Lévy insurance risk process with Poissonian taxation

The idea of taxation in risk process was first introduced by Albrecher, H. & Hipp, C. Lundberg’s risk process with tax. Blätter der DGVFM 28(1), 13–28, who suggested that a certain proportion of the insurer’s income is paid immediately as tax whenever the surplus process is at its running maximum. In this paper, a spectrally negative Lévy insurance risk model under taxation is studied. Motivated by the concept of randomized observations proposed by Albrecher, H., Cheung, E.C.K. & Thonhauser, S. Randomized observation periods for the compound Poisson risk model: Dividends. ASTIN Bulletin 41(2), 645–672, we assume that the insurer’s surplus level is only observed at a sequence of Poisson arrival times, at which the event of ruin is checked and tax may be collected from the tax authority. In particular, if the observed (pre-tax) level exceeds the maximum of the previously observed (post-tax) values, then a fraction of the excess will be paid as tax. Analytic expressions for the Gerber–Shiu expected discounted penalty function and the expected discounted tax payments until ruin are derived. The Cramér-Lundberg asymptotic formula is shown to hold true for the Gerber–Shiu function, and it differs from the case without tax by a multiplicative constant. Delayed start of tax payments will be discussed as well. We also take a look at the case where solvency is monitored continuously (while tax is still paid at Poissonian time points), as many of the above results can be derived in a similar manner. Some numerical examples will be given at the end.     

Long-term care social insurance: How to avoid big losses?

Long-term care (LTC) needs are expected to rapidly increase in the next decades, and at the same time, the main provider of LTC, namely the family, is stalling. This calls for more involvement of the state that today covers <20% of these needs and most often in an inconsistent way. Besides the need to help the dependent poor, there is a mounting concern in the middle class that a number of dependent people are incurring costs that could force them to sell all their assets. In this paper, we study the design of a social insurance program that meets this concern. Following Arrow (Am Econ Rev 53:941–973, 1963), we suggest a policy that is characterized by complete insurance above a deductible amount.     

Unbundling of insurance contracts according to IFRSs – applicability and limitations

Insurance contracts are difficult to report on in financial statements because they often – or even regularly – contain both an insurance component and a so-called deposit component. Both IFRS 4 “Insurance Contracts” and the IASB's recent Discussion Paper entitled “Preliminary Views on Insurance Contracts” require an insurer to unbundle those components under certain conditions. In this regard, unbundling refers to accounting for the deposit component separately from the insurance component as if they were independent contracts. However, the Discussion Paper contains no guidelines on how the process of unbundling shall be carried out. It is the authors' aim to develop a solution for the separation problem which is innovative, theoretically correct and practically applicable. The principal innovation is the way of distinction between different types of deposit components. Dividing them into “implicit” and “explicit” deposit components delivers the theoretically correct results for unbundling of insurance contracts for accounting purposes. While unbundling can be carried out without major difficulties in the case of insurance contracts containing an explicit deposit component, it is only implementable in exceptional cases for insurance contracts containing an implicit deposit component.     

Property–casualty insurance guaranty funds and insurer vulnerability to misfortune

The enactment of property–casualty insurance guaranty fund statutes in the US was associated with a decrease in insurers' reserves for Homeowners and Commercial Multi-Peril insurance. The evidence is: loss ratios among states enacting guaranty fund statutes declined relative to other states. Tests on loss accruals confirm that the effect was due to decrease in reserves. Other tests that distinguish between guaranty fund statutes offer no evidence that guaranty funds encouraged sound insurers to monitor competitors and assist regulators in identifying weak insurers. Instead, the data are consistent with an explanation where insurance regulators identify and discourage risk-increasing activity.     

Citicorp–Travelers Group merger: Challenging barriers between banking and insurance

The Citicorp–Travelers Group merger increased the prospects for new legislation to remove the barriers between banking and insurance, resulting in a positive wealth effect for institutions most likely to gain from deregulation. Analysis of abnormal returns surrounding the merger show that life insurance companies and large banks (excluding Citicorp and Travelers Group) have significant stock price increases, while the returns of small banks, health insurers, and property/casualty insurers are insignificantly different from 0. This analysis provides evidence that investors expect large banks and insurance companies to receive significant benefits from recent congressional legislation removing barriers to bancassurance.     

Does deposit insurance improve financial intermediation? Evidence from the Russian experiment

This study examines how the introduction of deposit insurance affects depositors and banks, using the deposit-insurance scheme introduced into the Russian banking system as a natural experiment. The fundamental research question is whether the introduction of deposit insurance leads to a more effective banking system as evidenced by increased deposit-taking and decreased reliance upon State-owned banks as custodians of retail deposits. We find that banks entering the new deposit-insurance system increase both their level of retail deposits and their ratios of retail deposits to total assets relative to banks that do not enter the new deposit insurance system. These results hold up in a multivariate panel-data analysis that controls for bank- and time-random effects. The longer a bank has been entered into the deposit insurance system, the greater is its level of deposits and its ratio of deposits to assets. Moreover, this effect is stronger for regional banks and for smaller banks. We also find that implementation of the new deposit-insurance system has the effect of “leveling the playing field” between State-owned banks and privately owned banks. Finally, we find strong evidence of moral hazard following implementation of deposit insurance in the form of increased bank risk-taking. Financial risk and, to a lesser degree, operating risk increase following implementation.     

