Journal of Risk and Insurance

Publisher:
Wiley
Publication date:
2021-02-01
ISBN:
0022-4367

Latest documents

  • The Role of Agents and Brokers in the Market for Health Insurance

    Health insurance markets in the United States are characterized by imperfect information, complex products, and substantial search frictions. Insurance agents and brokers play a significant role in helping employers navigate these problems. However, little is known about the relations between the structure of the agent/broker market and access and affordability of insurance. This article aims to fill this gap by investigating the influence of agents/brokers on health insurance offering decisions of small firms, which are particularly vulnerable to problems of financing health insurance. Using a unique membership database from the National Association of Health Underwriters together with a nationally representative survey of employers, we find that small firms in more competitive agent/broker markets are more likely to offer health insurance and at lower premiums. Moreover, premiums are less dispersed in more competitive agent/broker markets.

  • Enterprise Risk Management and Default Risk: Evidence from the Banking Industry

    Enterprise risk management (ERM) has emerged as a framework for more holistic and integrated risk management with an emphasis on enhanced governance of the risk management system. ERM should theoretically reduce the volatility of cash flows, agency risk, and information risk—ultimately reducing a firm's default risk. We empirically investigate the relationship between the degree of ERM implementation and default risk in a panel data set covering 78 of the world's largest banks. We create a novel measure of the degree of ERM implementation. We find that a higher degree of ERM implementation is negatively related to the credit default swap (CDS) spread of a bank. When a rich set of control variables and fixed effects are included, a one‐standard‐deviation increase in the degree of ERM implementation decreases CDS spreads by 21 basis points. The degree of ERM implementation is, however, not a significant determinant of credit ratings when controls for corporate governance are included.

  • 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 our analysis to the U.S. insurance industry to control for unobservable differences in business models and risk exposures across industries. We simultaneously model firms' adoption of ERM and the effect of ERM on the cost of capital. We find that ERM adoption significantly reduces firm's cost of capital. Our results suggest that cost of capital benefits are one answer to the question how ERM can create value.

  • An Incentive‐Compatible Experiment on Probabilistic Insurance and Implications for an Insurer's Solvency Level

    This article is the first to conduct an incentive‐compatible experiment using real monetary payoffs to test the hypothesis of probabilistic insurance, which states that willingness to pay for insurance decreases sharply in the presence of even small default probabilities as compared to a risk‐free insurance contract. In our experiment, 181 participants state their willingness to pay for insurance contracts with different levels of default risk. We find that the willingness to pay sharply decreases with increasing default risk. Our results, hence, strongly support the hypothesis of probabilistic insurance. Furthermore, we study the impact of customer reaction to default risk on an insurer's optimal solvency level using our experimentally obtained data on insurance demand. We show that an insurer should choose to be default‐free rather than having even a very small default probability. This risk strategy is also optimal when assuming substantial transaction costs for risk management activities undertaken to achieve the maximum solvency level.

  • A Termination Rule for Pension Guarantee Funds

    A termination rule based on a critical funding ratio is proposed for a pension guarantee fund (PGF) that considers closing an underfunded pension plan. This ratio is determined by solving an expected utility maximization problem on behalf of plan beneficiaries subject to two constraints designed to preserve the PGF's viability. The first is an upper bound on the PGF's annual intervention probability; the second, a restriction on the expected shortfall of an underfunded pension plan that is not closed. Both too low and too high critical funding ratios hurt beneficiaries’ interests, depending on their degree of risk aversion.

  • An Investigation of the Short‐Run and Long‐Run Stock Returns Surrounding Insurer Rating Changes

    We find that stock returns move in the direction of insurer rating changes in the 12‐month period prior to the announcement. There is an additional stock price response following the announcement of a downgrade, but no response to upgrade announcements. The reaction to a downgrade is more pronounced when it involves a smaller insurer, when it spans multiple levels, or when it is a threshold downgrade. Returns are significantly more negative during the 12 months leading up to a downgrade announcement during the financial crisis (2008 and 2009) compared to other sample years.

  • Testing for Asymmetric Information in Insurance Markets: A Multivariate Ordered Regression Approach

    The positive correlation (PC) test is the standard procedure used in the empirical literature to detect the existence of asymmetric information in insurance markets. This article describes a new tool to implement an extension of the PC test based on a new family of regression models, the multivariate ordered logit, designed to study how the joint distribution of two or more ordered response variables depends on exogenous covariates. We present an application of our proposed extension of the PC test to the Medigap health insurance market in the United States. Results reveal that the risk–coverage association is not homogeneous across coverage and risk categories, and depends on individual socioeconomic and risk preference characteristics.

