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Author(s)

Session

Title

Session I
  • Ruo Jia, University of St. Gallen
  • Zining Liu, Peking University
  • Wei Zheng, Peking University
1A

Are People Economically Prepared for Retirement in China?

Abstract
China is the second largest, most populated and rapidly ageing country in the world. Using the data from the China Health and Retirement Longitudinal Study (CHARLS) and China’s six waves of national census, we construct a China-specific model to estimate the retirement preparation by various groups of population in China, in terms of age, sex, education and marital status. The results will be compared with those of other countries including US. Based on the new findings, we would propose several policy suggestions for the government.

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  • Raimond Maurer, Goethe University Frankfurt
  • Olivia S. Mitchell, University of Pennsylvania
  • Ralph Rogalla, St. John's University
  • Tatjana Schimetschek, Goethe University Frankfurt
1A

Will They Take the Money and Work? People’s Willingness to Delay Claiming Social Security Benefits for a Lump Sum

Abstract:
No abstract available.

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  • Marilyn Montgomery, University of Pennsylvania
1B

Affordability of the NFIP Newly Mapped Procedure: Case Study in Jefferson and Orleans Parishes, Louisiana

Abstract:
No abstract available.

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  • Kathleen McCullough, Florida State University
  • Charles Nyce, Florida State University
1B

Determinants of Federal Natural Disaster Relief

Abstract
This paper provides a comprehensive study of the determinants of federal disaster relief. Political and economic hypotheses about the likelihood of a Presidential Disaster Declaration and the amount of federal aid that is received following a declaration are developed and tested. Three datasets are combined to complete the analysis: the SHELDUS data from the University of South Carolina, the Presidential Disaster Declaration database from the University of Delaware, and the Property Claims Service database of estimated insured losses. Analysis shows that the frequency of approval of major disaster declarations and the amount of federal aid received have increased through time. Many of these trends can be explained by policy changes in disaster management that have occurred. Some of the political and economic hypotheses are supported in the analysis. While disasters in election years are more likely to receive a major disaster declaration, Democratic Presidents are less likely than their Republican counterparts to approve applications. The most intriguing economic finding is that a higher percentage of losses being insured is correlated with higher amounts of federal aid. This may indicate that federal aid is not a substitute (or crowding out) pre-event loss financing in the form of private insurance purchases.

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  • Richard Mumo, University of Canterbury
1B

Dual Insurance Model and the Implications to Insurance Demand and Supply Post-Christchurch Earthquakes in New Zealand

Abstract
This paper gives an empirical analysis of post-Christchurch earthquakes insurance reactions. In a broad sense, the paper examines earthquakes ramification to supply-side for the entire insurance industry in New Zealand as well as goes further to give a narrow analysis of the quake implication to individual insurance company. The research has been motivated by the unique attribute of the New Zealand nature disaster insurance. This has helped the private insurance companies to provide insurance coverage at competitive premium rates even when the probability of a catastrophic event is considered high in New Zealand. The study starts by a market analysis that point to the need for government intervention in natural disaster insurance provision in Countries prone to disasters. In the end this paper will be able to illustrate the framework for natural disaster in New Zealand as well as give supply-side changes that were experienced in the aftermath of Christchurch quakes.

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  • Kathleen McCullough, Florida State University
  • Charles Nyce, Florida State University
1B

Determinants of Federal Disaster Relief

AbstractThis paper provides a comprehensive study of the determinants of federal disaster relief. Political and economic hypotheses about the likelihood of a Presidential Disaster Declaration and the amount of federal aid that is received following a declaration are developed and tested. Three datasets are combined to complete the analysis: the SHELDUS data from the University of South Carolina, the Presidential Disaster Declaration database from the University of Delaware, and the Property Claims Service database of estimated insured losses. Analysis shows that the frequency of approval of major disaster declarations and the amount of federal aid received have increased through time. Many of these trends can be explained by policy changes in disaster management that have occurred. Some of the political and economic hypotheses are supported in the analysis. While disasters in election years are more likely to receive a major disaster declaration, Democratic Presidents are less likely than their Republican counterparts to approve applications. The most intriguing economic finding is that a higher percentage of losses being insured is correlated with higher amounts of federal aid. This may indicate that federal aid is not a substitute (or crowding out) pre-event loss financing in the form of private insurance purchases.

Click here to view the paper.

  • Chia-Chun Chiang, University of South Carolina
1C

An Internal Capital Markets View: Evidence from Bancassurance

Abstract
I find that life insurers with bank affiliates (bancassurance groups) during the 2008 financial crisis enjoyed higher premium growth rates and higher survival probabilities. In addition, cost, revenue and profit scope economies for the bancassurance groups improved during the same period. The higher premium growth was mainly from annuity products (deposit-type insurance products), which are often viewed as substitutes for Certificates of Deposit (CD). This premium growth effect is consistent with cross-selling between banks and life insurers being less costly via internal markets within financial conglomerates than via external markets across stand-alone financial institutions. My results are consistent with the efficient internal capital market hypothesis. In addition, both the higher premium growth and the higher survival rate effects are more pronounced for ex-ante well-capitalized life insurers.

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  • Daniel Bauer, Georgia State University
  • Qiheng Guo, Georgia State University
  • George Zanjani, Georgia State University
1C

The Marginal Cost of Risk and Capital Allocation in a Property and Casualty Insurance Company

Abstract
In this paper, we introduce a multi-period profit maximization model for a property and casualty (P&C) insurance company, and use it for determining the marginal cost of risk and resulting economic capital allocations. In contrast to previous literature and as an important innovation, our model features a loss structure that matches the characteristics of a P&C company, comprising short-tailed and long-tailed business lines. In particular, we take into account the loss history and loss development years. As an example application, we implement the model using two P&C insurance business lines and two development years, and using NAIC loss data for calibration. Our numerical results demonstrate how loss history a ects the marginal cost and capital allocations.

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  • Felix Irresberger, Technical University Dortmund
  • Ying Peng, Temple University
1C

Why do life insurers use shadow insurance?

Abstract

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  • Martin Eling, University of St. Gallen
  • Ruo Jia, University of St. Gallen
1D

A Walk through the Graveyard: Which Insurance Companies Have to Leave the Market?

Abstract
This paper analyzes insurance companies that left the market in 2003-2013. In a sample of 4,655 insurers, 146 of which failed, we find that technical efficiency negatively and business volatility positively correlates with failure probability. Firm growth has a U-shaped non-linear relationship with the failure probability. We classify insurers taken over by other firms as a special type of failure, because they show different symptoms from other failures (i.e. higher efficiency and profitability). Moreover, we document that the warning signals from failure indicators become stronger as the time to the failure event approaches. The findings are robust across the 2008 financial crisis. Our research relies on a large dataset, a long time period, a cross-country design, and is innovative in using new insurer failure models relying on business volatility measures and rare event logistic regressions.

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  • Irina Gemmo, Goethe University Frankfurt, ICIR and SAFE
  • Martin Götz, Goethe University Frankfurt
  • Helmut Gründl, Goethe University Frankfurt
1D

Life Insurance and Demographic Change: An Empirical Analysis of Surrender Decisions Based on Panel Data

Abstract
We investigate empirically which individual and household specific sociodemographic factors influence the surrender behavior of life insurance policyholders. Based on the Socio- Economic Panel (SOEP), an ongoingwide-ranging representative longitudinal study of around 11,000 private households in Germany starting in 1984, we construct several proxies to identify life insurance surrender in the data. We use these proxies to conduct a linear regression, a fixed effects model, and a cross-section analysis. Our analyses provide evidence for a positive relation between life insurance surrender and household specific factors, such as recent divorce, the number of children in the household, recent acquisition of real estate, recent unemployment, and care-giving expenses in a household. Our results hold when accounting for region specific trends. They vary however for different age groups. The findings obtained in this study can help life insurers and regulators to detect and understand industry specific challenges of the demographic change.

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  • Georges Dionne, HEC Montréalt
1D

Modeling and Estimating Individual and Firm Effects with Count Panel Data

Abstract
In this article, we propose a new parametric model for the modeling and estimation of accident distributions for drivers working in fleets of vehicles. The analysis uses panel data and takes into account individual and fleet effects in a non-linear model. Our sample contains more than 456,000 observations of vehicles and 87,000 observations of fleets. Non-observable factors are treated as random effects. The distribution of accidents is affected by both observable and non-observable factors from drivers, vehicles, and fleets. Past experience of both individual drivers and individual fleets is very significant to explain road accidents. Unobservable factors are also significant, which means that insurance pricing should take into account both observable and unobservable factors in predicting the rate of road accidents under asymmetric information.

