Reinsurance for Natural and Man-Made Catastrophes in the United States: Current State of the Market and Regulatory Reforms

U.S. insurers are heavily dependent on global reinsurance markets to enable them to provide adequate primary market insurance coverage. This article reviews the response of the world's reinsurance industry to recent mega-catastrophes and provides recommendations for regulatory reforms that would improve the efficiency of reinsurance markets. The article also considers the supply of insurance and reinsurance for terrorism and makes recommendations for joint public–private responses to insuring terrorism losses. The analysis shows that reinsurance markets responded efficiently to recent catastrophe losses and that substantial amounts of new capital enter the reinsurance industry very quickly following major catastrophic events. Considerable progress has been made in improving risk and exposure management, capital allocation, and rate of return targeting. Insurance price regulation for catastrophe-prone lines of business is a major source of inefficiency in insurance and reinsurance markets. Deregulation of insurance prices would improve the efficiency of insurance markets, enabling markets to deal more effectively with mega-catastrophes. The current inadequacy of the private terrorism reinsurance market suggests that the federal government may need to remain involved in this market, at least for the next several years.     

The effect of predation risk on cash holdings: Empirical evidence from the U.S. property‐liability insurance industry

Corporate cash holdings play a significant role in the U.S. property‐liability insurance industry yet the topic of insurer cash holdings policy has largely been overlooked by prior empirical research. While a number of studies have investigated firm‐specific factors related to cash holdings in the insurance industry, prior research has not examined how market concentration and potential predation risk impact cash holdings. We propose a new measure of market concentration and provide evidence in support of the predation risk theory. Specifically, we show that insurers exposed to more concentrated markets tend to hold more cash. Furthermore, the relation between market concentration and cash holdings is influenced by access to internal capital. While unaffiliated insurers without access to internal capital hold greater levels of cash in more concentrated markets, group insurers with access to internal capital do not hold greater levels of cash to mitigate predation risk.     

An Analysis of Contingent Commission Use by Property–Liability Insurers

The payment of contingent commissions in the property–liability insurance industry has long been commonplace, but recent events have made the practice highly controversial. Even prior to these events, wide variation existed among insurers in their use of contingent commissions. In this article, we examine the determinants of whether or not an insurer chooses to pay contingent commissions at all, as well as the determinants of the extent of their use for those insurers that pay them. We find a number of variables that have a significant relation to the use and extent of use of contingent commissions.     

The Economic Effects of Federal Participation in Terrorism Risk

The catastrophic terrorist attack of September 11, 2001 caused unprecedented insured losses. While the insurance industry covered these losses, it also took swift steps to limit its exposure to such risks in the future. In response to ensuing market dislocations, the Terrorism Risk Insurance Act (TRIA) was passed in 2002. The law temporarily requires primary insurers to offer terrorism coverage and creates a federal "backstop" to limit losses on such coverage. In anticipation of the program's scheduled expiration, and to inform debate on its possible extension, this article analyzes market developments in the wake of 9/11 and the passage of TRIA. We find that to date, TRIA has facilitated private sector participation in the market for terrorism insurance by lending structure to an otherwise ill-defined risk. While alternative terrorism risk bearing mechanisms are evolving, none appear ready to replace federal involvement presently. We conclude that a continuation of TRIA for a period of time would enhance U.S. economic performance in the near term. Failing to extend TRIA in the near term would result in decreased economic performance absent another major terrorist attack and greater instability, job loss, and bankruptcy in the event of another attack.     

The Insurance Industry's Talent Gap and Where We Go From Here

There is concern among insurers and related firms in the United States and abroad that there will be a shortage of skilled insurance professionals in the next few years as current workers retire. Though there have been discussions among insurers, organizations, and academics as to how to address this issue, until recently, each group has been primarily working in isolation. The Insurance Education & Career Summit, which took place in September 2011, brought together 110 individuals across these groups for the purpose of creating a unified strategy to both attract and retain skilled workers to the insurance industry and work to create the next generation of insurance executives. This article provides a brief background on the talent gap issue. We also discuss its potential impact on the insurance industry. Finally, we summarize the main obstacles identified by Summit participants to both attracting and retaining skilled workers as well as the strategies developed to overcome these obstacles.     

Accessibility of flood risk insurance in the UK: confusion,competition and complacency

Flood risk insurance can be an effective tool in assisting the restoration of damaged property after a flood event and sustaining communities through difficult times. It can also form part of a wider flood risk management strategy. In the light of recent flood events in the UK and in the context of changing property insurance markets, the universal cover previously enjoyed by floodplain residents has been called into question. Conflicting media and industry views leave the floodplain resident and the wider community in confusion. A survey of floodplain residents in England regarding their experience with flooding and flood insurance in England has been undertaken. The results reveal that some floodplain residents do indeed encounter difficulties when seeking insurance for their homes. However, despite the risk‐averse policies of some insurers, availability of insurance is still strong in both at‐risk and previously flooded locations. Success in gaining insurance may lead to complacency among residents who see no advantage in pursuing other, more costly, damage mitigation actions. As a tool in risk management, therefore, the market is prevented from realising its potential by competition, which results in a lack of a consistent approach, rewards homeowners' search strategies and reduces information flow.     