  • Trust‐Preferred Securities and Insurer Financing Decisions

    We analyze insurance holding company (IHC) issuance of trust‐preferred securities (TPS) from 1994 to 2013. We find that larger and more financially levered IHCs issued TPS in 1996 and 1997, as well as those that obtained financial strength ratings from A.M. Best. Abnormal stock price returns are positively related to financial distress costs, growth opportunities, and tax burden, but negatively related to size. Consistent with the pecking order theory, intent to use TPS proceeds to retire debt is positively related to abnormal stock returns, whereas intent to use proceeds to retire preferred equity is negatively related to abnormal stock returns.

  • Managing Capital via Internal Capital Market Transactions: The Case of Life Insurers

    The movement of capital within insurance groups is important for understanding insolvency risk management, as well as regulatory policies regarding capital standards and group supervision. Panel data estimates indicate that, on average, a dollar decrease in performance (net income plus unrealized capital gains) when performance is negative is associated with a $0.26 increase in capital contributions to life insurers from other entities in the group, and that a dollar increase in performance when performance is positive is associated with a $0.56 increase in the amount of internal shareholder dividends paid by life insurers to other entities in the group. Moreover, the sensitivity of internal dividends to performance is higher during the financial crisis than the noncrisis period. Also, insurers with low (high) risk‐based capital ratios receive more (less) internal capital contributions than other insurers, holding other factors constant.

  • Issue Information: Journal of Risk and Insurance 1/2018

Featured documents

  • The Impact of the Financial Crisis and Natural Catastrophes on CAT Bonds

    This article employs secondary market data to examine how natural catastrophes or financial crises affect CAT bond premiums. We find evidence that both the financial crisis and Hurricane Katrina significantly affected CAT bond premiums. The premium increase resulting from natural catastrophes can...

  • ORGANIZATION STRUCTURE AND CORPORATE DEMAND FOR REINSURANCE: THE CASE OF THE JAPANESE KEIRETSU

    This study investigates the impact of organization structure on corporate demand for reinsurance. Previous research has shown that the unique corporate groupings in Japan known as the “keiretsu” have relatively low bankruptcy costs, low agency conflicts, low information asymmetry, and low effective ...

  • Pricing Standardized Mortality Securitizations: A Two‐Population Model With Transitory Jump Effects

    Mortality dynamics are subject to jumps that are due to events such as wars and pandemics. Such jumps can have a significant impact on prices of securities that are designed for hedging catastrophic mortality risk, and therefore should be taken into account in modeling. Although several single‐popul...

  • A Termination Rule for Pension Guarantee Funds

    A termination rule based on a critical funding ratio is proposed for a pension guarantee fund (PGF) that considers closing an underfunded pension plan. This ratio is determined by solving an expected utility maximization problem on behalf of plan beneficiaries subject to two constraints designed to ...

  • Managing Mortality Risk With Longevity Bonds When Mortality Rates Are Cointegrated

    This article investigates the dynamic mean‐variance hedging problem of an insurer using longevity bonds (or longevity swaps). Insurance liabilities are modeled using a doubly stochastic compound Poisson process in which the mortality rate is correlated and cointegrated with the index mortality rate....

  • Organizational Form, Ownership Structure, and CEO Turnover: Evidence From the Property–Casualty Insurance Industry

    We investigate the role of organizational form and ownership structure in corporate governance by examining CEO turnover for U.S. property–casualty insurers. Our article extends the prior literature by decomposing stock insurers into publicly traded and nonpublicly traded (closely held) entities...

  • Systemic Risk and The U.S. Insurance Sector

    This article examines the potential for the U.S. insurance industry to cause systemic risk events that spill over to other segments of the economy. We examine primary indicators of systemic risk as well as contributing factors that exacerbate vulnerability to systemic events. Evaluation of systemic ...

  • The New Life Market

    The huge economic significance of longevity risk for corporations, governments, and individuals has begun to be recognized and quantified. By virtue of its size and prevalence, longevity risk is the most significant life‐related risk exposure in financial terms and poses a potential threat to the...

  • The Role of Agents and Brokers in the Market for Health Insurance

    Health insurance markets in the United States are characterized by imperfect information, complex products, and substantial search frictions. Insurance agents and brokers play a significant role in helping employers navigate these problems. However, little is known about the relations between the...

  • Enterprise Risk Management and Default Risk: Evidence from the Banking Industry

    Enterprise risk management (ERM) has emerged as a framework for more holistic and integrated risk management with an emphasis on enhanced governance of the risk management system. ERM should theoretically reduce the volatility of cash flows, agency risk, and information risk—ultimately reducing a...

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