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  • Benjamin Heidler, LMU Munich
  • Johannes Jaspersen, LMU Munich
  • Dominik Lohmaier, LMU Munich
  • David Pooser, St. John's University
  • Andreas Richter, LMU Munich
1E

Managerial Discretion and Variable Risk Preferences

Abstract
We analyze the risk taking of insurance groups in the U.S. property and casualty insurance market. We base our predictions on the behavioral theory of the firm. Speci cally, we rely on the model by March and Shapira (1992) and amend it by the moderating role of managerial discretion. We operationalize this concept by di erentiating between the two predominant organizational forms in insurance markets: mutuals and stock insurers. Our analysis on the performance and risk taking of insurers between 2001 and 2014 shows strong support for the hypotheses derived from our model. While we can find a strong moderating effect of managerial discretion for risk taking above the reference point constructed from social aspirations, we find no such effects for the reference point constructed from the possibility of insurer insolvency. We draw several implications both for insurance markets and further studies of the behavioral theory of the firm.

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  • Stephen Fier, University of Mississippi
  • David Pooser, St. John's University
1E

Property-Casualty Reserve Errors And Surplus Note Issuance

Abstract
Prior research contends that firm management may manipulate earnings in order to issue equity at a higher price or to issue debt with a lower yield. However, evidence surrounding this phenomenon and the potential effectiveness of earnings manipulation is mixed. Given the strict regulatory reporting requirements of property-casualty insurance companies and the increased use of surplus notes by insurers, the insurance industry represents an ideal setting to test for earnings management efforts around the issuance of securities. We provide the first evidence that insurers manage earnings via loss reserves around the issuance of surplus notes. However, while our evidence suggests that management manipulates reserves around surplus note issuance, the yields are unaffected by this activity. These results imply that although management may attempt to influence the price of issued securities though the management of earnings, investors are not influenced by this manipulation.

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  • Martin Boyer, HEC Montréal
  • Elijah Brewer, DePaul University
  • Willie Reddic, DePaul University
1E

Insurers Complexity and Managerial Discretion

Abstract
Insurers are one of the most complex corporate entities, not only because they are financial institutions, but also because they have the ability to accumulate adequate and sufficient reserves in tax-sheltered accounts for a very long time. Using a novel measure of insurer complexity, which separates operating (lines) from geographic (states) complexity, our empirical results reveal evidence of what we call the informational asymmetric hypothesis whereby discretionary reserves are positively related to operating complexity and negatively related to geographic complexity. We thus find that operating (geographic) complex insurers have higher (lower) amounts of loss reserves.

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Session II
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  • Martin Boyer, HEC Montréal
  • David Eckles, University of Georgia
  • Charles Nyce, Florida State University
II-A

Are Actuaries Systematically or Systemically Wrong (or not)?

Abstract
Insurance reserving is a complicated matter. Actuaries estimate claims incurred today that will need to be paid over a number of years. Over time, as more information about these claims is acquired actuaries are able to adjust the insurer's reserves to reflect such information about incurred losses. Changes in reserves as they develop can be seen as errors in the initial reserve. We study the distribution of these errors. Under the assumption that errors are randomly distributed, we should nd no dependence between errors across claim years (the year where the loss is finally paid), accident years (the year where the loss is incurred), or reserves of the same age (stage of development). We develop a model of reserve development that allows for the testing of correlations across estimation and accident years, insurers, and lines of business to determine if the errors are indications of manipulation or are more systemic in nature.

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  • Siwei Gao, Eastern Kentucky University
  • Hsiao-Tang Hsu, University of Louisiana at Lafayette
II-A

Enterprise Risk Management and Accounting Quality

Abstract
In this study we examine the role of enterprise risk management (ERM) in financial reporting quality. ERM expands internal control to form a solid conceptualization focusing more on risk. Using information regarding ERM from financial report and related disclosure, we find positive associations between ERM adoption and accounting quality. Firms employing ERM framework tend to have lower magnitude of discretionary accruals, lower probability to avoid loss, and lower probability to beat or meet analysts’ earnings forecast. These associations are more significant in insurance companies than those in other financial industries. In addition, we find effects of ERM on analyst behavior. ERM adoption is associated with more accurate, less optimistic and lower dispersion of analysts’ earnings forecast.

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  • Thomas Berry-Stoelzle, University of Iowa
  • James Carson, University of Georgia
  • In Song, University of Central Arkansas
II-A

Are Loss Reserve Errors and Internal Capital Market Substitute?

Abstract
Property-liability insurer loss reserves are managed across the entire distribution of earning to mask fluctuations in income to increase firm value. Studies find insurers generally put money aside for good years and take money out for bad years (Grace 1990 and Beaver, McNichols and Nelson, 2003). We first examine if single unaffiliated insurers over-reserve more than insurers affiliated with a group. Then, we further investigate whether single unaffiliated insurers have to take money out of the reserves to deal with high losses whereas firms with access to internal capital markets (ICMs) are less likely to do that because their group members can transfer capitals internally to the rest of the groups via ICMs. Thus we inspect the relation between insurers’ profitability and their use of loss reserve error to see if it is substitute of internal capital markets. We show evidence that single unaffiliated insurers over reserve more on average than firms affiliated with a group and access to ICMs. Also single unaffiliated firms take money out of the reserves to deal with high losses whereas firms with access to ICMs do that less. Therefore, insurer loss reserve errors are internal capital markets substitute to deal with fluctuations in losses.

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  • Chunli Cheng, University of Hamburg
II-B

Linking Surrender Risk to Mortality Risk: Does the Systemic Health Shock Matter?

Abstract
No abstract available.

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  • Eric R. Ulm, Georgia State University
  • Jin Gao, Lingnan University
II-B

The Effect of Labor Income and Health Uncertainty on the Valuation of Guaranteed Minimum Death Benefits

Abstract
No abstract available.

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  • Jin Gao, Lingnan University
  • Eric R. Ulm, Georgia State Universit
II-B

Valuation of Variable Long-term Care Annuities with Guaranteed Lifetime Withdrawal Benefits: A Variance Reduction Approach

Abstract
This paper proposes an efficient valuation for a variable Long-term Care Annuity with Guaranteed Lifetime Withdrawal Benefits (GLWB). This innovative product provides retirement solutions for both longevity risk and long-term care protection. The product includes the benefits of guaranteed income streams and long-term care protection. The product includes the benefits of guaranteed income streams and long-term care expenses for retirees. However, the valuation of this type of product is very complicated and time-consuming. In this paper, we propose a Monte Carlo valuation algorithm that uses the variance reduction technique. The numerical results indicate that the proposed valuation algorithm is very efficient under a broad range asset models. The proposed algorithm provides a general approach for a rapid valuation of this type of product and can help provide life insurance companies offering innovative products with an appropriate valuation tool.

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  • Christian Hilpert, University of Hamburg
II-C

The Effect of Loss Aversion on Equity-Linked Life Insurance with Surrender Guarantees

Abstract
No abstract available.

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  • Richard Peter, University of Iowa
  • Andreas Richter, LMU Munich
  • Paul Thistle, University of Nevada, Las Vegas
II-C

Ambiguity Aversion in Competitive Insurance Markets: Adverse and Advantageous Selection

Abstract
We analyze an extension of the Rothschild-Stiglitz model where loss probabilities are ambiguous and consumers are ambiguity averse to determine whether there are adverse or advantageous selection equilibria. We show that non-increasing absolute ambiguity aversion is sufficient for adverse selection. The effect of ambiguity on the critical proportion of high risks required for the RS equilibrium to exist can be decomposed into a deductible effect and an ambiguity effect. When single-crossing does not hold, then in a competitive insurance market with actuarially fair prices, advantageous selection cannot occur in equilibrium.

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  • Xiao Lin, University of Connecticut
II-C

Consumer Risk Selection and Price Sensitivity: Evidence from a Renters Insurance Market

Abstract
This paper tests for the existence of multiple dimensions of private information in a renters insurance market. We estimate two sets of results: 1, fully controlling for factors used in insurance pricing, do renters living in high-risk areas buy more earthquake insurance on both the extensive margin (whether coverage is purchased) and the intensive margin (coverage limit chosen); 2, exploiting the discontinuity in price across pricing territories, how do renters' price sensitivities di er in di erent geographic areas. We follow health economics literature in inferring \taste for insurance" from consumer price sensitivity. We nd evidence that renters living in higher-risk territories are more price sensitive than those living in lower-risk territories, resulting in the within-territory (price- xed) selection to be less severe for those living in high-risk areas, as they are probably paying more attention to the absolute level of price than to the risk information, and do not take up earthquake insurance even though they know that they are getting a relatively good price on insurance.

