Journal of Risk and Insurance
- Publication date:
- Nbr. 86-3, September 2019
- Nbr. 86-2, June 2019
- Nbr. 86-1, March 2019
- Nbr. 85-4, December 2018
- Nbr. 85-3, September 2018
- Nbr. 85-2, June 2018
- Nbr. 85-1, March 2018
- Nbr. 84-4, December 2017
- Nbr. 84-3, September 2017
- Nbr. 84-2, June 2017
- Nbr. 84-S1, April 2017
- Nbr. 84-1, March 2017
- Nbr. 83-4, December 2016
- Nbr. 83-3, September 2016
- Nbr. 83-2, June 2016
- Nbr. 83-1, January 2016
- Nbr. 82-4, December 2015
- Nbr. 82-3, September 2015
- Nbr. 82-2, June 2015
- Nbr. 82-1, March 2015
- Optimal Longevity Hedging Framework for Insurance Companies Considering Basis and Mispricing Risks
This article studies the optimal hedging strategy to deal with longevity risk for the life insurer considering basis risk. We build up a longevity hedging framework that incorporates not only the internal natural hedging but also the external hedging by using the q‐forwards. The optimal hedging strategy is obtained by a minimizing‐variance approach that can minimize the impact of longevity risk on the insurer's profit function. To investigate the basis risk, instead of using population mortality, we adopt a unique mortality data set of annuity and life insurance policies that enable us to calibrate the multi‐population mortality dynamics for different lines of insurance policies. We consider three different hedging strategies: the natural hedging strategy, the external hedging strategy, and combining both natural hedging, and external hedging strategies. The hedge effectiveness for different hedging strategies is evaluated. In addition, the mortality forecast model based on VECM and ARIMA are used to examine the impact of basis risk on hedge effectiveness. As a result, combining both internal and external hedging strategies is the most effective way to manage longevity risk. Ignoring the basis risk will decrease the hedge effectiveness.
- Exit, Voice, or Loyalty? An Investigation Into Mandated Portability of Front‐Loaded Private Health Plans
We study theoretically and empirically how consumers in an individual private long‐term health insurance market with front‐loaded contracts respond to a newly mandated portability requirement of their old‐age provisions. To foster competition, effective 2009, the German legislature made the portability of standardized old‐age provisions mandatory. Our theoretical model predicts that the portability reform will increase internal plan switching. However, under plausible assumptions, it will not increase external insurer switching. Moreover, the portability reform will enable unhealthier enrollees to reoptimize their plans. We find confirmatory evidence for the theoretical predictions using claims panel data from a big private insurer.
- Issue Information: Journal of Risk and Insurance 3/2019
- On Social Preferences and the Intensity of Risk Aversion
We study the relative risk aversion of an individual with particular social preferences: his wellbeing is influenced by his relative wealth, and by how concerned he is about having low relative wealth. Holding constant the individual's absolute wealth, we obtain two results. First, if the individual's level of concern about low relative wealth does not change, the individual becomes more risk averse when he rises in the wealth hierarchy. Second, if the individual's level of concern about low relative wealth intensifies when he rises in the wealth hierarchy and if, in precise sense, this intensification is strong enough, then the individual becomes less risk averse: the individual's desire to advance further in the wealth hierarchy is more important to him than possibly missing out on a better rank.
- Insurers and Lenders as Monitors During Securities Litigation: Evidence from D&O Insurance Premiums, Interest Rates, and Litigation Costs
This study examines whether directors’ and officers’ insurers and lenders effectively monitor securities litigation and respond through pricing before case outcomes are known. By “monitoring,” we refer to tracking case progress and obtaining information from the insured (defendant) firm and its counsel prior to case resolution. We find that insurers and lenders increase rates, and that this effect is almost completely isolated to firms with cases that eventually settle. We confirm that this response is reasonable as settled cases are associated with lower future earnings, while there is generally no relation between future earnings and dismissed cases. As direct costs appear low, our results suggest that most costs are indirect in the form of reputational damage. Overall, our results suggest that researchers and policymakers interested in litigation should focus on settled cases, which are the only cases with material long‐term costs.
- Effects of Prescription Drug Insurance on Hospitalization and Mortality: Evidence from Medicare Part D
We used Medicare administrative data (2002–2009) and an instrumental variables design that exploits the natural experiment created by the implementation of Medicare Part D to estimate the effect of prescription drug coverage insurance on the use and costs of inpatient services. We find that gaining prescription drug insurance through Part D caused approximately a 4 percent decrease in hospital admission rate, a 2–5 percent decrease in Medicare inpatient payments per person, and a 10–15 percent decrease in inpatient charges. Among specific types of admissions, gaining insurance was associated with significant decreases in admissions for CHF and COPD.
- Consumption‐Based Asset Pricing in Insurance Markets: Yet Another Puzzle?
Although insurance is the typical textbook example for an asset that negatively correlates with consumption, the suitability of the classical consumption‐based asset pricing model with power utility to explain historical premiums and claims has not yet been tested. We fill this gap by fitting it to property–casualty market data for Australia, Italy, the Netherlands, the United States, and Germany. In doing so, we reveal yet another asset pricing anomaly. More specifically, the consumption‐based model implies even larger relative risk aversion coefficients in the insurance sectors than in the equity markets of the aforementioned countries. To solve this puzzle, we draw on the loss aversion and narrow framing approach by Barberis, Huang, and Santos (2001) as well as the second‐degree expectation dependence framework by Dionne, Li, and Okou (2015), with encouraging results.
- Systemic Risk in Financial Markets: How Systemically Important Are Insurers?
