An Insurance Market Simulation With Both Adverse and Advantageous Selection

The theory of adverse selection predicts that high‐risk individuals are more likely to buy insurance than low‐risk individuals if asymmetric information regarding individuals’ risk type is present in the market. The theory of advantageous selection predicts the opposite—a negative relationship between insurance coverage and risk type can be obtained when hidden knowledge in other dimensions (e.g., the degree of risk aversion) is present in addition to the risk type. Using the heterogeneity of insurance buyers in either risk type or risk aversion, we first introduce a classroom‐based insurance market simulation game to show that adverse selection and advantageous selection can coexist. We then explain the underlying concepts using two methods: a mathematical framework based on expected utility theory and an empirical framework based on the results of the game itself. The game is easy to implement, reinforces textbook concepts by providing students a hands‐on experience, and supplements current textbooks by bringing their content up to date with current research.     

Hidden Overconfidence and Advantageous Selection

Theories of adverse selection and moral hazard predict the occurrence of the risk and the coverage of the insurance should be positively correlated, whereas empirical researches find little support of it. This paper provides a theoretical model of hidden overconfidence and demonstrates that a competitive insurance market may settle on separating equilibrium with advantageous selection predicting a negative relationship between risk and coverage. By assuming heterogeneity in risk perception and hidden action on self-protection, we find that, in equilibrium, the rational type of individual takes precautions to reduce the loss probability, whereas the overconfident type of individual will not make any effort. In the separating equilibrium, the insurer provides a product with high coverage to attract rational type of individual (low risk), and a product with low coverage for overconfident type of individual (high risk). In addition, other types of equilibrium such as adverse selection or linear premium rate are also found.     

Testing Adverse Selection With Two‐Dimensional Information: Evidence From the Singapore Auto Insurance Market

This article examines adverse selection in insurance markets with two‐dimensional information: policyholders’ riskiness and degree of risk aversion. We build a theoretical model to make equilibrium predictions on competitive insurance screening. We study several variations on the pattern of information asymmetry. The outcomes range from full separation to partial separation, and complete pooling of risk types. Next, we propose a copula approach to jointly examine policyholders’ coverage choice and accident occurrence in the Singapore automobile insurance market. Furthermore, we invoke the theory to identify subgroups of policyholders for whom one may expect the risk–coverage correlation and adverse selection to arise.     

An Examination of the Equity Market Response to The Gramm-Leach-Bliley Act Across Commercial Banking, Investment Banking, and Insurance Firms

Abstract:  This paper examines the wealth effects of the events surrounding the passage of the Gramm-Leach-Bliley Act of 1999 and changes in systematic risk from the pre-Act period to the post-Act period for commercial banks, investment banks, and insurance firms. The results suggest that investment banks and insurance firms are better positioned to exploit the benefits of product-line diversification opportunities allowed by the legislation compared to commercial banks that experience no significant market reaction. Further evidence indicates a significant risk shift and overall reduction in riskiness for the financial sectors under consideration around the event period.     

Does Inefficient Risk Sharing Increase Public Self-Protection?

This paper studies how the risk of having an unequal distribution of income across the population affects the investment in a public self-protection policy, such as financial regulation or climate change mitigation. Two economies are compared. In the first economy, there is perfect risk sharing, i.e., individuals can credibly commit on a set of transfers that will remove ex-post inequalities in consumption. In the second economy, no risk sharing takes place. By referring to the literature on background risks, I determine some conditions in terms of change in risk aversion and prudence, which guarantee an increase in self-protection under inefficient risk sharing. Generally speaking, if self-protection reduces the risk of inequality, the investment tends to rise when either the probability of a catastrophic event and/or the risk of inequality are sufficiently low. If self-protection increases the risk of inequality, the investment tends to rise when both the probabilities of aggregate loss and the increase in the risk of inequality are sufficiently small.     