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  • Jeanne Commault, Ecole Polytechnique
II-D

How Do Prudent Consumers Respond To Transitory Income Shocks? Reconciling Income Panel Data and Natural Experiments

Abstract
Estimations from panel data on income and consumption find that transitory income shocks are not followed by significant consumption changes, while results based on natural experiments obtain statistically significant and economically large responses of consumption to tax rebates. I account for these discrepancies by showing that existing panel data estimators neglect the correlation between log-consumption growth and past shocks caused by precautionary behavior. These interactions undermine the exogeneity of the instruments used to identify the shocks in panel data and generate a downward bias. I present an estimator that is robust to log-consumption growth being contingent on the consumers’ history of shocks. The estimated elasticity of consumption to transitory shocks on net income shifts from 0.05 to 0.10 and becomes significant.

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  • Desu Liu, Nanjing University
  • Mario Menegatti, Università Degli Studi Di Parma
II-D

Tertiary health prevention and saving

Abstract
The paper studies the interaction between saving and tertiary health prevention in a two-period framework where future decline in health is certain. The cost of investment in prevention occurs in the health attribute and future benefits include an increase in the probability of receiving treatment and a partial recovery of health if treated. In this framework, we show that the effects of changes in the returns on saving and on tertiary prevention depend on agent’s correlation attitude (either correlation aversion or correlation loving). Furthermore, we study how prudence/imprudence in health and cross-prudence/imprudence in wealth determine the impact of a background health risk on optimal choices. Finally, we analyze the effect of high-order preferences in case of high-degree risk changes.

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  • Hazel Bateman, UNSW Australia
  • Ralph Stevens, UNSW Australia
  • Susan Thorp, University of Sydney
  • Shang Wu, UNSW Australia
II-D

Long-term care risk, income streams and late in life savings

Abstract
We conduct and analyze a large experimental survey where participants made hypothetical allocations of their retirement savings to three products, a long-term care insurance (LTCI) providing income in long-term care (LTC) states, a life annuity and a liquid investment account. The results show that the stated demand of the LTC income product is negatively correlated with financial literacy and numeracy skills and positively correlated with the potential to receive extensive care from families, pre-existing precautionary savings for LTC and expectations about the chance of needing residential care. This implies that the product has the potential to attract people relying on informal care from unpaid care givers. Moreover, the ratio of income in LTC states over income in non-LTC states does not depend on current health states of individuals, suggesting a life care annuity which bundles LTCI with a life annuity has the potential to pool different risks and thus facilitates the demand for coverage of LTC and longevity risk. We also find evidence on the causal relationship between LTC risk and late in life savings. In the absence of the LTC income product, a significantly higher proportion of participants decreased their annuitization level compared to those who increased it.

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  • Martin Eling, University of St. Gallen
  • Ruo Jia, University of St. Gallen
II-E

Efficiency and Profitability in the Global Insurance Industry

Abstract
We examine the relationship between firm efficiency and profitability (E-P relationship) using a global insurance dataset across 11 years. Consistent with prior studies in banking and insurance, we document a significantly positive correlation between cost efficiency and returns on equity or assets. Beyond the extant evidence, we found significant industry dependency in the E-P relationship driven by industry idiosyncrasies, whereas cost efficiency is more critical to the profitability of life insurers than nonlife insurers. The E-P relationship is also nonlinear: the marginal effects of cost efficiency on profitability diminish as the insurer’s cost efficiency approaches to the best practice.

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  • Hua Chen, Temple University
  • David Cummins, Temple University
  • Tao Sun, University of Wisconsin-La Crosse
  • Mary Weiss, Temple University
II-E

Reinsurance Network and the Performance of U.S. Property-Liability Insurers

Abstract
Reinsurance plays a fundamental role in the insurance market to connect insurers and diversify risks. Prior studies have examined the impact of reinsurance counterparty relationships, such as reinsurance exposure, concentration, and tenure, on firm performance. However, no extant research investigates the relationship between an insurer’s network position in a reinsurance network and its performance. In this paper, we utilize network analysis to construct the reinsurance networks from 2000 to 2011 and then evaluate an insurer’s market position using various centrality measures. We find that there is an inverted U-shaped relationship between an insurer’s underwriting performance (measured by combined ratio) and its network position, whereas there is a U-shaped relationship between its profitability (measured by risk adjusted ROA or risk adjusted ROE) and its network position. We also investigate the impact of an insurer’s network position on its operational efficiency, including cost efficiency, revenue efficiency and profit efficiency.

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  • Alexander Bohnert, Friedrich-Alexander-Universität Erlangen-Nürnberg
  • Nadine Gatzert, Friedrich-Alexander-Universität Erlangen-Nürnberg
  • Philipp Lechner, Friedrich-Alexander-Universität Erlangen-Nürnberg
II-E

An Empirical Investigation of Drivers and Value of Enterprise Risk Management in European Insurance Companies

Abstract
No abstract available.

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Session III
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  • Benjamin Collier, University of Pennsylvania
  • Howard Kunreuther, University of Pennsylvania
  • Erwann Michel-Kerjan, University of Pennsylvania
  • Daniel Schwartz, University of Chile
III-A

Are Risk Preferences Consistent Across Low and High Stakes? Evidence from the Field

Abstract
We examine whether households’ risk preferences differ for small and large stakes losses. We develop a structural model and estimate household loss distributions to analyze decisions for a continuum of risk using flood insurance data on over 17 million household policies. Each household makes two decisions: the deductible amount (ranging from $500 to $5,000) indicates their attitudes toward small losses; the coverage limit (the maximum the insurance would pay in a claim) indicates their attitudes toward the risk of large losses. Testing a variety of value functions as well as allowing for the possibility that households distort probabilities, we find that households’ risk preferences are inconsistent for different stakes of the same risk. For example, households’ deductible and coverage limit decisions imply different coefficients of relative risk aversion. Both decisions are marked by overweighting of small probabilities and diminishing sensitivity to losses: households notice the difference between a $1,000 loss and $2,000 loss more than that between an $11,000 loss and $12,000 loss. However, households exhibit greater diminishing sensitivity to losses and overweight small probabilities more when selecting a deductible compared to selecting a coverage limit. We conclude that despite making these low and high stakes decisions concurrently and for the same risk, households treat them as separable choices toward which they have different attitudes.

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  • Rachel Huang, National Central University
  • Yu-Hao Huang, Cathay Life Insurance Co., Ltd
  • Larry Tzeng, National Taiwan University
III-A

Experimental Estimation of the Preference Parameters in Almost Stochastic Dominance

Abstract
Almost stochastic dominance (ASD) as proposed by Leshno and Levy (2002) has been widely applied in decision theory and in practice. It can help to identify the preferred distribution for the majority of decision makers when a small violation in stochastic dom- inance is involved. The purpose of this paper is to experimentally de?ne the preference parameters in the set of most decision makers. By adopting almost Nth-degree risk de- ?ned by Tsetlin et al. (2015), the parameters for economically relevant risk-averse and prudent decision makers are estimated.

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  • Mark Browne, St. John's University
  • Verena Jaeger, LMU Munich
  • Andreas Richter, LMU Munich
  • Petra Steinorth, St. John's University
III-A

Family Transitions and Risk Attitude

Abstract
We use the German Socio Economic Panel to analyze the impact of life changing events on individuals’ risk tolerance levels over time, which is reported in response to a question on individuals’ willingness to take risks. The dataset follows a representative sample of the German population. We find substantial changes in risk attitudes over time with respect to getting married or separating from a partner, giving birth to a child for the first time, and providing care to a family member. Furthermore, we find that these effects are associated with household structure. In particular, we observe that the risk tolerance of individuals that are referred as the head of household demonstrates more extreme changes associated with life events while having children moderates the changes associated with the dissolution of households.

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  • Anne-Sophie Charest, Laval University
  • Van Son Lai, Laval University
  • Denis-Alexandre Trottier, Laval University
III-B

CAT bond spreads: A model with HARA utility and an empirical validation using nonparametric tests

Abstract
Previous empirical studies on catastrophe (CAT) bond premium calculations rely almost exclusively on actuarial models, and usually compare their accuracy strictly in terms of in- sample t and predictive power. We contribute to this literature by deriving a utility-based speci cation for pricing CAT bonds under hyperbolic absolute risk aversion (HARA), and by proposing two speci cation tests that use nonparametric estimation techniques to test simultaneously for all possible mis-speci cations. Various pricing models are then estimated and tested with data from the primary market for CAT bonds. Our results suggest that the utility-based model we propose not only is well-suited for explaining the risk-return relationship observed in the CAT bond market but also delivers the best performance among the tested models. We also provide new empirical evidence that the aggregate utility function of CAT investors exhibits decreasing absolute risk aversion.

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  • Martin Eling, University of St. Gallen
  • Jan Hendrik Wirfs, University of St. Gallen
III-B

Modeling and Management of Cyber Risk

Abstract
Cyber risks are an important point on the business agenda in every company, but they are difficult to assess due to the absence of reliable data and profound analyses. To improve this situation, we identify cyber losses from an operational risk database and analyze these with methods from the field of actuarial science. Specifically, we apply operational risk models in order to yield consistent risk estimates, depending on country, industry, size, and other variables. Our results show that human behavior is the main source of cyber risk and that cyber risks are very different compared to other operational risk. The results of the paper are useful for practitioners, policymakers and regulators in order to provide a better understanding of this new and important type of risk.

