs to be more carefully applied in insurance regulation.

Click here to view the paper.

  • Johannes G. Jaspersen- Ludwig-Maximilians-Universitaet
  • Andreas Richtery- Ludwig-Maximilians-Universitaet
  • Sebastian Soikaz- Ludwig-Maximilians-Universitaet
5C

On the Demand E ects of Rate Regulation- Evidence from a Natural Experiment

Abstract:
We analyze the in uence of rate regulation on insurance demand in an annuity setting. With a unique dataset containing a natural experiment due to German federal regulation and the E.U. Gender Directive we study the impact of such rate regulation on contract choices in variable annuity products. Our data contains two di erent choice variables with antithetic predictions for men and women, meaning that women should increase their demand in one choice and decrease it in the other, while men should exhibit opposite behavior. We nd with regard to both choices that both men and women have lower demand for guarantees within the annuity in unisex contracts than without rate regulation. As the e ect is equal for men and for women and observable in both choices, we cannot convincingly link it to adverse selection. We hypothesize that the e ect could instead be explained by the public perception of unisex tari s.

Click here to view the paper.

  • Alexander Braun- University of St. Gallen
  • Hato Schmeiser- University of St. Gallen
  • Florian Schreiber- University of St. Gallen
5D

On Consumer Preferences and the Willingness to Pay for Term Life Insurance

Abstract:
We run a choice-based conjoint analysis for term life insurance with a sample of 2,017 German consumers, for which data has been collected through web-based experiments. Individual-level part worth utility profiles are estimated by means of a hierarchical Bayes model. Drawing on the elicited preference structures, we compute relative attribute importances and different willingness to pay measures. In addition, we present comprehensive simulation results for a realistic competitive setting that allows to assess market expansion and product switching effects. Brand, critical illness cover, and medical underwriting are found to be the most important non-price product attributes. Thus, the market is prepared to accept significant markups in the monthly premium, if a policy comprises their preferred levels. However, we also document a large fraction of individuals that have no willingness to pay at all, presumably due to the absence of a need for mortality risk coverage. Among those who are generally interested in a term life contract, preferences vary considerably, implying that product differentiation helps to avoid price pressure and grow market shares. Finally, based on the predicted demand sensitivities and a set of cost assumptions, it is shown that insurers require an in-depth understanding of consumer preferences to choose the profit-maximizing price.

Click here to view the paper.

  • Chunli Cheng- University of Bonn
  • Jing Li- University of Bonn
5D

Early Default Risk and Surrender Risk: Impacts on Participating Life Insurance Policies

Abstract:
We study the fair valuation of participating life insurance policies with sur- render guarantees when an early default mechanism is imposed by a regulator. An insurance company is forced to be liquidated once a solvency threshold is reached before maturity. The early default regulation affects the contracts’ value not only directly via changing the contracts’ payment streams but also indirectly via influencing policyholders’ surrender behaviors. In this paper, we endogenize surrender risk by assuming a representative policyholder’s surrender intensity bounded from below and from above and uncover the impacts of the regulation on the policyholders’ surrender decision making. A partial differential equation is derived to characterize the price of a participating policy and solved with the finite difference method. Finally, we discuss the impacts of early default regulation and insurance company’s investment strategies on the policyholder’s surrender behavior as well as on the contract value, which are dependent on policyholder’s rationality level.

Click here to view the paper.

  • Krzysztof M. Ostaszewski- Illinois State University
  • Maochao Xu- Illinois State University
6C

Optimal Capital Allocation: Mean-Variance Models

Abstract:
This paper studies capital allocation problem based on minimizing loss functions. Two capital allocation models based on the Mean-Variance principle are proposed. General formulas for optimal capital allocations for both models are derived according to quadratic distance measure. In particular, we discuss centrally symmetric distributions and gamma distributions. Some numerical examples are given to illustrate the results.

Click here to view the paper.

  • Tim Boonen- University of Amsterdam
6C

Risk Redistribution with Distortion Risk Measures

Abstract:
This paper studies optimal risk redistribution between firms, such as banks or insurance companies. The introduction of the Basel II regulation and the Swiss Solvency Test (SST) has increased the use of risk measures to evaluate financial or insurance risk. We consider the case where firms use a distortion risk measure (also called dual utility) to evaluate risk. The paper first characterizes all Pareto optimal redistributions. Thereafter, it characterizes competitive equilibria in settings where a well-functioning market exists and firms act as price-takers. It also characterizes optimal redistributions in cases where a well-functioning market does not exist, so that redistributions can only be obtained via Over-the-Counter trade. The paper contributes to the literature in two ways. First, when a well-functioning market exists, it presents three conditions that are jointly sufficient for existence of a unique equilibrium redistribution. This equilibrium’s redistribution and prices are provided in closed form. Second, when a well-functioning market does not exist, it identifies four properties that need to be satisfied for a redistribution to be perceived as “fair” by all involved parties. It shows that there is a unique such risk redistribution. This redistribution coincides with the competitive equilibrium.

