The Impact of Rate Regulation on Claims: Evidence From Massachusetts Automobile Insurance

The article tests the hypothesis that insurance price subsidies created by rate regulation lead to higher insurance cost growth. The article makes use of data from the Massachusetts private passenger automobile insurance market, where cross‐subsidies were explicitly built into the rate structure through rules that limit rate differentials and differences in rate increases across driver rating categories. Two approaches are taken to study the potential loss cost reaction to the Massachusetts cross‐subsidies. The first approach compares Massachusetts with all other states while controlling for demographic, regulatory, and liability coverage levels. Loss cost levels that were about 29 percent above the expected level are found for Massachusetts during years 1978–1998, when premiums charged were those fixed by the state and included explicit subsidies for high‐risk drivers. A second approach considers changing cost levels across Massachusetts by studying loss cost changes by town and relating those changes to subsidy providers and subsidy receivers. Subsidy data based on accident year data for 1993–2004 show a significant and positive (relative) growth in loss costs and an increasing proportion of high‐risk drivers for towns that were subsidy receivers, in line with the theory of underlying incentives for adverse selection and moral hazard.     

The Incentive Effects of Increasing Per-Claim Deductible Contracts in Automobile Insurance

A new rating system of automobile insurance for vehicle damage in Taiwan was launched in 1996, introducing a deductible that increases with the number of claims. In this article, we provide a theoretical rationale for the existence of an increasing per‐claim deductible system and show that the new system is most likely an optimal choice for those insured who tend to have lower claims probability when incentives are present. Using a unique dynamic data set, we are able to conduct a natural experiment to examine the incentive effects (both positive and negative) by looking at the change in claim tendency before and after switching between two deductible plans: an increasing per‐claim deductible and a zero deductible. Our results provide direct evidence of the effects of deductible structures on claim behavior.     

推进机动车辆保险费率市场化改革势在必行

机动车辆保险费率市场化是近些年来保险市场上的一个热门话题,也是制约机动车辆保险市场发展的一个瓶颈和唯一的出路。回顾30多年来车险费率的变化、利弊以及市场化的前提条件等,对加快费率市场化有一个更为清晰的认识,既要充分认识车险费率市场化的重要性和必要性,摈弃那些保守怕乱的错误认识,从市场经济和市场化对接的高度理解车险改革特别是费率改革的迫切性,又要认真做好思想准备、技术准备、人员准备和流程准备工作,积极搭建适合费率市场化操作平台的步伐,坚定不移地走机动车辆保险费率市场化改革之路。     

Evidence of Asymmetric Information in the Automobile Insurance Market: Dichotomous Versus Multinomial Measurement of Insurance Coverage

In the empirical analysis of information asymmetry in automobile insurance markets, prior research used a dichotomous measurement approach that induces excessive bundling in coverage measurements and sample selection biases. To improve on the conditional correlation method for testing information asymmetry, we propose a multinomial measurement approach that constructs coverage categories at ordered multinomial levels. With this approach, we find robust evidence of information asymmetry in both coverage area and coverage amount choices, which we could not find with the dichotomous measurement approach. It thus demonstrates the sensitivity of the empirical findings to the method used to measure insurance coverage.     

Dollarization in Emerging Markets: Evidence from Georgia

This paper studies dollarization using the implications of three versions of a money-in-utility function model. These versions accentuate the roles of the exchange rate, the interest rates on foreign and domestic currencies time deposits, and domestic and foreign inflation. Monthly Georgian data for the period 1996-2007 are employed in the analysis. Findings indicate that the U.S. dollar is a strong substitute for the domestic currency and has a significant share in domestic liquidity services. The historical dollarization is well explained by the exchange rate model.     

Market Segmentation Effects in Corporate Credit Rating Changes: The Case of Emerging Markets

We examine stock market reactions to corporate credit rating changes in 26 emerging market countries included in the Morgan Stanley Capital International (MSCI) Emerging Market Index. We hypothesize and test the notion that emerging market firms in the American Depository Receipts (ADRs) markets are more likely to purchase ratings from the Big Two (Moody’s and S&P), and that they react more strongly to the announcements of corporate rating changes by Moody’s or S&P than to those of raters in local markets. We compare the effect of credit rating changes of the Big Two in two emerging stock markets: local markets (local currencies) and ADR markets (U.S. dollars). We find significant price reactions in the ADR markets, and insignificant reactions in local markets, and conclude that there is capital market segmentation in ADR markets for credit rating changes of emerging market firms. We find evidence that investors react more strongly in the ADR markets than local markets because they require higher costs of capital for firms cross-listed both in the ADR markets and local markets due to greater expected bankruptcy costs and foreign exchange risks of those firms. We also report that stock markets react significantly, not only to rating downgrades, but also to upgrades in the ADR markets.