Optimal investment of an insurer with regime-switching and risk constraint

We investigate an optimal investment problem of an insurance company in the presence of risk constraint and regime-switching using a game theoretic approach. A dynamic risk constraint is considered where we constrain the uncertainty aversion to the ‘true’ model for financial risk at a given level. We describe the surplus of an insurance company using a general jump process, namely, a Markov-modulated random measure. The insurance company invests the surplus in a risky financial asset whose dynamics are modeled by a regime-switching geometric Brownian motion. To incorporate model uncertainty, we consider a robust approach, where a family of probability measures is cosidered and the insurance company maximizes the expected utility of terminal wealth in the ‘worst-case’ probability scenario. The optimal investment problem is then formulated as a constrained two-player, zero-sum, stochastic differential game between the insurance company and the market. Different from the other works in the literature, our technique is to transform the problem into a deterministic differential game first, in order to obtain the optimal strategy of the game problem explicitly.     

社会医疗保险、自我保护与商业健康保险

基于消费者保险需求理论,采用中国家庭金融调查（CHFS）数据,分析了社会医疗保险、自我保护与商业健康保险之间的关系。结果表明：社会医疗保险抑制了商业健康保险的发展,显著减少了自我保护支出;自我保护促进了商业健康保险的发展。鉴于此,政府应制定合理的封顶线及报销比例以提供适度的基本医疗保险保障水平,商业保险公司应提供差异化的健康保险以补充社会医疗保险,政府及保险公司应鼓励自我保护投资以促进商业健康保险发展。     

Self-Protection, Information and the Precautionary Principle

In this paper we examine the effect of information on investment in self-protection. We show that the relationship between more information and investment in self-protection is ambiguous in general. If absolute risk aversion is constant, then investment in self-protection always decreases with a better information structure. We show that if we interpret the Precautionary Principle as requiring more self-protection today, it is difficult to accept it on the grounds of efficiency, except for a particular subset of information structures.     

Risk management and market conditions

In this paper, we investigate the relation between hedging activity by commercial/merchant/producers to commodity prices and commodity market volatility using Commitments of Traders reports from commodity futures markets exchanges. Qualifying the body of literature which attributes hedging activity to departures from Modigliani-Miller theory, market imperfections and transactions cost, we address the paradoxes of hedging which is not value creating and the absence of hedging when firms might benefit, arguing that it may be related to the market conditions and risk appetite. We discover that prices and volatility are generally statistically significant contributors to hedging activity by commercial/merchant/producers’ users but with marked differences in their elasticities. For some commodities, price levels alone and not volatility are significant. We demonstrate that analysis of hedging in commodity markets should take cognisance of conditions and the degree of risk aversion, otherwise the implicit assumption is that hedging is invariant to such matters. Through considering both market conditions and the degree of risk aversion, understanding the motivation for hedging may be enhanced.     

中国实体企业金融化:货币扩张、资本逐利还是风险规避?

本文构建了一个刻画实体企业在流动性金融资产和固定资产之间进行权衡的投资组合选择模型,并创新性地将货币扩张的宏观因素引入微观模型,推演中国实业部门金融化的驱动逻辑。理论模型显示:货币扩张、资本逐利和风险规避本质上是宏观和微观两个不同层面的要素变量,但都卷入实业部门金融化的驱动机制中,然而驱动效应的表现形式要比已有文献的理论模型更加复杂。基于上市公司面板数据总体样本的实证结果表明:货币扩张、资本逐利和风险规避均是企业金融化的关键影响因素,但货币扩张表现为直接抑制和间接促进两种效应。进一步引入宏观风险因素和根据企业所有权性质划分样本的稳健性检验则给出了更为细致的信息:货币因素可能通过宏观风险因素间接作用于企业金融化;所有权性质不同的企业的金融化驱动机制也表现出明显的异质性:国有企业金融化主要受货币因素和风险规避因素影响;民营企业金融资产占比层面的金融化驱动因素是风险规避和资本逐利,而金融渠道获利占比层面的金融化则受到货币因素的显著影响;其他类型企业的金融化主要受货币因素的显著影响。     

财政转移支付如何影响了地方政府债务?