Consumers’ collision insurance decisions: a mental models approach to theory evaluation

Using interviews with 74 drivers, we elicit and analyze how people think about collision insurance coverage and decide whether to buy coverage, and if so, what deductible level to carry. We compare respondents’ judgments and behaviors to predictions of three models: baseline expected utility (EU) theory, which predicts that insurance is an inferior good, meaning more wealthy people buy less; a modified EU model, which incorporates income constraints and suggests that property insurance is a normal good, meaning more wealthy people buy more; and a mental accounting model which predicts that consumers budget income across consumption categories. The results suggest they purchase insurance as a normal good, guided by a cognitive model that emphasizes budget constraints. Verbal reports reveal a desire to balance two conflicting goals in deductible decisions: keeping premiums ‘affordable’ and keeping deductible level ‘affordable.’ Thus, wealth does not distinguish people by risk aversion, but by ability to pay. In other words, the behavior of less wealthy people is not driven by greater risk aversion, but by their lesser ability to pay, both now and later. We find that a simple heuristic using only vehicle value accounts for most decisions of whether to purchase optional collision coverage: out of 45 respondents who did not have loans on their vehicles, 90% of those with vehicles worth more than $1000 carried collision coverage, while less than 30% of those with lower‐valued vehicles did.     

Accounting and litigation risk: evidence from Directors’ and Officers’ insurance pricing

We study whether and how financial reporting concerns are priced by insurers that sell Directors’ and Officers’ (D&O) insurance to public firms. As D&O insurers typically assume the liabilities arising from shareholder litigation, the premiums they charge for D&O coverage reflect their assessment of a company’s litigation risk. Using a sample of public firms in the 2001–2004 Tillinghast D&O insurance surveys, we document that firms with lower earnings quality or prior accounting restatements pay higher premiums after controlling for other factors impacting litigation risk. In addition, insurers’ concerns about financial reporting are most evident for firms with restatements that are not revenue or expense related, are greater in the period following the passage of the Sarbanes–Oxley Act of 2002, and are greater for firms with financial reporting problems that linger. Our results are consistent with past restatements being viewed as evidence of chronic problems with a firm’s financial statements. By analyzing archival data, we can also quantify the effects of other determinants of D&O premiums (such as business risk, corporate governance, etc.) identified by Baker and Griffith (Univ Chic Law Rev 74(2):487–544, 2007a) through interviews regarding the D&O underwriting process.     

Technical basis for collective (Group) pensions insurance in Norway — K 1946

I. Introduction.

In 1933 O. Aabakken in this journal ¹ Olav Aabakken: “A New Basis of Calculation for Collective Pensions Insurance in Norway”. 1933. dealt with the collective (group) pensions insurance in Norway and especially with the technical basis — K 1931 — which was adopted in 1931 by the life offices in common for this branch of insurance. This basis was worked out from the experiences since 1917, when collective pensions insurance was introduced in Norway. When the National old-age insurance was introduced in 1936, the life offices adopted some new collective pensions benefits which could be employed in the cases where an adjustment to the National old age insurance was desirable. O. Böe has described the mode of adjustment. ² Olav Böe: “Relations between Collective Pensions Insurance, Employer's Pension Funds and National Insurance in Norway”. Transactions of the Eleventh International Congress of Actuaries, Paris 1937.      

Farmers’ crop insurance perception and participation decisions: empirical evidence from Hunan,China

The measurement of risk perception and risk attitudes, and their link to actual risk behaviors have been extensively discussed. However, the potential impact of perception of risk management instruments on the decision to use those instruments has rarely been addressed. This article hypothesizes that the degree of perception of insurance contracts and participation decisions could have substantial mutual influence depending on the development of the market. An empirical work is carried out based on a survey of data for paddy rice farmers in Hunan Province, China. It shows that the sampled farmers’ crop insurance perception was surprisingly low despite years of pilot programs and tens of billions of expenditure in government subsidies. The result of simultaneous equations model indicates that crop insurance perception and participation are simultaneously determined and mutually improving. Moreover, empirical evidence indicates that the impact of crop insurance participation on perception is slightly stronger than that of perception on participation, and thus provides weak evidence of a ‘learning-by-doing’ stage in China at present. Together with evidence of substantial local disparities in perception, implications for the Chinese government in further cultivating the crop and rural insurance market are discussed.     