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  • Muhammed Altuntas, University of Cologne
  • Thomas Berry-Stoelzle, University of Iowa
  • David Cummins, Temple University
III-C

Enterprise Risk Management and Economies of Scale and Scope: Evidence from the German Insurance Industry

Abstract
Enterprise risk management (ERM) is the approach of managing all risks faced by an enterprise in an integrated, holistic fashion. This research investigates whether the utilization of the ERM approach helps firms achieve economies of scale and scope. We use detailed survey data of German property-liability insurance companies that allows us to construct continuous measures of ERM quality. We find that ERM quality positively moderates the scale-cost efficiency (scalerevenue efficiency) and scope-cost efficiency (scope-revenue efficiency) relationships, indicating that ERM facilitates economies of scale and scope. Our results suggest that ERM’s impact on economies of scale and scope is one answer to the question how ERM can create value.

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  • Nadine Gatzert, Friedrich-Alexander-Universität Erlangen-Nürnberg
  • Philipp Lechner, Friedrich-Alexander-Universität Erlangen-Nürnberg
III-C

Determinants and Value of Enterprise Risk Management: Empirical Evidence from Germany

Abstract
Enterprise risk management (ERM) has become increasingly important in recent years, es-pecially due to an increasing complexity of risks and regulatory frameworks. In addition, by considering all enterprise-wide risks within one integrated framework and by taking a forward-looking risk-reward perspective, ERM is intended to enhance shareholder value. The aim of this paper is to empirically analyze firm characteristics and determinants of an ERM implementation and to study the impact of ERM on firm value. We focus on compa-nies listed at the German stock exchange, which to the best of our knowledge is the first empirical study with a cross-sectional analysis regarding ERM determinants and its impact on firm value for a European country. Our findings based on logistic and Cox regression analyses show that larger companies, companies operating in geographic segments besides Germany, and firms in the banking, insurance or energy sector are more likely to adopt an ERM program. In addition, our results confirm a significant positive impact of ERM on shareholder value.

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  • James Cardon, Brigham Young University
  • Mark Showalter, Brigham Young University
III-D

Insurance Plan Switching in a Dynamic Model of Health Care Utilization

Abstract
We use a panel of claims data from 1999-2014 to investigate the role of plan switching in a model of health care utilization. Policy holders can choose a single low coverage plan or one of several higher coverage alternatives with varying degrees of managed care. Using dynamic panel data methods, we find that two lags of expenditures are necessary to obtain a good fit of the data. We find that those switching from low to high coverage spend significantly more and those switching from high to low spend significantly less than their comparison non-switching counterparts. While we cannot interpret the coefficients as causal effects, the magnitudes are too large to result from differences in cost sharing provisions alone and are therefore evidence of adverse selection. However, since only a small number (3.64 percent) switch each year, it may be that number of families with usable private information is relatively small.

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  • Annette Hofmann, St. John's University
III-D

Camouflage and Ballooning in Health Insurance: Evidence from Abortion

Abstract
This paper provides a microeconomic basis for simultaneously explaining two phenomena related to health insurance: camouage and ballooning. We use abortions in Switzerland as an illustrative example. First, a signicant share of abortions is camouaged by contrived medical coding, and second, there is evidence of ballooning in that jurisdictions with strict enforcement of abortion regulation tend to export the problem to more liberal ones. The analysis diers from the existing literature in that we explicitly model the search eort of an individual seeking a health service, i.e., an abortion or camouage. Using data provided by a major social health insurer, theoretical predictions are conrmed to a considerable degree. In particular, women who derive a particularly high benet from an abortion (and even more so, from its camouage) are less discouraged by strict enforcement than others.

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  • David Hales, University of California
  • Mary Riddel, University of Nevada, Las Vegas
III-D

Predicting Cancer-Prevention Behavior: Disentangling the Effects of Utility Concavity and Risk Perceptions

Abstract
Studies such as Barsky et al. (1997), Anderson and Mellor (2008), and Dohmen et al. (2011) have concluded that risk aversion affects people’s choices to take or avoid health risks. Another strand of this literature finds that these decisions are often rooted in misperceptions about health risks (Viscusi 1990, 1991; Lundborg and Lindgren 2002, 2004; Khwaja, Sloan and Chung 2007). We argue that if the health preference function follows a Rank-Dependent or Cumulative Prospect preferences, that both of these factors need to be considered. We use a survey of 474 men and women to investigate the influence of utility risk aversion, probability weighting represented by optimism, and cognitive ability on the choice to engage in behaviors that either increase or mitigate cancer risk. We measure optimism in two dimensions: baseline optimists are those who inaccurately believe their cancer risk to be below its expert-assessed level, while control optimists are those who believe they can reduce their risk of cancer (by changing their lifestyle choices) to a greater extent than is actually the case. Our results indicate that baseline optimism is significantly and positively correlated with subject’s tendencies to engage in cancer risk-reducing behaviors, and negatively correlated with risky behaviors. Subjects’ control misperceptions also appear to play a role in their tendency to engage in risky and prevention behaviors. When controlling for both of these types of risk misperception, utility risk aversion plays a much smaller role in determining health behaviors than found in past studies. This supports previous findings that health preferences are characterized by significant probability weighting.

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  • Jing Ai, University of Hawaii at Manoa
  • Sharon Tennyson, Cornell University
  • Wei Zhu, University of International Business and Economics
III-E

Why Use Agents? Consumer Reference Manipulation in Life Insurance Market

Abstract
We explore agents’ role in life insurance on the premise that consumers are of limited rationality and their life insurance purchase decisions are reference-dependent and regretinduced. Our analysis provides a unified interpretation for both the bright and dark sides of the agency system that is still a predominant form of distribution in life insurance markets. On the one hand, consumers are passive in life insurance purchase even with complete information of mortality risk and agents can increase their welfare by promoting a larger insurance amount, in the meanwhile increasing profits for the insurers. On the other hand, agents can manipulate consumers into buying an excessively high amount of insurance. With a commission-based compensation mechanism, agents have a strong incentive for overselling. As a response, insurers resort to a rate cutting strategy to help consumers maintain their reservation welfare, inducing more insurance purchase in market equilibrium. We further explore the welfare implications of agent selling and find that consistent with market realities, the agency system is often more welfare enhancing in whole life insurance than in term life insurance.

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  • Tim Boonen, University of Amsterdam
III-E

Equilibrium Recoveries in Insurance Markets with Limited Liability

Abstract
This paper studies optimal insurance in equilibrium in case the insurer is protected by limited liability. We focus on the optimal allocation of remaining assets in default. Perfect pooling of risk is optimal, but a protection fund is needed to charge levies to policyholders with low losses. If policyholders cannot be forced ex post to pay a levy, we show that the constrained equal loss rule is optimal. This rule gained particular interest in the literature on rationing. We show existence of an equilibrium in the market, and study the welfare losses if other recovery rules are used in default. Moreover, we show that in absence of a monitoring device, the insurer will always invest all its assets in the risky technology. We show that the welfare losses of choosing a wrong recovery rule can be substantial for the insurer.

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  • Ruo Jia, University of St. Gallen
III-E

Roles of Commitment and Information in Multi-Period Insurance Contracting: A Comprehensive Review and New Empirical Evidence

Abstract
The central question in multi-period insurance contracting is the type of inter-temporal pricing pattern. Some products have a highballing (front-loaded) pattern, others are lowballing (back-loaded), and still others are flat. These patterns are sensitive to commitment and informational conditions of insurance products. This paper presents the first comprehensive review of theoretical and empirical research to uncover the roles of commitment and information in determining the type of inter-temporal pricing pattern. Moreover, a new two-sample empirical design is constructed, which excludes heterogeneity in firms, markets, and time periods, thus to isolate the impact of insurer’s commitment on its inter-temporal pricing strategy. Insurer learning is also a necessary informational condition for a lowballing pricing strategy; however whether the learning is asymmetric or symmetric turns out to be irrelevant. The paper emphasizes the control of insurance demand and supply factors in addition to the risk type when empirically examining the risk-based dynamic selection.