The Determinants of Private Debt Holdings: Evidence From the Life Insurance Industry

Life insurers hold the majority of private debt. Lenders in the private debt market must have the ability to evaluate the credit quality of borrowers and to perform ongoing risk monitoring. The purpose of this study is to examine the determinants of private debt holdings in the life insurance industry. The results suggest that larger insurers, insurers with higher financial quality, mutual insurers, publicly traded insurers, insurers facing stringent regulation, and insurers with greater cash holdings are more prevalent lenders in the private debt market.     

The Impact of Catastrophes on Insurer Stock Volatility

This article investigates the impact of natural catastrophes and the 9‐11 attacks on (1) the volatility of insurance stocks and (2) the correlation of insurance stocks with the market. We find that natural catastrophes increase the volatility of insurance stocks. They also have a tendency to reduce the correlation of insurance stocks and the market. Investors can, consequently, diversify natural catastrophe risk by additionally holdings of a market portfolio. However, this does not hold for 9‐11. The events of 9‐11 led to increases in volatility and, simultaneously, to an increase in correlation. We also find evidence that 9‐11 increased the beta of insurance stocks.     

Aufsichtsrechtliche Rahmenbedingungen für die Tätigkeit von EU-Versicherern in der Türkei

In recent years the Turkish insurance market has exerted a strong appeal, especially for insurers seated in the EU, in view of its exponential growth rates and its dormant growth potential. EU insurers are, however, subject to more stringent insurance supervisory requirements when entering this insurance market, external to the EU, than when expending into other European insurance markets.     

Catastrophe Bonds—Regulating a Growing Asset Class

As the severity of natural catastrophes continues to intensify, disaster risk management is becoming increasingly important. In order to expand the capacity of the insurance markets, insurers and reinsurers have utilized alternative risk financing mechanisms such as catastrophe (CAT) bonds. Although the CAT bond market has increased recently, past CAT bond defaults have demonstrated that there are still concerns relating to contract documentation and the collateral structure of the bonds. This article argues that additional regulation that addresses these contracting problems and financial risks would facilitate greater use of CAT bonds. Regulatory change should also include industry‐wide accounting and tax reforms that will further support risk management objectives and the growth of the market. If the CAT bond market continues to experience the growth that was witnessed in the past year and additional regulation is implemented, insurers, reinsurers and governments can benefit from the cost‐effective protection that the instruments may provide in the event of a mega‐catastrophe.     

我国保险业在后危机时代的风险管理

美国次贷危机引发的华尔街金融风暴席卷全球,危机延伸到保险业导致美国保险巨头美国国际集团AIG由政府接管,金融危机使得人们更深层次地意识到风险管理对于金融业的重大意义。保险作为一种风险管理方式,其行业自身的风险管理尤为重要。本文借鉴国外保险公司的风险管理策略,并结合我国构建风险管理体系的经验与实际情况,提出关于构建我国保...     

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.     

我国产险公司承保亏损原因分析及建议

近年来,我国产险市场保持快速增长,但自2006年起承保效益连续出现大面积亏损,严重影响产险公司偿付能力。本文分析了产险公司承保效益情况,并剖析了造成普遍亏损的原因,认为要扭转产险行业普遍亏损的现状,保险企业要转变经营理念,提升自身经营绩效及经营水平;保险监管部门要在尊重市场规律基础上,推出有效的监管措施,为促进有序竞争提供制度保障。     

CAT Bonds and Other Risk-Linked Securities: State of the Market and Recent Developments

This article reviews the current status of the market for catastrophic risk (CAT) bonds and other risk-linked securities. CAT bonds and other risk-linked securities are innovative financial vehicles that have an important role to play in financing mega-catastrophes and other types of losses. The vehicles are especially important because they access capital markets directly, exponentially expanding risk-bearing capacity beyond the limited capital held by insurers and reinsurers. The CAT bond market has been growing steadily, with record amounts of risk capital raised in 2005, 2006, and 2007. CAT bond premia relative to expected losses covered by the bonds have declined by more than one-third since 2001. CAT bonds now appear to be priced competitively with conventional catastrophe reinsurance and comparably rated corporate bonds. CAT bonds have grown to the extent that they now play a major role in completing the market for catastrophic-risk finance and are spreading to other lines such as automobile insurance, life insurance, and annuities. CAT bonds are not expected to replace reinsurance but to complement the reinsurance market by providing additional risk-bearing capacity. Other innovative financing mechanisms such as risk swaps, industry loss warranties, and sidecars also are expected to continue to play an important role in financing catastrophic risk.     