This study investigates how insurers contribute to systemic risk in the global financial system. In a modeling framework embracing publicly traded and nonpublic firms, the financial system is represented by 201 major banks and insurers over the period from 2004 through 2014. In the aggregate, the insurance sector contributes relatively little to systemic losses; during the financial crisis and the European sovereign debt crisis, its risk share averaged 9 percent. Individually, however, several multi‐line and life insurers appear to be as systemically risky as the riskiest banks. Our results, therefore, affirm that some insurers are systemically important and indicate that insurers’ level of systemic risk varies by line of business. We discuss several important implications of our results for managing systemic risk in insurance, arguing for a combination of entity‐ and activity‐based regulation.
- How Cellphone Bans Affect Automobile Insurance Markets
In this article, 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 prior studies that present evidence that the enactment of such laws alters drivers’ behaviors in ways that reduce the risk of automobile accidents. We posit that that, by extension, these laws should also lead to reductions in the amount of losses paid by private passenger automobile physical damage insurers. Our analysis indicates that the enactment of a ban on the hand‐held use of a cellphone while driving reduces the incurred losses and incurred loss ratios of automobile insurers by approximately 3 percent, suggesting that these bans have important economic consequences not previously documented in the literature. Additional analysis suggests that hand‐held cellphone bans eventually lead to incremental reductions in premiums, but we do not observe these reductions in premiums until a couple of years following the enactment of a ban. Our analysis of automobile insurance losses also represents a departure from most prior studies of cellphone bans and therefore contributes to the ongoing debate in the public health literature regarding the extent to which hand‐held cellphone bans have implications for traffic safety.
- Where Less Is More: Reducing Variable Annuity Fees to Benefit Policyholder and Insurer
In the United States, variable annuities (VAs) are popular long‐term personal investment vehicles. Recently, however, sales have begun to dwindle. In fact, financial advisers have long argued against investing in VAs due to the products’ high fees. VA providers charge these fees—typically at a constant rate throughout the policy period—to cover their expenses and the costs of embedded guarantees, and lowering this constant fee rate could make the VA unprofitable. Instead, we propose and analyze a simple change to the fee “structure” that would lower fee rates overall (and thus make the product more attractive to investors) without reducing the insurer's profit. The key insight is that this time‐dependent fee rate (with moderate front‐loading) implicitly discourages policy lapses and exchanges, which reduces the providers’ policy acquisition expenses. Taking into account financially optimal lapse (and reentry) decisions, we determine the optimal timing and rate of the fee reduction for a competitive as well as for an innovative VA provider. An important characteristic of this feature is that it can be implemented easily and effectively to both new and existing VA policies.
- Directors' and Officers' Liability Insurance, Corporate Risk and Risk Taking: New Panel Data Evidence on The Role of Directors' and Officers' Liability Insurance
This article develops and tests hypotheses regarding the relationship between directors’ and officers’ (D&O) insurance purchase and firm size, governance characteristics, and business risk, using a unique panel data set on Canadian firms for years 1996–2005. The data permit examination of the...
- Enterprise Risk Management and the Cost of Capital
Enterprise risk management (ERM) is a process that manages all risks in an integrated, holistic fashion by controlling and coordinating any offsetting risks across the enterprise. This research investigates whether the adoption of the ERM approach affects firms' cost of equity capital. We restrict...
- Forecasting Mortgage Securitization Risk Under Systematic Risk and Parameter Uncertainty
Abstract The global financial crisis exposed financial institutions to severe unexpected losses in relation to mortgage securitizations and derivatives. This article finds that risk models such as ratings are exposed to a large degree of systematic risk and parameter uncertainty. An out‐of‐sample...
- Heterogeneous Beliefs and the Demand for D&O Insurance by Listed Companies
This article introduces a new rationale for the existence of “directors’ and officers” (D&O) insurance. We use a model with volatile stock markets where shareholders design compensation schemes that incentivize managers to stimulate short‐term increases in stock prices that do not maximize long‐run ...
- The Impact of Introducing Insurance Guaranty Schemes on Pricing and Capital Structure
The introduction of an insurance guaranty scheme can have significant influence on the pricing and capital structures in a competitive market. The aim of this article is to study this effect on competitive equity–premium combinations while considering a framework with policyholders and equity...
- Insurance Fraud in the Workplace? Evidence From a Dependent Verification Program
Many employers have implemented dependent verification (DV) programs, which aim to reduce employee benefits costs by ensuring that ineligible persons are not enrolled in their health insurance plans as dependents. We evaluate a DV program using a panel of health plan enrollment data from a large,...
- The Value of Investing in Enterprise Risk Management
Prior studies show that enterprise risk management improves firm performance. This article investigates which aspects of enterprise risk management add value. We find that the use of economic capital models and dedicated risk managers improve operating performance. Requiring the dedicated risk...
- Deciding Whether to Invest in Mitigation Measures: Evidence From Florida
Prior research provides theoretical insight into factors likely to impact the decision to mitigate such as the degree of risk aversion, the cost of market insurance, and the cost of self‐insurance. We provide empirical evidence related to several hypotheses from the self‐insurance literature on the ...
- An Extreme Value Approach for Modeling Operational Risk Losses Depending on Covariates
A general methodology for modeling loss data depending on covariates is developed. The parameters of the frequency and severity distributions of the losses may depend on covariates. The loss frequency over time is modeled with a nonhomogeneous Poisson process with rate function depending on the...
- DIRECTORS’ AND OFFICERS’ LIABILITY INSURANCE AND FIRM VALUE
This study examines the effect of directors' and officers' liability (D&O) insurance on firm value. Previous studies are divided on the value implication of D&O insurance: some argue for various benefits of being covered by D&O insurance, whereas others focus on the managerial opportunism stemming...