Directors’ and Officers’ liability insurance and bond credit spreads: Evidence from China

Using hand-collected data on purchases of D&O insurance by Chinese listed firms for the period from 2008 to 2019, we empirically find that D&O insurance negatively associates with credit spreads. The negative relationship still holds after conducting a series of robustness tests and is not driven by the eyeball effect. We also show that D&O insurance can reduce credit spreads via the channels of internal controls, external monitoring, information asymmetry and default risk. Moreover, the negative effect of D&O insurance on credit spreads is more pronounced for non-state-owned firms, those located in regions with a low level of marketization or that employ rating agencies with a bad reputation. Our study complements the literature on the credit spreads and corporate governance.     

Cross-border M&As in the financial sector: Is banking different from insurance?

This paper investigates what factors might help explain the internationalization strategy of banks and insurance companies, by comparing the determinants of cross-border M&As in the two sectors in a unified framework. The empirical analysis shows that between 1990 and 2003 the internationalization of banks and insurance companies followed similar patterns. Distance and economic and cultural integration are important determinants for both the banks’ and the insurance companies’ expansion abroad. Comparative advantage also has a prominent role, the more so for banks. The evidence is less supportive of the view that cross-border M&As are more frequent between similar countries, as predicted by the new trade theory. Finally, and most interestingly, we find indirect evidence consistent with the hypothesis that implicit barriers to foreign entry are more important in explaining the behavior of banks than that of insurance companies.     

Product-market strategy and underwriting performance in the United Kingdom’s property–casualty insurance market

Drawing on a framework from the organizational economics literature, we utilize a panel data design to examine empirically the effect of motor insurance and liability insurance business on the overall underwriting performance of insurers operating in the United Kingdom’s (UK) property–casualty insurance market. We find that participation in liability insurance contributes positively to underwriting performance, whereas motor insurance is associated with inferior underwriting performance. Additionally, we find that higher reinsurance ratio is associated with better underwriting performance, but reduced profit margins. Our results show that higher leverage too is associated with better underwriting performance. We conclude that our results could have potentially important commercial and/or policy implications.     

Does prevention as an investment strategy explain the intention to purchase guarantees for unit-linked life insurance?

The present paper examines the relationship between prevention as an investment strategy and the perceptions about unit-linked insurance on the intention to purchase interest rate guarantees for such products. We propose a framework in which the relationship between adopting prevention as an investment strategy, and the intention to purchase interest rate guarantees is moderated by the level of financial literacy of the individual and this interaction is mediated by the perceptions regarding unit-linked insurance. We find support for our conceptual model by testing it on a sample of 1017 financial decision makers in Germany using a moderated mediation analysis. The paper therefore offers insights into the decision-making process of financial consumers in Germany and presents practical implications for designing products for age-old provision.     

The impact of directors’ and officers’ insurance on audit pricing: Evidence from UK companies

This paper examines the impact of directors’ and officers’ (D&O) insurance on audit pricing in a large sample of UK companies. The existence of D&O insurance is expected to exert a dual impact on auditors’ pricing decisions. The presence of an additional source of funds to satisfy stakeholder claims in the event of audit client failure suggests that audit fees in insured companies should be lower. Alternatively, recent research has identified a positive link between the presence of D&O insurance and a number of characteristics traditionally associated with more expensive audits. The main objective of this study is to ascertain which of these influences pre-dominates. Analysing a sample of 753 UK listed companies in the early 1990s, when companies were obliged to disclose the presence of D&O insurance, this study shows that D&O insurance is associated with higher audit fees. It also confirms that insured companies are larger, more complex and present a greater audit risk (using a range of measures) than uninsured companies. Further analysis suggests that the impact of D&O insurance on audit fees may be influenced by company size, auditor size, and the extent of non-executive presence on the company's board.     

Underwriting and investment risks in the property-liability insurance industry: evidence prior to the 9–11 event

Underwriting and investment are two important and related business activities of insurance companies. However, studies on the interrelation between underwriting and investment risks of Property-Liability (P-L) insurance companies are sparse in the literature. Using a sample of US P-L insurers, this article conducts an empirical investigation of how these two risks are associated with each other in the 1994–2000 period (before the September 11th terrorist attack in 2001). Our results, robust to various estimations, suggest that there is no significant relationship between the underwriting and investment risks among our sample firms. Such results based on pre 9–11 event period provide some support for the conjecture of Achleitner et al. (Geneva Pap Risk Insur Issues Pract 27:275–282, 2002) that many insurance companies may have failed to take an integrated approach to risk management. This resulted in a heavy loss due to dual exposures in both underwriting and investment in the 9–11 event. In the aftermath of the recent global financial crisis, risk taking and risk management of financial institutions have received more attention and increasing scrutiny. We believe the current paper provides some useful insights in this vein.