中国的“影子保险”:来自监管自然实验的证据

影子保险在金融稳定中扮演着重要角色,但现有文献较多关注影子银行,对影子保险关注不足。“影子保险”即保险公司通过再保险方式将保险业务转移给不受监管或者受监管较弱的关联企业的活动,这会推高其真实的杠杆水平,增加金融体系脆弱性。然而,由于影子保险的不透明性和缺少自然实验,现有研究仅基于有限数据或模型给出简单的特征事实或结构性估计,很少能从因果关系上清楚地识别影子保险活动及其机制。本文利用中国加强对中资保险公司(处理组)再保险关联交易监管的政策冲击这一自然实验,使用微观数据和双重差分方法,识别了中国金融体系中的影子保险活动。研究发现,相关监管有效降低了影子保险活动,这一效应对集团公司的影响尤为显著;在机制方面,相关监管通过影响中资保险公司资产负债表两端的结构性调整进而降低了其风险承担行为,提高了经营稳定性。本文方法对识别金融机构的监管套利和防范系统性金融风险具有一定参考意义。     

An Exploratory Analysis of Insurer Groups

Grouping is a widespread and interesting phenomenon of the insurance industry, among both life‐health insurers and property‐liability insurers. Recognizing the potentially important implications of group membership for insurer behavior and characteristics, numerous academic researchers using insurance company data have included a dummy variable in their regression analysis to control for group membership. However, it has never been clear exactly what is being controlled for when such a variable is included. This article attempts to shed light on this question. Results indicate that group affiliated insurers tend to be larger than unaffiliated insurers, are more likely to be licensed in New York, are more likely to be stock firms than mutuals, and are likely to be less geographically concentrated.     

Das Versicherungsaufsichtsrecht der Russischen Föderation

In recent years the Russian insurance market passed through a remarkably dynamic phase measured by the figure of licensed insurers. Nevertheless basic problems for its future development still exist. Consequently the Russian lawmaker sees need to take action. The article therefore inquires on the existing market regulation. The topic of this contribution focuses on insurance supervision law of the Russian Federation.     

Management von Terrorrisiken in Deutschland — eine empirische Analyse

In this article insurance is considered as a means for allocating terrorism risk. After September 11^th, 2001 several countries, among them Germany, Great Britain, and the United States, have intervened on the markets for terrorism insurance. In Germany a primary insurance company was founded by the government and private insurers to supply cover for this peril. Using a full dataset of the demand for terrorism insurance this paper provides an evaluation of the intervention on the market for terrorism insurance in Germany. The results derived are then used to suggest ways to improve the allocation of terrorism risk in Germany.     

Health Care Reform,Efficiency of Health Insurers,and Optimal Health Insurance Markets

This research examines the efficiency of the U.S. health insurers. It shows that more insurers are less efficient than in the previous sample year; however, the results suggest that the federal health care reform has no significant effect on the overall efficiency of all insurers as a whole, which is very low but does not change much over time. This research explores how to improve the efficiency of the health insurance market by proposing state, regional, and national efficiency-based goal-oriented market models and an efficiency duplicating system, and it discusses important implications to the health care compacts, the health insurance exchanges or marketplaces, and the national multistate programs. It also analyzes further moves for efficiency enhancement with regard to payment methods and the health care delivery system. One interesting finding is that the Medicaid program is very efficient because it provides support to the offering of Medicaid coverage and further expansion, which enhances the health welfare of society with fewer resources inputs from the perspective of efficiency. This research should provide important insights for state and federal governments, policy makers, regulators, the health insurance industry, and consumers.     

Strategisches Asset-Liability Management in der Versicherungswirtschaft — Ein Ansatz zur integrierten Bilanzstrukturoptimierung

Asset-Liability Management has gained increased significance within the German insurance industry. This was mainly driven by recent capital market developments. In fact, insurers have encountered challenges to earn given interest guarantees. Regulatory changes also require more sophisticated ALM-tools. Solvency II will change the underlying paradigm and shift balance sheets perception towards a market value oriented view. Especially liabilities will have to be accounted for using the fair value approach. Most ALM-tools appear to be unable to cope with these demands. To improve this current practice, in this paper a Markowitz-approach is employed in order to generate an integrated method for the optimization of assets and liabilities in the life insurance industry. This technique aims to link new regulatory requirements to the latest capital market theory and therefore delivers a procedure for an integrated asset allocation policy in the insurance industry.