Do Stock Prices of Property Casualty Insurers Fully Reflect Information about Earnings,Accruals, Cash Flows,and Development?

This paper examines whether the stock prices of property and casualty (P&C) insurers fully reflect information contained in earnings, cash flows and accruals, and one particular accrual—development of loss reserves. The reserve for policy losses is a major accrual for P&C firms, requires substantial judgment and is the subject of unique disclosures that reveal the ex post error in management estimates. We find that investors underestimate the persistence of cash flows and overestimate the persistence of accruals for P&C insurers, but our evidence suggests the market does not underestimate the persistence of the development accrual.     

Genetic Testing,Insurance Economics,and Societal Responsibility

Three major perspectives emerge when the discussion of the implications of genetic testing on the insurance industry commences. One viewpoint, strongly advocated by certain consumer groups and ethicists on the basis of societal responsibility, categorically denies any necessity for connecting the results of genetic testing and issuance of insurance. By contrast, the insurance industry, upon examining the economics and dynamics of participation in voluntary insurance markets, lives in fear of a world filled with asymmetrical information (counter to the axioms for competitive markets), adverse selection (action by the insured as a result of asymmetric information to the perceived economic disadvantage of the insurer), and ultimately even the possibility of potential market failure or insurance company insolvency. An actuarial perspective considering the benefits (to the insurer) of this new genetic information concentrates primarily on the possibility of developing improved quantitative assessments of risk and better calculations of the actuarial present value of future loss costs based on the new statistically significant information gained from genetic testing. The strengths and weaknesses and facts and fallacies of each of these perspectives are examined in this paper, and potential solutions to the ultimate role of genetic testing in insurance underwriting and rate making are considered from the perspectives of the major players in this debate.     

The impact of implied facilities cost of money subsidies on capital expenditures and the cost of debt in the defense industry

We examine the public policy effects of a cash flow subsidy unique to the government contracting industry, on defense contractors’ capital expenditures and cost of debt over a relatively long time-period, 1978–2009. Because the Department of Defense found evidence of a shrinking defense industrial base in the early 1970s, it wanted to encourage capital spending by defense firms. The result was a cost accounting standard that reimbursed contractors for an imputed facilities capital cost of money (FCCOM) that has remained in effect, virtually unchanged, for almost 30 years, despite structural changes in the defense industry. Our results, using a sample of 628 defense firms, suggest that the standard met its intended objective of increased capital spending within 10 years of its promulgation. However, we also find that the FCCOM subsidy may have contributed to a decreased cost of debt within the defense sector over the long-term. Finally, further analyses indicate that the long-term persistence of this subsidy may have encouraged defense contractors to overinvest in capital goods. Our findings suggest that public policy makers should consider both direct and indirect effects of regulation embedded in accounting standards.     

Budget impact of everolimus for the treatment of progressive,well-differentiated,non-functional neuroendocrine tumors of gastrointestinal or lung origin that are advanced or metastatic

Background: Advanced neuroendocrine tumors (NETs) are a rare malignancy with considerable need for effective therapies. Everolimus is a mammalian target of rapamycin (mTOR) inhibitor approved by the US Food and Drug Administration (FDA) and European Medicines Agency (EMA) in 2016 for treatment of adults with progressive, well-differentiated, non-functional NETs of gastrointestinal (GI) or lung origin that are unresectable, locally advanced, or metastatic.

Objective: To assess the 3-year budget impact for a typical US health plan following availability of everolimus for treatment of GI and lung NETs.

Methods An economic model was developed that considered two perspectives: an entire health plan and a pharmacy budget. The total budget impact included costs of drug therapies, administration, hospitalizations, physician visits, monitoring, and adverse events (AEs). The pharmacy model only considered drug costs.

Results: In a US health plan with 1 million members, the model estimated 66 patients with well-differentiated, non-functional, and advanced or metastatic GI NETs and 20 with lung NETs undergoing treatment each year. Total budget impact in the first through third year after FDA approval ranged from $0.0568–$0.1443 per member per month (PMPM) for GI NETs and from $0.0181–$0.0355 PMPM for lung NETs. The total budget impact was lower than the pharmacy budget impact because it included cost offsets from administration and AE management for everolimus compared with alternative therapies (e.g. chemotherapies).