Click here to view the paper.

  • François Pannequin- CES and ENS Cachan
  • Anne Corcos- CURAPP-CNRS and Université de Picardie Jules Verne
  • Claude Montmarquette- CIRANO and Université de Montréal
6D

Insurance and self-insurance: Beyond substitutability, the mental accounting of losses?

Abstract:
We provide an experimental analysis of the key issue of the substitutability between insurance and self-insurance. As shown by the seminal paper of Ehrlich and Becker (1972), this substitutability emerges from the fact that policyholders equalize both marginal benefits from insurance and self-insurance. This result falls within the basics of risk management but, surprisingly, has not been the object of important empirical or behavioral testing. The current research fills this gap by providing an experimental test of the substitutability between insurance and self-insurance. Facing a risk on their income, subjects can buy their preferred insurance coverage by paying the corresponding premium – a two-part insurance tariff is specified – and simultaneously choose their optimal level of prevention by investing in a self-insurance technology. The elicitation of the concomitant demand for insurance and self-insurance shows an incomplete matching with respect to the theory. When the unit price of insurance raises, the demand for insurance decreases and the demand for self-insurance increases. But individuals do not choose their levels of coverage (insurance and prevention) in order to equalize the marginal benefits from both mechanisms. More accurately, individuals seem to comply with a global accounting model: they are sensitive to a change in insurance price but this sensitivity is strongly confined by the global amount of coverage, including both insurance and prevention, individuals wish to realize. Individual risk attitudes – risk loving and risk aversion – do not change the nature of these results, but only the degrees of coverage (higher for risk-averters).

Click here to view the paper.

  • Ajay Subramanian- Georgia State University
  • Jinjing Wang- Georgia State University
6E

Catastrophe Risk Transfer

Abstract:
We provide a novel explanation for the predominance of retention and reinsurance relative to securitization in the transfer of catastrophe risks using a signaling model. When an insurer has private information about its portfolio, its choice between reinsurance and securitization serves as a signal of the risk of its portfolio. The insurer's choice re ects the tradeo between the lower adverse selection costs of reinsurance due to the superior monitoring resources of reinsurers against the costs arising from reinsurers' market power. Perfect Bayesian Equilibria of the signaling game have a partition form where the lowest risk insurers choose reinsurance, intermediate risk insurers choose partial securitization, and high risk insurers choose full securitization. An increase in the size of potential losses increases the trigger level of risk above which insurers choose securitization. Consequently, catastrophe risks, which are characterized by low frequency-high severity losses, are only securitized by very high risk insurers, thereby leading to the relative predominance of capital retention and reinsurance in catastrophe risk transfer. Our framework and analysis can be adapted to study the transfer of other types of risk such as credit risk, the choice between informed and \arms length" nancing, etcetera.

Click here to view the paper.

  • Gregor N.F. Weiß- Technische Universität Dortmund
  • Denefa Bostandzic- Ruhr-Universität Bochum
  • Felix Irresberger- Technische Universitä Dortmund
6E

Catastrophe bonds and systemic risk

Abstract:
Do catastrophe bonds increase or decrease the exposure and contribution to systemic risk of issuing insurance companies? And if such issues influence systemic stability, what design features of the bond and characteristics of issuing insurer cause catastrophe bond issues to destabilize the financial sector? Contrary to current conjectures of insurance regulators, we find that the contribution of ceding insurers to systemic risk actually decreases significantly after the issue of a catastrophe bond. We empirically confirm that a higher pre-issue leverage, a higher firm valuation and previous cat bond issues all exert a decreasing effect on the issuer’s systemic risk contribution.

Click here to view the paper.

  • Greg Niehaus- University of South Carolina
6E

Managing Capital and Insolvency Risk via Internal Capital Market Transactions: The Case of Life Insurers

Abstract:
Understanding the movement of capital between insurers and affiliated companies under common ownership is important for understanding insurer insolvency risk and the impact of regulatory policies regarding capital standards and group supervision. Aggregate data indicate that life insurers received substantial internal capital contributions from other entities in their group and decreased the internal shareholder dividends paid during the financial crisis. Panel data estimates indicate that, on average, a dollar decrease in net income when net income is negative is associated with a $0.32 increase in capital contributions from other entities in the group, and that a dollar increase in net income when net income is positive is associated with a $0.56 increase in the amount of internal shareholder dividends paid by the insurer to other entities in the group. Also, insurers with low (high) risk-based capital ratios receive more (less) internal capital contributions than other insurers. While the sensitivity of internal capital movements to performance and capitalization is concentrated in groups with a large number of affiliates, insurers in these groups do not on average, holding other factors constant, have lower capital or lower liquidity ratios than insurers in groups with less active internal capital markets.

Click here to view the paper.

 

Home | Contact Us | Site Map | © American Risk and Insurance Association