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Session IV
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  • Semir Ben Ammar, University of St. Gallen
  • Alexander Braun, University of St. Gallen
  • Martin Eling, University of St. Gallen
IV-A

Asset Pricing and Extreme Event Risk: Common Factors in Catastrophe Bond Funds

Abstract
Catastrophe (cat) bond funds are an alternative and innovative investment opportunity. Although they are sometimes still classified as bond mutual funds or hedge funds, their returns behave unlike those of any other asset class. Thus, traditional asset pricing models, such as the five-factor approach of Fama and French (1993) and the seven-factor approach of Fung and Hsieh (2004), are not suitable for dedicated cat bond funds. The aim of this paper is to provide a detailed empirical analysis of these investment vehicles and to derive a factor model, which is able to explain both their time-series and cross-sectional return characteristics. Using a comprehensive dataset, we show that cat bond funds have historically exhibited a superior risk-adjusted performance. We then identify key return drivers and introduce a peril-based three-factor approach. Despite a strong overall fit, we are left with significant positive alphas for one quarter of all cat bond funds, which are either attributable to manager skill or to exotic beta exposures from other ILS market segments.

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  • Benjamin Collier, University of Pennsylvania
  • Andrew Haughwout, Federal Reserve Bank of New York
  • Howard Kunreuther, University of Pennsylvania
  • Erwann Michel-Kerjan, University of Pennsylvania
  • Michael Stewart, Federal Reserve Bank of New York
IV-A

Firm Age and Size and the Financial Management of Real Shocks

Abstract
No abstract available

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  • Marc Ragin, University of Georgia
IV-A

An Ex-Post Assessment of Investor Response to Catastrophes

Abstract
A large body of research has documented negative abnormal stock returns for property-casualty insurance companies in the wake of major catastrophes. These studies often have concluded that investors expect claims from the disaster to outweigh any potential growth in demand or rates. We test the fundamental value predictions implied by these returns, examining the relationship between post-catastrophe returns and future financial outcomes for the insurers. We find no relationship between returns and any profit measures, which conflicts with many standard models of intrinsic value. We do, however, observe a positive relationship between post-catastrophe returns and growth in Total Assets. We conclude that this does reflect a non-standard assessment of firm value—investors were correct in predicting how the disaster will affect the firm’s balance sheet, but not the firm’s income statement. We discuss possible implications of these findings and develop a plan for further investigation.

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  • James Karl, East Carolina University
  • Charles Nyce, Florida State University
IV-B

How Cellphone Bans Affect Automobile Insurance Markets

Abstract
In this paper, we examine the effect of laws prohibiting the hand-held use of a cellphone while driving on the automobile insurance market. Our research is motivated by the fact that prior studies present evidence that the enactment of such laws alters drivers’ behaviors in ways that lead to fewer automobile accidents. We posit that that, by extension, these laws should also lead to reductions in the amount of losses paid by automobile insurers. Our analysis is consistent with this expectation and suggests that the enactment of a ban on the hand-held use of a cellphone while driving leads to a 1.3 percent reduction in the average amount of losses incurred by automobile insurers. We also find evidence that these laws lead to reductions in incurred loss ratios but have no impact on premiums.

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  • Georges Dionne, HEC Montréal
  • Ying Liu, Shandong University
IV-B

Insurance Incentives and Road Safety: Evidence from a Natural Experiment in China

Abstract
we investigate the effects of the insurance incentives on safe driving by evaluating both the accident frequency and accident severity following the reform of the insurance pricing mechanism introduced in the city of Shenzhen in China. Our contribution to literature is a clean identification of causal effect of insurance incentives on road safety by employing the difference-in-differences methodology in the framework of a natural experiment. We find that increasing insurance incentives can reduce accident frequency significantly. These results are robust to the inclusion of controls, alternative definitions for accident frequency and the placebo experiments. Moreover, the impact of basing insurance pricing on traffic violations is bigger than on past claims. The impact of insurance incentives on accident severity is inconclusive and insignificant.

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  • Jing Ai, University of Hawaii at Manoa
  • Shanshan Wang, Beihang University
  • Tianyang Wang, Colorado State University
  • Jiantao Zhou, Beihang University
IV-B

Economic and Non-Economic Losses Fraud Severity Estimation of Auto Bodily Injury: Evidence from China

Abstract
Despite the increasing importance of opportunistic fraud activities in liability claims to insurers, relatively little research has been done to understand the causes and impacts of these activities. General damage awards are often argued to be the primary motivating factor for this type of opportunistic fraud. We test this hypothesis using a unique sample of closed claim lawsuit cases in automobile bodily injury liability during 2007-2012 in China. Our results show that the economic and non-economic losses fraud is significant and exists universally in any injury severity, disability or death damages. Hospitalization opportunistic fraud occurs mainly in more serious injury severity, but the opportunistic fraud within the elderly group occurs mainly in less serious injury severity. Our findings provide additional insights on ex post moral hazard and have important policy implications to both insurers and regulators.

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  • Thomas Berry-Stoelzle, University of Iowa
  • Patricia Born, Florida State University
  • Sabine Wende, University of Cologne
IV-C

Do Health Insurance Mergers Hurt Consumers? Firm-Level Evidence from U.S. Insurance Companies

Abstract
No abstract available.

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  • Cameron Ellis, University of Georgia
  • Joshua Frederick, University of Georgia
IV-C

Getting Crowded: Second-Order Effects of Medicaid Expansion Refusal

Abstract
The Patient Protection and A ordable Care Act (ACA) is one of the most debated, and dividing, pieces of legislation in recent memory. One of the main elements of the ACA is the mandatory expansion of Medicaid eligibility from the poverty line to 138% of the poverty line. Immediately following law's passage, a number of states sued for the law to be ruled unconstitutional. While the majority of the law held up to judicial scrutiny, the Supreme Court did rule that the mandatory expansion violated states' rights and thus states could opt out. Nearly all of the debate has focused on the direct e ects of the newly covered, but there are also important secondary e ects to consider. If the newly-eligible portion di ers from the general populace then an expansion of Medicaid can a ect the private market for health insurance. In this paper, we use policy-level data from the Health Insurance Exchanges to identify and estimate the e ects of Medicaid expansion on the private health insurance market. We find that adopting the expansion reduces average monthly premiums by $48.68.

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  • Mark Browne, St. John's University
  • Yu Lei, University of Hartford
IV-C

The Impact of the Affordable Care Act on the Financial Performance of Health Insurers

Abstract
No abstract available.

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  • James Garven, Baylor University
  • James Hilliard, Northern Arizona University
IV-D

Insurance Company Capital Structure Swaps and Shareholder Wealth

Abstract
In the face of asymmetric information and comparative advantage, there may be opportunities to enrich long-term shareholders at the expense of other stakeholders. While these opportu- nities will typically fade over repeated opportunities, the long-term nature of insurance claims may provide opportunities for market timing. One way insurance managers can enrich long-term shareholders is by issuing equity to take advantage of favorable reinsurance market conditions. This is analogous to a traditional capital structure exchange (in which managers issue equity and use the proceeds to retire debt), except that the insurer's obligations are stochastic. Our model suggests that under certain conditions (especially when reinsurance appears \cheap"), managers can enrich long-term shareholders by issuing more equity and using the proceeds to purchase reinsurance.

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  • Janina Muehlnickel, Technical University Dortmund
IV-D

Expected Insurer Stock Returns and Systemic Risk Premia

Abstract
In this study, we employ asset pricing models to investigate how investors price the systemic importance of insurance companies. We examine the cross-section of expected stock returns of life and non-life insurers for the time period 1990-2014 and two crisis periods. As potential risk factors, we test the interconnectedness with the banking and insurance sector, size, and the dependence on the CDS market. Our results show that investors receive a premium for holding stocks of highly interconnected insurance companies. Market participants thus appear to assume that insurance companies are not too-interconnected-to-fail to be bailed out by the government in the event of failure. We find that even directly after the bailout of AIG, investors did not view insurance companies as systemically relevant. Furthermore, we find evidence that suggests that an insurer’s size does not fully predict the firm’s systemic relevance.

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  • Mike Adams, University of Bath
  • Yihui Jia, Swansea University
  • Vineet Upreti, Swansea University
IV-D

Reinsurance and the Cost of Equity in the United Kingdom’s Non-Life Insurance Market

Abstract
The effect of risk management on the cost of equity of insurers is investigated. Using panel data drawn from firms operating in the UK’s non-life insurance sector, we show that reinsurance (risk management) can decrease the cost of equity of insurance companies, but the relation is non-monotonic in nature. We find that reinsurance purchase is associated with reduction in the cost of equity but the rate of reduction declines as the level of premiums ceded relative to total gross premiums written increase. We also find that cost of equity is positively associated with the probability of bankruptcy and that reinsurance can reduce the cost of equity by reducing the probability of bankruptcy.

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  • Vickie Bajtelsmit, Colorado State University
  • Tianyang Wang, Colorado State University
IV-E

Household Strategies for Managing Longevity Risk

Abstract
No abstract available.

