Insurance guaranty fund—what good is it?

In this paper, we analyze under which conditions a self-supporting insurance guaranty fund can be beneficial for the policyholders in an incomplete market. Within the analyzed setting, we find out that in general, if existent, the potential advantages from its introduction cannot be fairly divided among the participating insurers. Thereby, we have to expect systematic wealth transfers between the policyholders of different insurance companies. We introduce a framework for utility-based fund charges as a solution to this problem.     

Rational Risk Perception: Utopia or Dystopia?

Societal conflicts with regard to risk management are common. The public has different beliefs than many experts and administrators with regard to such issues as the citing of a repository for spent nuclear fuel or whether genetically modified organisms should be allowed to enter the human food chain. As a result, political tensions arise and there may be a skew allocation of resources for risk mitigation. The question raised in the article is if a consensus society is possible and desirable. If views converge on high risk beliefs, the cost would be very high as well. If views converge on low risks, some hazards could be neglected and environmental damage considerable, as used to be the case in the Former Soviet Union and other socialist countries which lacked a free press. A consensus society is neither possible nor desirable. No party has access to the final truth with regard to risks and hazards; diversity is an asset.     

HIPAA's privacy rule: what is it, and how does it affect you?

This article discusses the implications for stakeholders of the privacy rule under the Health Insurance Portability and Accountability Act of 1996, on which the U.S. Department of Health and Human Services first released guidance on July 6, 2001. Although guidance will continue to evolve, the authors urge organizations to initiate the implementation of policies to ensure compliance by the actual effective date of 2003. (Small health plans have until 2004 to comply.)     

Authenticity: is it real or is it marketing?

Marty Echt, the new head of marketing at Hunsk Engines, is determined to bring the motorcycle maker back to its roots. He says it's not enough to project authenticity to customers--employees must personally subscribe to the brand's values. Should the company's CEO support Marty's "real deal" vision? Five experts comment on this fictional case study. Bruce Weindruch, the founder and CEO of the History Factory, says that an authenticity-based campaign can be effective--but only if it's truly drawn from history. Marketers like Marty often remember their organization's past in a golden haze. Weindruch recommends exploring old engineering drawings, ads, and product photos in order to understand what customers and employees really valued back in the day. Gillian Arnold, a consultant to luxury fashion and fine jewelry brands, thinks Marty's approach is right: People in key marketing posts must be passionate about their products and know them inside and out. She argues that the CEO needs to commit more fully to the new campaign and address the significant gap between the staff and the brand. James H. Gilmore and B. Joseph Pine II, the cofounders of Strategic Horizons, point out that Hunsk needs to manage customers' perceptions rather than trying to be a "real company" or forming a management team whose personal interests match the brand. People purchase a product if it conforms to their self-image; that alone determines the brand's authenticity. Glenn Brackett of Sweetgrass Rods, a maker of bamboo fly-fishing rods, says Marty seems to be one of the few people who understand Hunsk motorcycles. If employees bring blood, sweat, heart, and soul to a product, it will manifest that spirit, and customers will line up for it.     

Risk,Capital, and Operating Efficiency: Evidence from Taiwan’s Life Insurance Market

ABSTRACT

In this article, we investigate the relationships among risk, capital, and operating efficiency for Taiwanese life insurance companies from 2004 to 2009 by using the two-stage least-square approach. We find a positive relation between inefficiency and product risk. At the same time, efficient insurers are seen as taking higher asset risk than inefficient insurers. A contrasting finding also shows that the relationship between capital and product risk is positive, while the relationship between capital and asset risk is negative. Moreover, we present a negative relationship between inefficiency and capital level, indicating that well-capitalized insurers operate more efficiently than poorly capitalized insurers.     

Risk Management Failures: What Are They and When Do They Happen?

The difficulties of the past year have convinced many observers that current risk management practices are deeply flawed, and that such flaws have contributed greatly to the current financial crisis. In this paper, the author challenges this view by showing the need to distinguish between flawed assessments by risk managers and corporate risk‐taking decisions that, although resulting in losses, were reasonable at the time they were made. In making this distinction, the paper also identifies a number of different ways that risk management can fail. In addition to choosing the wrong risk metrics and misidentifying or mismeasuring risks, risk managers can fail to communicate their risk assessments and provide effective guidance to top management and boards. And once top management has used that information to help determine the firm's risk appetite and strategy, the risk management function can also fail to monitor risks appropriately and maintain the firm's targeted risk positions. But if risk management has been mistakenly identified as the culprit in many cases, current risk management practice can be improved by taking into account the lessons from financial crises past and present. In particular, such crises have occurred with enough frequency that crisis conditions can be modeled, at least to some extent. And when models reach their limits of usefulness, companies should consider using scenario planning that aims to reveal the implications of crises for their financial health and survival. Instead of relying on past data, scenario planning must use forward‐looking economic analysis to evaluate the expected impact of sudden illiquidity and the associated feedback effects that are common in financial crises.     