本文以地方融资平台公司发行的城投债为样本,研究来自中央政府的财政转移支付对于地方城投债发行的影响。研究发现,来自中央政府的人均财政专项转移支付每增加1元,会导致地方融资平台公司城投债发行增加人均0.312元,而包括税收返还和一般性转移支付在内的非专项转移支付对城投债的发行并无显著影响。并且,专项转移支付对城投债发行的显著正影响只在中西部省份存在,东部地区并未发现这一机制。本文的进一步研究表明,地方政府债务的借新还旧现象也正在显现,并且变得越来越严重。     

Stock market expectations and risk aversion of individual investors

We study the relationship between stock market return expectations and risk aversion of individuals and test whether the joint effects arising from the interaction of these two variables affect investment decisions. Using data from the Dutch National Bank Household Survey, we find that higher risk aversion is associated with lower stock market expectations. We identify significant and negative effects on the probability that individuals invest in stocks arising from the interaction between stock market expectations and risk aversion. These effects are in addition to a significant and positive impact from stock market return expectations as well as a significant and negative effect from risk aversion separately. However, once individuals participate in the stock market, their stock market expectations alone remain significant in determining their portfolio allocation decisions.     

Dynamic Portfolio Choice with Stochastic Wage and Life Insurance

We study optimal insurance, consumption, and portfolio choice in a framework where a family purchases life insurance to protect the loss of the wage earner's human capital. Explicit solutions are obtained by employing constant absolute risk aversion utility functions. We show that the optimal life insurance purchase is not a monotonic function of the correlation between the wage and the financial market. Meanwhile, the life insurance decision is explicitly affected by the family's risk preferences in general. The model also predicts that a family uses life insurance and investment portfolio choice to hedge stochastic wage risk.     

乐观预期、保障能力与商业保险购买——来自中国家庭的微观证据

本文基于中国家庭微观调查数据,在考虑商业保险“保障”和“投资”双重属性的前提下,实证研究了乐观预期对家庭商业保险购买的影响。结果发现,乐观预期对家庭商业保险购买存在显著的积极影响,即户主乐观预期程度越高,家庭购买商业保险的意愿越强。进一步区分保障型商业保险和投资型商业保险,发现乐观预期对商业保险购买的积极影响主要来自对投资型商业保险的需求,对保障型商业保险购买的影响则不显著。更重要地,不同风险保障能力下乐观预期对商业保险购买存在异质性影响,家庭储蓄较多、社会保障覆盖较好以及社会资本水平较高的家庭,乐观预期对商业保险购买的积极影响更大。本研究不仅有助于从预期视角理解商业保险市场的“有限参与”之谜,也为提升家庭风险保障和财富增值能力提供了借鉴。     

The Risk‐Sharing Implications of Disaster Insurance Funds

We study the risk‐sharing implications that arise from introducing a disaster insurance fund to the cat insurance market. Such a form of intervention can increase efficiency in the private market, and our design of disaster insurance suggests a prominent role of catastrophe reinsurance. The model predicts buyers will increase their demand in the private market, and the seller will lower prices to such an extent that their revenues decrease upon introduction of disaster insurance. We test two predictions in the context of the Terrorism Risk Insurance Act (TRIA). It is already known that the introduction of TRIA led to negative abnormal returns in the insurance industry. In addition, we show this negative effect is stronger for larger and for low‐risk‐averse firms—two results that are consistent with our model. The seller’s risk aversion plays an important role in quantifying such feedback effects, and we point toward possible distortions in which a firm may even be overhedged upon introduction of disaster insurance.     