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  • Atsuyuki Kogure, Keio University
IV-E

An Extended Lee-Carter Model for Mortality Differential by Long-Term Care Status

Abstract
This paper aims to propose a new methodology to forecast mortality rates of the long-term care (LTC) population with longevity risk. A major obstacle to devising such a method is lack of data on the number of deaths in LTC populations, which prevents us from using the conventional mortality model such as the Lee-Carter model. To overcome this difficulty, we propose an extended Lee-Carter model with a term representing mortality differential due to LTC status which does not require the data on the number of deaths in LTC populations. We apply the proposed model to the data from the Japanese long-term care insurance system. Our preliminary results show that the proposed method captures the heterogeneity in the mortality rate between the LTC statuses properly. We plan to deliver a more detailed investigation at the conference.

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Session V
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  • Masayasu Kanno, Kanagawa University
V-A

Interconnectedness and Systemic Risk in the U.S. CDS Market

Abstract
This study assesses systemic risk in the US credit default swap (CDS) market. First, we estimate the bilateral exposures matrix using aggregate fair value data on call reports by the Federal Deposit Insurance Corporation and theoretically analyze interconnectedness in the US CDS network using various network measures. The robustness of the estimated bilateral matrix is fully assured by sensitivity analysis using a core–periphery model and modified Jaccard index. Second, we theoretically analyze the contagious defaults introducing the Eisenberg and Noe framework. The network analysis shows that three to six banks were central in the network in the past. The default analysis shows the theoretical occurrence of many stand-alone defaults and a few contagious defaults during the global financial crisis. A stress test based on a hypothetical severe stress scenario predicts the occurrence of future contagious defaults. To conclude, the risk contagion via the CDS network is relatively restricted.

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  • Jannes Rauch, University of Cologne
  • Mary Weiss, Temple University
  • Sabine Wende, University of Cologne
V-A

Contagion within the Global Financial Sector: Sector and Firm Analysis of Banking and Insurance

Abstract
We take an asset pricing perspective to analyze contagion effects in the global financial sector during the financial crisis of 2007-2009. More specifically, contagion is analyzed at the sector and firm level. We measure cross-industry linkages between the banking and insurance sectors. Using a factor model and banking and insurance sector indices from a large set of countries for the years 1991-2009, we find significant contagion effects in the global financial industry during the financial crisis, both within and across financial sectors. In addition, our results at the firm level indicate that larger banks are more affected by contagion effects. Furthermore, we find that the regulatory environments which restrict banks and insurance firms from competing with each other reduced contagion effects during the financial crisis. Our results are valuable for both investors and regulators, as they reveal increased linkages in the global financial industry during the crisis, which exacerbate portfolio diversification.

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  • Alberto Dreassi, University of Trieste
  • Stefano Miani, University of Udine
  • Andrea Paltrinieri, University of Udine
  • Alex Sclip, University of Udine
V-A

Bank and Sovereign Risk Spillovers to the Insurance Sector: Evidence from Europe

Abstract
This paper empirically investigates credit risk spillovers to the insurance sector, focusing on the European sovereign debt crisis and analyzing CDS spreads variations. Due to the mixed evidence of existing literature, we aim at verifying how sovereign spillovers propagate and evolve due to the banking transmission channel and how insurers’ business models explain their vulnerability. We expect to find that the debt crisis increased the credit risk of insurers through their asset holdings and that this effect was amplified by spillovers from the banking sector. We aim at explaining the impact of contagion by a set of bank- and insurance-specific strategic and business characteristics, namely capital ratios, product risks, sources of income and diversification. Finally, in contrast with some recent contributions, we expect contagion to be more relevant for also systemically important insurers, due to their greater interconnectedness with the banking sector.

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  • Courtney Baggett, Butler University
  • Cassandra Cole, Florida State University
V-B

An Analysis of Internal and External Capital Markets: The Role of Regulation

Abstract
This article examines the impact of regulation on capital market behavior, by examining both internal and external reinsurance transactions. I differentiate between admitted and surplus line insurers in order to determine whether the two types of firms serve different purposes within the overall reinsurance marketplace. Surplus line and admitted insurers differ in many ways, several of which I consider within this article. The overall purpose, however, is to examine whether surplus line and admitted insurers differ in their useage of internal and external reinsurance. A simultaneous equations model (SEM) is implemented to capture the firm’s decision regarding capital market transactions. Findings indicate that surplus line insurers cede significantly more affiliated reinsurance premiums than admitted insurers. In addition, I find consistent evidence in support of internal and external reinsurance being used as complements, rather than substitutes.

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  • Ajay Subramanian, Georgia State University
  • Jinjing Wang, Ohio Northern University
V-B

Capital, Risk, Insurance Prices and Regulation

Abstract
We develop a unified equilibrium model of competitive insurance markets that incorporates the demand and supply of insurance as well as insurers’ asset and liability risks. Insurers’ assets may be exposed to both idiosyncratic and aggregate shocks. We obtain new insights into the relationship between insurance premia and insurers’ internal capital that potentially reconcile the conflicting predictions of previous theories that investigate the relation using partial equilibrium frameworks. Equilibrium effects lead to a non-monotonic U-shaped relation between insurance price and internal capital. We study the effects of aggregate risk on the Pareto optimal asset and liquidity management by insurers as well as risk-sharing between insurers and insurees. When aggregate risk is low, both insurees and insurers hold no liquidity reserves, insurees are fully insured, and insurers bear all the aggregate risk. When aggregate risk takes intermediate values, both insurees and insurers still hold no liquidity reserves, but insurees partially share aggregate risk with insurers. When aggregate risk is high, however, it is optimal to hold nonzero liquidity reserves, and insurees partially share aggregate risk with insurers. The efficient asset and liquidity management policies as well as the aggregate risk allocation can be implemented through a regulatory intervention policy that combines a minimum liquidity requirement when aggregate risk is high, ex post taxation contingent on the aggregate state, comprehensive insurance policies that combine insurance with investment, and reinsurance.

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  • Shinichi Kamiya, Nanyang Business Schoo
  • George Zanjani, Georgia State University
V-B

Egalitarian Equivalent Capital Allocation

Abstract
We apply Moulin’s notion of egalitarian equivalent cost sharing of a public good to the problem of insurance capitalization and capital allocation where the liability portfolio is fixed. We show that this approach yields overall capitalization and cost allocations that are Pareto efficient, individually rational, and, unlike other mechanisms, stable in the sense of adhering to cost monotonicity.

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  • Samuel Cox, Georgia State University
  • Yijia Lin, University of Nebraska-Lincoln
  • Tianxiang Shi, University of Nebraska-Lincoln
V-C

Pension Risk Management with Funding and Buyout Options

Abstract
There has been a surge of interest in recent years from defined benefit pension plan sponsors in de-risking their plans with strategies such as “longevity hedges” and “pension buyouts” (Lin et al., 2015). While buyouts are attractive in terms of value creation, they are capital intensive and expensive, particularly for firms with underfunded plans. The existing literature mainly focuses on the costs and benefits of pension buyouts. Little attention has been paid to how to capture the benefits of de-risking within a plan’s financial means, especially when buyout deficits are significant. To fill this gap, we propose two options, namely a pension funding option and pension buyout option, that provide financing for both underfunded and well funded plans to cover the buyout risk premium and the pension funding deficit, if a certain threshold is reached. To increase market liquidity, we create a transparent pension funding index, calculated from observed capital market indices and publicly available mortality tables, to determine option payoffs. A simulation based pricing framework is then introduced to determine the prices of the proposed pension options. Our numerical examples show that these options are effective and economically affordable. Moreover, our sensitivity analyses demonstrate the reliability of our pricing models.

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  • Andreas Milidonis, University of Cyprus
  • Takeshi Nishikawa, University of Colorado Denver
  • Jeungbo Shim, University of Colorado Denver.
V-C

CEO Inside Debt and Risk Taking: Evidence from Property-Liability Insurance Firms

Abstract
We examine the incentive effects of CEO inside debt (pensions and deferred compensation) on risk taking using the sample of the U.S. publicly traded property-liability insurers. To represent managerial risk-taking, we employ Value at Risk (VaR) and expected shortfall (ES) which capture extreme movements in the lower tail of insurer stock return distribution. We document that inside debt represents a significant component of CEOs’ compensation in the insurance industry. The results indicate that there is a significant negative relationship between CEO inside debt holdings and risk-taking behavior, suggesting that CEO debt-like compensation can be an effective governance mechanism to reduce firm risk. The results are robust to alternative measures of key variables and various regression models.

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  • Liping Chu, Shanghai University of International Business and Economics
  • Michael Goldstein, Babson College
  • Tong Yu, University of Cincinnati
V-C

Earnings Up/Liabilities Down: Do Corporations Strategically Manage Pension Discount Rates?

