2016 Annual Meeting

The 2016 Annual Meeting was held in Cambridge, MA. Click here to view the full program.

Session 1A: Retirement Decisions

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

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Are People Economically Prepared For Retirement in China

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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Session 1B: Performance of CAT-Exposed Insurance Market

Determinants of Federal Natural Disaster Relief

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

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

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Session 1C: Capital Management 1

Why do life insurers use shadow insurance?

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

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 affects the marginal cost and capital allocations.

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An Internal Capital Markets View: Evidence from Bancassurance

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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1D: Panel Data

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

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

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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Modeling and Estimating Individual and Firm Effects with Count Panel Data

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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1E: Managerial Discretion

Insurers Complexity and Managerial Discretion

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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Property-Casualty Reserve Errors And Surplus Note Issuance

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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Managerial Discretion and Variable Risk Preferences

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 rm. Speci fically, 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 differentiating 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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