Public Versus Private Insurance with Dual Theory: A Political Economy Argument

This paper analyzes the political support for public insurance in the presence of a private insurance alternative. The public insurance is compulsory and offers a uniform insurance policy. The private insurance is voluntary and can offer different insurance policies. Adopting Yaari's [Econometrica, 55, 95–115, 1987] dual theory to expected utility (i.e., risk aversion without diminishing marginal utility of income), we show that adverse selection on the private insurance market may lead a majority of individuals to prefer public insurance over private insurance, even if the median risk is below the average risk (so that the median actually subsidizes high-risk individuals). We also show that risk aversion makes public insurance more attractive and that the dual theory is less favourable to a mixed insurance system than the expected utility framework. Lastly, we demonstrate how the use of genetic tests may threaten the political viability of public insurance.     

Convergence and risk-return linkages across financial service firms

We examine the risk and return linkages across US commercial banks, securities firms, and life insurance companies during the 1991–2001 period. After controlling for changes in the broader stock market, interest rates, and foreign currency values, we find that return and risk interdependencies across these financial firms are significant and size-varying; larger institutions display stronger volatility transmission linkages, while smaller ones exhibit more prominent return-related linkages. The tighter link in risk among large financial institutions (FIs) suggests stronger convergence, employment of common models of risk measurement and risk management, and more intense inter-industry competition, particularly between large banks and large securities firms, compared to smaller institutions. Lack of risk spillover among smaller FIs confirms the intuition that they typically assume more localized and idiosyncratic risk. The co-movement of stock returns among smaller FIs has been helped by the effects of locally based factors, such as economic conditions and state regulations, on all such institutions, and a less diversified product set. Differences in spillover patterns between large and smaller institutions have implications on investment choices and mergers and acquisitions in the industry. Introduction of the Gramm-Leach-Bliley Act (1999) has had dissimilar effects on the riskiness of large versus smaller life insurance and securities firms, and an insignificant effect on commercial banks.     

福建省发展地方优势特色农产品保险的实践和思考

发展现代农业,就必须解决农业生产面临的自然灾害和市场价格波动风险,就需要大力发展农业保险分散风险.当前,一些地方优势特色农产品保险发展还不够充分,不能有效分散地方优势特色农产品自然灾害和市场价格波动风险,成为制约地方优势农产品持续发展的一个因素.在供给侧,农业保险经营主体能力有待提高,保障的总体水平仍然偏低,保险产品种类少,产品设计重物不重人.在需求侧也存在一些地方政府重视不够,投入不足,农民投保意愿不强等短板.为此,建议供需两侧同步发力,共同推动地方优势特色农产品保险高质量发展,更好分散地方优势特色农业生产经营风险.供给侧注重保险产品创新、保险机构服务能力提升,需求侧增加财政投入、调动农民参保缴费积极性.     

Investment policy in family controlled firms

We explore the relation between family ownership and corporate investment policy. Our analysis centers on two incentives, risk aversion and extended investment horizons, which potentially influence the level and type of investments that family firms undertake. We find that family firms devote less capital to long-term investments than firms with diffuse ownership structures. When dividing long-term investment into its two components of R&D and capital expenditures, we note that family firms, relative to nonfamily firms, prefer investing in physical assets relative to riskier R&D projects. Additional tests indicate that family firms receive fewer patent citations per dollar of R&D investment relative to nonfamily firms. Overall, all empirical results indicate that family preferences for lower firm risk, across all family sub-types, affects corporate R&D spending and capital expenditures.     

Would emerging market pension funds benefit from international diversification: investigating wealth accumulations for pension participants

In recent years, investment portfolio selection is growing in importance for many emerging market pension funds, as pension reforms replace traditional pay-as-you-go systems with advanced funding systems. Various investment regulations are applied to the funded pensions, particularly in the form of portfolio limits for equities and international assets. With a bootstrap simulation approach, this paper attempts to quantify the impacts on retirement benefits of restricting international assets from the investment portfolios of emerging market pension funds. We find that, on average, over half of the pension portfolios of emerging market countries should be in international assets in order to maximize the expected utility of moderate and conservative pension fund participants. More generally, international assets can play a significant role in the investment portfolios for workers with risk aversion varying from aggressive to conservative. With few exceptions, the entire probability distribution of wealth accumulations at retirement could be shifted higher with the inclusion of international assets.