Abstract
A significant number of U.S. publicly listed firms failed to sufficiently lower discount rates used to discount their future pension obligations when interest rates decreased. This results in an understatement of their pension liabilities and a reduction in charges against earnings. Firms with poor operating performance, firms experiencing poor investment returns and with greater pension contributions were less likely to decrease the rate used to discount their pension liabilities when interest rates indicated they should do so, and thereby possibly understating the present value of these pension liabilities, possibly to avoid higher pension charges against earning during financial difficulties. The phenomenon is most pronounced during the recent financial crisis. Moreover, we find that such strategic pension discount rate “stickiness” are most severe among firms whose ratings are closed to the investment grade cutoff. The imperfect elasticity of pension discount rates to market interest rates allows firms to manipulate their earnings while reducing the constraints of defined benefit pension plans.

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  • Martin Boyer, HEC Montréal
  • Franca Glenzer, Frankfurt University
V-D

Pensions, Annuities, and Long-Term Care Insurance: On the Impact of Risk Screening

Abstract
We examine the interaction between the choice of a retirement vehicle and the purchase of long-term care insurance in a world where agents learn about their longevity and long-term care risk over time. In our setting, and absent any long-term care issues, acquiring a retirement product before learning one’s risk type would be preferred by risk averse agents. When we introduce the possibility of needing long-term care, we show that agents may prefer to wait until they know their health status (i.e., their risk type) before purchasing a retirement product (a situation akin to having a defined contribution pension plan). Other agents will opt to purchase their retirement product before learning their health status (a situation akin to having a defined benefit pension plan). The preference of one retirement vehicle over the other depends, inter alia, on the level of information asymmetry on the market, on an agent’s risk aversion, and on the probability of needing long-term care and its potential cost. When agents purchase their retirement vehicle before knowing their health status, then agents will choose a contract that provides them with less than full coverage. When agents wait to know their health status before purchasing a retirement product, then full long-term care insurance is purchased by all agents.

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  • Michael Hoy, University of Guelph
  • Afrasiab Mirza, University of Birmingham
  • Asha Sadanand, University of Guelph
V-D

Guaranteed Renewable Insurance Under Demand Uncertainty

Abstract
Guaranteed renewability is a prominent feature in health and life insurance markets in a number of countries. It is generally thought to be a way for individuals to insure themselves against reclassi?cation risk. We investigate how the presence of unpredictable ?ucutations in demand for life insurance over an individual?s life-time (1) affects the pricing and structure of such contracts and (2) can compromise the effectiveness of guaranteed renewability to achieve the goal of insuring against reclassi?ction risk.

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  • Johannes Jaspersen, LMU Munich
  • Andreas Richter, LMU Munich
  • Sebastian Soika, LMU Munich
V-D

Welfare Effects of Adverse Selection Due to Rate Regulation in Annuities

Abstract
We analyze the welfare effects of adverse selection due to rate regulation in the German annuity market. We use a life cycle model on consumption, savings and annuity demand to derive a hypothesis on the possible effect of rate regulation on adverse selection in the market. We then proceed to test this hypothesis using a unique data set from a large European life insurance company. This proposal outlines our research methodology, the model used for analysis and the data available to us.

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  • Christian Biener, University of St. Gallen
  • Pascal J. Kieslich, University of Mannheim
  • Andreas Landmann, University of Mannheim
V-E

Individual and Cross-Cultural Differences in Decision Processes Under Risk

Abstract
A large variety of descriptive theories have been developed to explain decisions under risk—ranging from complex integrative models to simplifying heuristics. Typically, developing and testing these models relies on very specific sets of participants, namely highly educated participants from Western populations. An open question is to what degree previous findings and models can be generalized to other populations. We address this question by analyzing choices between monetary lotteries in a student and a general population from Germany as well as in a general population from the Philippines. In particular, we perform a strategy classification study using an extensive set of integrative and heuristic decision strategies to assess which of these can best account for participants’ choices and reaction times. Our results indicate large individual and cross-cultural variance in decision processes. These can partly be explained by individual numeric abilities.

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  • Ruilin Tian, North Dakota State University
V-E

Optimal Demand for Life Insurance in China Under Culture Barriers and Investment Uncertainties

Abstract
We propose a dynamic optimization model to explore the optimal demand for life insurance of a Chinese household with two breadwinners. The lifecycle welfare is measured as the total utility of consumption over the lifetime of the household. We solve a household’s portfolio problem by explicitly recognizing the existence of culture barriers, social security after retirement, loadings on insurance premiums, and uncertainty of mortality. Our results show that life insurance purchase decision is not independent but correlated with a consumer’s wealth, social security, investment risk, bequest incentives, and human capital. Moreover, the presence of incompatible shared values and ideas that place cultural barriers may impede life insurance purchase, which causes a serious uninsurance/underinsurance problem in China.

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  • Xuan Nguyen, Deakin University
  • Cong Pham, Deakin University
  • Pasquale Sgro, Deakin University
  • Tam Trinh, Deakin University
V-E

Culture, Financial Crisis and the Demand for Property and Accident Health Insurance in OECD Countries: An Assessment

Abstract
We study how the cultural characteristics and the global financial crisis (GFC) impacted the non-life insurance expenditure in the OECD countries in the period 2000-2013 where we focus on the property and accident and health insurance markets. Our system Generalized Method of Moment (GMM) estimations reveal that in addition to the traditional economic and legal factors, the cultural characteristics such as long-term orientation, individualism, masculinity, and uncertainty avoidance played an important role in determining the expenditure on these insurance products across the OECD countries. However, in the presence of the GFC, the impacts of the cultural factors have dissipated. Furthermore, per capita income, which has long been regarded as one of the most important drivers of demand for non-life insurance in the literature, failed to explain the spending on accident and health insurance during the GFC. The paper provides valuable information for not only various constituents of the insurance sector but also policy makers in the OECD countries.

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Session VI
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  • Thomas Berry-Stoelzle, University of Iowa
  • Steven Irlbeck, University of Iowa
VI-A

Local Religious Beliefs and Property-Liability Insurance Companies’ Loss Reserving Decisions

Abstract
We empirically examine the effect of local religious beliefs on property-liability insurers’ loss reserving decisions. Insurers headquartered in areas with a relatively low Protestant or relatively high Catholic population report lower loss reserve values for future insurance claim payments on their balance sheet. Reporting lower values for future losses has two effects: It increases current earnings and it increases the risk of a potential reserve shortfall if future claim payments are higher than expected. Assuming local religious beliefs are an important component of local culture, our results suggest that local culture significantly influences accounting choices in a regulated industry.

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  • Evan Eastman, University of Georgia
  • David Eckles, University of Georgia
VI-A

Medical Loss Ratio Malpractice?

Abstract
Under the Affordable Care Act, health insurers are required to spend a certain portion of premium revenue on consumers. This spending requirement is measured by the medical loss ratio. However, rather than a simple ratio of outflows to inflows, the medical loss ratio allows health insurers to include reserves. Reserves include payments that are expected to be made for losses that have not been finalized, have not been reported, or even have not occurred. By definition, these components of reserves are estimated and lend themselves to managerial discretion. While it is too early to study how the behavior of health insurers has changed with the enactment of the Affordable Care Act, it is not too early to study the degree to which health insurers manage reserves based on other incentives. In this paper we find evidence of health insurers managing reserves to smooth income, in response to executive compensation incentives, and to achieve a target rating. We also show that use of a Big 4 auditor and accounting firm can help mitigate the management of reserves.

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  • David Eckles, University of Georgia
  • Mary Kelly, Wilfrid Laurier University
  • Anne Kleffner, University of Calgary
VI-A

The Impact of Institutional Factors On Reserve Errors – A Cross-Border Analysis

Abstract
There is a significant academic literature on the management of loss reserves by insurance companies in order to circumvent regulatory scrutiny, to improve managerial compensation or to smooth tax liabilities. The ability and the incentives of insurers to manage reserves depend not only on company-specific factors, but also on the regulatory and accounting regimes in which firms operate. We capture the impact of these different regimes by undertaking a cross-border analysis that examines the magnitude and direction of reserve errors for property/casualty insurers that operate both in Canada and the United States. Using data from 1995 to 2015 for property/casualty insurers that file annual statements in both countries, we analyze differences in loss reserve errors while controlling for variables known to impact loss reserve errors that are available in both countries.

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  • Christian Knoller, LMU Munich
  • Stefan Neuss, LMU Munich
  • Richard Peter, University of Iowa
VI-B

Financial Support, Moral Hazard, and Other-Regarding Preferences

Abstract
In this paper, we provide evidence of moral hazard in an incentivized laboratory experiment. We show that individuals cut down prevention expenditures as soon as adverse outcomes be-come less severe. Furthermore, based on a general model of other-regarding preferences, we hypothesize that the strength of this moral hazard effect is attenuated by the intensity of other-regarding preferences. We test this prediction in a treatment with the very same financial in-centives for effort provision, which we implement, however, with the help of financial sup-port provided voluntarily by another individual. In this case, moral hazard can no longer be detected. Moreover, differences in how individuals adjust prevention to the strength of finan-cial incentives are significant between both treatments. We quantify these differences and discuss the implications of our results for charitable giving specifically and the provision of financial support in general.