Limitations: Because GI and lung NETs are rare diseases with limited published data, several assumptions were made that may influence interpretation of results.

Conclusions: The budget impact for everolimus was minimal in this rare disease area with a high unmet need, largely due to low disease prevalence. These results should be considered in the context of significant clinical benefits potentially provided by everolimus, including significantly longer progression-free survival (PFS) for advanced GI and lung NET patients.     

Cost-effectiveness analysis on the use of fidaxomicin and vancomycin to treat Clostridium difficile infection in France

Background: Fidaxomicin is a macrocyclic antibiotic with proven efficacy against Clostridium difficile infection (CDI) in adults. It was licensed in France in 2012, but, due to higher acquisition costs compared with existing treatments, healthcare providers require information on its cost/benefit profile.

Objective: To compare healthcare costs and health outcomes of fidaxomicin and vancomycin, as reference treatment for CDI.

Methods: A Markov model was used to simulate the treatment pathway, over 1 year, of adult patients with CDI receiving fidaxomicin or vancomycin. Several patient sub-groups (severe CDI; recurrent CDI; concomitant antibiotics; cancer; renal failure; elderly) were evaluated. Cost-effectiveness was analyzed based on cure and recurrence rates derived from published randomized clinical trials comparing fidaxomicin and vancomycin, and costs calculated from the payer perspective using French hospitalization data and drug cost databases. Model outputs included costs in euros (reference year 2014) and health outcomes (recurrence; sustained cure rates). Alternative scenario and sensitivity analyses were performed using data from other clinical trials in CDI, including one conducted in real-life clinical practice in France.

Results: Drug acquisition costs were €1,692 higher in fidaxomicin-treated patients, but this was offset by the lower hospitalization costs with fidaxomicin, which were reduced by €1,722. The reduction in the cost of hospitalization was driven by the significantly lower number of recurrences in fidaxomicin-treated patients, offsetting the acquisition cost of fidaxomicin in all sub-groups except recurrent CDI and concomitant antibiotics.

Conclusion: This study demonstrated that, despite higher acquisition costs, the lower recurrence rate with fidaxomicin resulted in cost savings or low incremental costs compared with vancomycin.     

Designing Markets for Developing Countries

This paper highlights what we know from market microstructure and how this should guide the design of equity markets in developing counties. I first consider the basic economic functions of capital markets and of exchanges. I develop more fully the importance of price discovery and liquidity, and how these are affected by the market environment and by characteristics of firms themselves. I then consider the particular implications of this for capital markets in emerging countries. Research has suggested various links between market designs and performance, and I review the implications of these for exchange structure. I conclude with some thoughts on how best to structure markets for newly listing companies.     

Liquidity and valuation in an uncertain world

During the 2007–2009 financial crisis there was little or no trading in a variety of financial assets, even though bid and ask prices existed for many of these assets. We develop a model in which this illiquidity arises from uncertainty, and we argue that this new form of illiquidity makes bid and ask prices unsuitable as metrics for establishing “fair value” for these assets. We show how the extreme uncertainty that traders face can be characterized by incomplete preferences over portfolios, and we use Bewley's (2002) model of decision making under uncertainty to derive equilibrium quotes and the nonexistence of trading at these quotes. We then suggest alternatives for valuing assets in illiquid markets.     

A configurational approach to understanding gender differences in entrepreneurial activity: a fuzzy set analysis of 40 countries

This paper explores entrepreneurial activity for men and women across 40 countries. Building on research grounded in social cognitive and institutional theories, we propose a configurational approach to explore how effects of different causal conditions are interdependent in explaining gender specific entrepreneurial activity. Using fuzzy-set qualitative comparative analysis, we find that no one causal element is sufficient for promoting entrepreneurial activity. Instead micro-level attributes of entrepreneurial self-efficacy and opportunity recognition in combination with macro-level business environment formal institutions and national culture create configurations of conditions that lead to high levels of entrepreneurial activity amongst men and women. Moreover, the causal factors configure in different ways for male and female entrepreneurs. This study demonstrates the value of using a configurational analytical technique to explore together the micro- and macro- complexities of what drives men and women around the world to engage in entrepreneurial activity.