Information technology investment governance: What is it and does it matter?

While the growth in the number of IT investments remains strong, research in the IT investment field is limited, resulting in suboptimal practical guidance on effectively governing IT investments. Based on resource-based theory, this paper reports the initial work involved in developing a construct named IT investment governance (ITIG), because it can be used to measure organizations' capability to govern their IT investments. This paper then empirically examines the association of ITIG and corporate performance. The preliminary result is a four-factor, 16-item instrument for assessing the ITIG construct. This method's factors are IT investment value governance, IT investment value monitoring, IT investment appraisals and IT investment project management. The impact of ITIG on corporate performance was demonstrated with a significant and positive relationship found to exist between the ITIG construct and corporate performance, thus supporting the effectiveness of the ITIG construct. Corporations with higher levels of ITIG capability are more likely to maximize the contribution of their IT investments to firm value.     

When is discretion superior to timeless perspective policymaking?

The monetary policy literature assumes increasingly that policy is formulated according to the timeless perspective (Woodford, 1999a). However, by treating appropriately the auxiliary state variables that characterize the timeless perspective equilibrium when evaluating policy performance, this paper shows that discretionary policymaking can be superior to timeless perspective policymaking and identifies model features that make this outcome more likely. Using standard New Keynesian DSGE models, discretion is found to dominate timeless perspective policymaking when the price/wage Phillips curves are relatively flat, due, perhaps, to firm-specific capital (or labor) and/or Kimball (1995) aggregation in combination with nominal rigidities. These results suggest that studies applying the timeless perspective might also usefully compare its performance to discretion, paying careful attention to how policy performance is evaluated.     

Briys,Eric, and de Varenne,François,Insurance: From Underwriting to Derivatives: Asset Liability Management in Insurance Companies

Abstract

This paper uses economic principles to analyze alternative recognition schemes for end-of-period retirement plan liabilities; the candidates, using U.S. nomenclature, are the vested benefit obligation (VBO), the accumulated benefit obligation (ABO) and the projected benefit obligation (PBO).

In competitive employment markets with rational contracting we are unable to justify projected costing (PBO-based) for typical pay-related defined benefit plans. Projected costing misrepresents the economic obligations incurred by shareholders and invites moral hazard.

Employee exposure to moral hazard may be minimized by exit costing (VBO-based) which recognizes only those benefits to which an exiting employee is entitled under the explicit benefit contract. But exit costing may not fully inform shareholders about the obligations that they have incurred under implicit contracts that extend beyond the plan document. Accrued costing (represented in the United States by the ABO) may better measure shareholders’ economic commitments.

Small differences between the ABO and the VBO may measure a human capital asset incented by delayed vesting and benefit eligibility. Large differences are a marker for frail benefit design and potential moral hazard.

Moral hazard options exercised by employers disappoint employees and may lead to unwelcome ex-post results-oriented repairs imposed by legislators, regulators and courts.     

Bankruptcy: What is left for the creditors? A Belgian exploratory study

It is sometimes alleged that in cases of bankruptcy, there is often not much left for the creditors, especially for the ordinary unsecured creditors. This article examines, in an exploratory way, what the different classes of creditors, depending on their priority position, recover in cases of bankruptcy in Belgium, by investigating a sample of 286 bankruptcy files from the Commercial Court of Ghent (Belgium's second largest city). This article also explores what impact some existing proposals to improve the position of ordinary unsecured creditors in the event of bankruptcy would have had on the bankruptcy cases studied.     

Are Farmers’ Behaviors Rational When They Pay Less for Social Endowment Insurance? Evidence from Chinese Rural Survey Data

In recent years, farmers have had high participation rate in the rural social endowment insurance in China, for which personal contribution and government subsidy are the main funding source. There have been increasingly more farmers participating into the program. However, their enthusiasm for high premium payment was rather low as most of them selected the minimum premium for insurance. In this article, the discounted utility theory from behavioral economics was adopted to analyze insurance selection behaviors of farmers; in addition, a discounted incremental utility model with a hyperbolic discounting function was also further constructed to describe their insurance decision-making processes. Based on the investigation of time preferences of farmers, their insurance participation behaviors of diverse natures were simulated. The corresponding results indicated that active insurance participation and low insurance premium payment were rational choices for most farmers; in comparison, for the elders with higher income, different choices can be made. Therefore, policy makers could formulate differentiated subsidy policies directing at farmers from different groups, so as to stimulate their enthusiasm for premium payment.     