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  • Cassandra Cole, Florida State University
  • Jacqueline Volkman-Wise, Temple University
VI-B

Risk Tolerance and Stock-Market Participation of U.S. Households Around the Financial Crisis

Abstract
There has been a great deal of literature published in recent years related to the financial crisis. However, little research exists on the impact of the financial crisis on individual investors. In this paper, we investigate how the financial crisis has impacted U.S. investors, specifically considering whether the impact varies by age. We develop a simple theoretical model in which there is a financial shock at time one and examine how the allocation toward the risky asset varies between individuals who have more or less time post-shock. Additionally, using data from the Survey of Consumer Finances, we examine the changes in risk tolerance and stock ownership around the financial crisis. We find that middle aged cohorts increased stock ownership after the crisis whereas younger cohorts decreased stock ownership. We also find that household risk tolerance decreased during the crisis with the youngest cohort having the greatest decrease and thereby becoming more risk-averse. Finally, we find that, in addition to various demographic and financial variables, risk tolerance and the usage of financial tools impact the probability of stock ownership; however, the impact varies before and after the crisis. We also find significant differences among age cohorts.

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  • Michel Gendron, Laval University
  • Van Son Lai, Laval University
  • Issouf Soumare, Laval University
VI-C

Economic Capital for Insurers: Insurance Cycle and Catastrophic Risk

Abstract
This paper proposes a stochastic model to study the economic capital and performance of an insurer of natural disasters in the presence of underwriting cycle. The model included a parameter capturing the strategy adopted by the insurer under different cycles. We use the ruin probability and the conditional value-at-risk adjusted returns to capture the performance of the insurer. Using historical natural catastrophic events data of the United States from 1960 to 2008, we find different behaviours depending on the type of catastrophic event. The existence of underwriting cycle represents a major risk for the insurer, but it can be advantageous if the insurer chooses the right strategy at the onset. Furthermore, we show that catastrophic insurance portfolio needs to be composed of at least 50 elements to gain from diversification.

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  • Alexander Braun, University of St. Gallen
  • Joel Weber, University of St. Gallen
VI-C

Evolution or Revolution? How Solvency II will Tilt the Balance Between Reinsurance and ILS

Abstract
The introduction of solvency II will decrease regulatory frictions regarding insurance-linked securities (ILS) and thus redefined how insurance and reinsurance companies can use these instruments for coverage against natural catastrophe risk. We draw on a theoretical framework to forecast the impact of Solvency II on the relative market volume of ILS compared to traditional reinsurance. The key model parameter is estimated by means of OLS and forecasted based on an ARIMA model with Hodrick-Prescott Filter. We complement our results with scenarios for which we estimate probabilities using a Gumbel distribution. Our findings indicate that Solvency II will have a moderate positive effect on ILS markets. More specifically, market participants can expect the volume of ILS to rise to more than 26 percent of the volume of traditional reinsurance by the end of 2018.

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  • Martin Eling, University of St. Gallen
  • Werner Schnell, University of St. Gallen
VI-C

Does Insurance Regulation Adequately Reflect Cyber Risk? An Analysis of Solvency II and the Swiss Solvency Test

Abstract
Cyber risk is a relatively new type of risk, which might be huge in magnitude both in underwriting and in the operational risk of insurance companies. We first describe the dy-namic nature of cyber risk, then analyze the current regulatory treatment and finally assess the adequacy of the current treatment. Our results indicate that the current regulatory treatment does not adequately reflect the potential risk exposure from this new type of risk. We make recommendations for an adequate assessment of cyber risk both in underwriting and opera-tional risk.

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  • Helmut Gründl, Goethe University Frankfurt
  • Christian Kubitza, Goethe University Frankfurt
VI-D

Systemic Risk in the Insurance, Banking, Brokerage and Non-Financial Sectors: Time-Lags and Persistence

Abstract
Common systemic risk measures focus on the instantaneous occurrence of triggering and systemic events. However, systemic events may occur with a time-lag to the triggering event. To study this contagion period and the resulting persistence of institutions' systemic risk, we develop and employ the Conditional Shortfall Probability (CoSP), which is the likelihood that a systemic market event occurs with a specific time-lag to the triggering event. Based on CoSP we propose two aggregate systemic risk measures, namely the Aggregate Excess CoSP and the CoSP-weighted time-lag that re ect the systemic persistence and contagion period of an institution's triggering event. Our empirical results show a significant systemic time-lag for various institutions. The size of this time-lag and the related systemic risk (measured by CoSP) depend on the respective institution and market. In general, we find that brokers exhibit the most persistent systemic impact on all considered markets, whereas non-financial companies have the smallest systemic persistence. Insurance companies are exposed to the largest systemic persistence among financial institutions, particularly if systemic risk is triggered by non-financial companies. In contrast, the systemic persistence of insurance companies is similar to that of banks but substantially smaller than the systemic persistence of brokers.

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  • Xin Che, University of Mississippi
  • Andre Liebenberg, University of Mississippi
VI-D

Effects of Business Diversification on Asset Risk-Taking: Evidence from the U.S. Property-Liability Insurance Industry

Abstract
We investigate the effect of line-of-business diversification on asset risk-taking in the U.S. property-liability industry. The coordinated risk management hypothesis (Schrand and Unal, 1998) implies that insurers with reduced underwriting risk have an incentive to increase investment risk. Consistent with this hypothesis we find that diversified insurers take more asset risk than non-diversified insurers, and that the degree of asset risk-taking is positively related to diversification extent. Our results are robust to corrections for potential endogeneity bias, selectivity bias, and alternative diversification and asset risk measures. We also provide event study evidence that further supports the coordinated risk management hypothesis. Specifically, we find that when a focused firm diversifies, it increases its asset risk relative to firms that remain focused, and when a diversified firm refocuses, it reduces its asset risk relative to firms that remain diversified.

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  • Christopher Bierth, Technical University Dortmund
  • Felix Irresberger, Technical University Dortmund
  • Gregor Weiss, University of Leipzig
VI-D

Derivatives Usage and Default Risk in the U.S. Insurance Sector

Abstract
This paper studies the effect of derivatives usage by U.S. insurers on the insurers’ respective default risk. We first document that insurers that employ financial derivatives have a significantly lower risk of defaulting than matched non-using insurers. We then find empirical evidence that the decreasing effect of derivatives usage on default risk is reversed in case insurers use derivatives for risk-taking and non-hedging purposes. Moreover, we find derivatives usage to be positively correlated with an insurer’s exposure to systemic market shocks. Our results corroborate current views by insurance regulators that derivatives usage for trading negatively affects financial stability

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  • Ajita Atreya, University of Pennsylvania
VI-E

An Assessment of the National Flood Insurance Program’s (NFIP) Community Rating System (CRS)

Abstract
No abstract Available

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  • Martin Boyer, HEC Montréal
  • Michèle Breton, HEC Montréal
  • Pascal Fançois, HEC Montréal
VI-E

An Investigation of Pari-Mutuel Type Options: The Case of HuRLOs

Abstract
HuRLOs (Hurricane Risk Landfall Options) are quasi-binary options designed to hedge hurricane risks in the Atlantic region of the U.S. The payoff of this option depends both on a risky event and on the number of active options in the market, in a pari-mutuel setup similar to that of horse races. This paper investigates strategic issues inherent to holding such options. To this end we simulate the operations of the HuRLO market assuming rational but myopic investors. Our experiments show that the investment strategies of players may have a significant impact on the expected utility of all players. Specifically, the order, sequence and packaging of transactions has a non-trivial impact on the price paid and on the number of options held by players. This makes the calculation of the "true" value of a HuRLOs, not to mention their optimal purchase, a very complex problem. This difficulty in to calculate and purchase optimally HuRLOs may explain the current lack of market interest for this type of insurance contract. Another reason may be the 10 year lull in hurricanes making landfall in the United States.

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  • Jiang Cheng, Shanghai University of Finance and Economics
  • David Cummins, Temple University
  • Tzuting Lin, National Taiwan University
VI-E

Are All Mutuals the Same?

Abstract
We investigate CEO turnover pattern of the U.S. property-casualty mutual insurers. Mutuals are classified as family-controlled mutuals, association-controlled mutuals, and pure mutuals. The probability of both routine and non-routine turnover has a significantly negative relationship with mutual firm performance, and inside succession dominates when routine turnover occurs. The probability of non-routine CEO turnover is lower for family-controlled mutuals, but higher for association-controlled mutuals, than pure mutuals. Family-controlled mutuals with family-member CEOs have the lowest turnover rate among all ownership types in mutuals.

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