Deposit Insurance and Risk Management of the U.S. Banking System: What is the Loss Distribution Faced by the FDIC?

We examine the question of deposit insurance through the lens of risk management by constructing the loss distribution faced by the Federal Deposit Insurance Corporation (FDIC). We take a novel approach by arguing that the risk management problem faced by the FDIC is similar to that of a bank managing a loan portfolio, only in the FDIC’s case the risk arises from the potential for loss of the individual banks in its portfolio. We explicitly estimate the cumulative loss distribution of FDIC insured banks using two variations of the Merton model and find that reserves are sufficient to cover roughly 99.85% of the loss distribution, corresponding to about a BBB+ rating. However, under different stress scenarios (higher correlations, fat-tailed bank returns, increased loss severity) that level can be much lower: approximately 96% corresponding to about a B+ rating.JEL classification: G210, G280.Any views expressed represent those of the author only and not necessarily those of the Federal Reserve Bank of New York or the Federal Reserve System.     

Beyond Risk Aversion: Why,How and What's Next?

Risk attitudes other than risk aversion (e.g. prudence and temperance) are becoming important both in theoretical and empirical work. While the literature has mainly focused its attention on the intensity of such risk attitudes (e.g. the concepts of absolute prudence and absolute temperance), I consider here an alternative approach related to the direction of these attitudes (i.e. the sign of the successive derivatives of the utility function).     

Trustee reputation in securitization: When does it matter?

We consider the role of trustees–who are nominated to protect the interests of investors–in securitization pricing and whether investors rely on them to mitigate risks. In particular, we examine the effect of trustee reputation on initial yield spreads of European mortgage‐backed security (MBS) issuances between 1999 and the first half of 2007. We find that engaging reputable trustees led to lower spreads during the credit boom period prior to the 2007–2009 financial crisis. Our findings suggest that trustees’ reputation was considered by investors to be more important when risk assessment became more challenging.     

The Bankruptcy System's Chapter 22 Recidivism Problem: How Serious is It?

This paper is adapted from the keynote address from the Eastern Finance Association's 2014 meeting in Pittsburg, Pennsylvania. We highlight a recidivism problem: about 15% of debtors who emerge as continuing entities under Chapter 11, or are acquired as part of the bankruptcy process, ultimately file for bankruptcy protection again (18.25% when considering only those firms which emerge as a continuing, independent entity). We argue that the “Chapter 22” issue should not be dismissed by the bankruptcy community just because no interested party objects during the confirmation hearing. Applying the Z”‐Score model to a large sample of Chapter 11 cases reveals highly different and significant expected survival profiles at emergence. Credible distress prediction techniques can effectively predict the future success of firms emerging from bankruptcy and be used by the bankruptcy court to assess the feasibility of the reorganization plan, a requirement mandated by the Bankruptcy Code. Branch reviews, discusses, and critiques in this follow‐up article to Altman's original thesis.     

When and Why Do Takeovers Lead to Fraud?

This paper develops a model explaining how acquisitions of controlling block ownership can facilitate post‐takeover fraud by new managers when investor protection is poor. Based on disclosures of embezzlement or breach of fiduciary duty in Korean firms, we find that the probability of explicit looting in takeover targets is 13%, almost five times as large as a matched sample of non‐targets. Post‐takeover frauds are primarily driven by transfers of minority blocks, while the corresponding probability in majority acquisitions is statistically indistinguishable from the non‐targets. These findings may explain why minority acquisitions of controlling blocks are popular under poor investor protection.     

Topics and trends in finance research: What is published,who publishes it and what gets cited?

In this study we provide a detailed examination of the subject matter of finance research and its institutional features as it has evolved over the past two decades. Drawing on novel approaches from data science, we examine the content of more than 30,000 published papers. Overall, we find a striking lack of diversity in the topics investigated and the methodological approaches used. Almost all finance research is conducted using techniques from economics and mathematics, with virtually no use made of qualitative methods or interdisciplinary approaches. Looking at the developments of the discipline over time, we document an increase in the volume of corporate finance research and a variation in the topics covered following the financial crisis, although these changes appear to be reactive and trivial rather than paradigm shifts. We also provide a cartography of research in finance and its citation-based impact by the location of authors. Leading finance research is concentrated in elite US institutions, and has a disproportionately strong citation-based impact. Compared with other business and management sub-fields, citations in finance are heavily skewed towards the top journals as the latter generate almost twice as much impact as the lower rated outlets.