Measuring Selection Incentives in Managed Care: Evidence From the Massachusetts State Employee Insurance Program

Capitation gives insurers incentive to manipulate their offerings to attract the healthy and deter the sick. We calculate the incentives for such service-specific quality distortions using managed care medical and pharmacy spending data for fiscal years 2001 and 2002 from the Massachusetts State Employee Insurance Program. Services most vulnerable to stinting are cardiac care, diabetes care, and mental health and substance abuse services. Empirically, the financial temptation to distort service quality increases nonlinearly with supply-side cost sharing. Our empirical results highlight how selection incentives work at cross-purposes with efforts to reward excellent chronic disease management. Initiatives coupling pay-for-performance with risk adjustment and mixed payment hold promise for aligning incentives with quality improvement.     

Effects of the 1970 Bank Holding Company Act: Evidence from Capital Markets

This study measures the effects of the 1970 amendment to the Bank Holding Company (BHC) Act on the profitability and risk of BHCs using capital market data. Differences in abnormal returns and risk among three portfolios of bank shares which differ in their regulatory status are examined in various periods preceding and following the enactment. No significant differences in performance and no change in the relative risk of any pair of portfolios were observed. Thus, the null hypothesis that the nonbank expansion provisions of the 1970 amendment had no effect on BHCs' risk and profitability cannot be rejected.     

Volatility Spillover Effects in Interregional Equity Markets: Empirical Evidence from Brazil and Turkey

We investigate volatility spillovers between two stock markets: Turkey and Brazil. Using a misspecification-robust causality-in-variance test, we find evidence supporting volatility spillovers from the São Paulo Stock Exchange to the Istanbul Stock Exchange. Moreover, the results imply that financial crises may change the nature of volatility spillovers between the two markets by adding an additional channel of volatility transmission from Turkey to Brazil.     

国民经济核算视角下的保险产出及中国的实证

保险公司在生产什么？保险投资是不是保险生产活动？保险产出应采用“总额法”还是“净额法”计量？这些保险经济学的基础性问题,至今仍存在着计量分歧和理论争议。本文综合运用国民经济核算、保险学和经济学的知识体系,搭建了保险生产的创新理论框架和核算方法。在对我国两阶段的保险企业会计科目对比分析的基础上,测算了我国2003-2015年的保险产出,得出两种保险产出数据存在显著差异的结论。     

Medical Insurance Effects on Household Durable Goods Consumption: Evidence from China

In this article, we employ the China Health and Nutrition Survey (CHNS) data to investigate the effect of medical insurance on household durable goods consumption, which is closely related to China’s future rapid economic growth. We apply a logit regression model and find that medical insurance significantly promotes household durable goods consumption. Moreover, urban and rural households have different consumption choices when they are covered by medical insurance. To be more specific, urban households with medical insurance augment their consumption of refrigerators, washing machines, and air conditioners; rural households with medical insurance increase their purchases of color TVs, refrigerators, washing machines, air conditioners, and computers.     

Risk Preferences Heterogeneity: Evidence from Asset Markets

Using asset market data, as well as theoretical relations between investors' preferences,option-implied, risk-neutral, probability distribution functions (PDFs,) and index-implied,actual, PDFs, this paper extracts a time-series of investors' relative risk aversion (RRA)functions. Based on results recently derived by Benninga and Mayshar (2000), thesefunctions are used to recover the evolution of risk preferences heterogeneity. Applyingnon-parametric estimation on European call options written on the S & P500 index, wefind that: (i) the RRA functions are decreasing; and (ii) the constructed risk preferencesheterogeneity series is positively correlated in a static, as well as a dynamic, setup witha prevalent proxy for investors heterogeneity, namely, the spread between auction- andmarket-yields of Treasury bills.     

Convertible Bond Issues: Evidence from Security Markets

A convertible bond (CB) is a hybrid security containing elements of both common stock and straight debt. Still, empirical investigations on CB issue announcements have failed to discern any pattern in the stock market reaction that is consistent with announcements of either common equity or straight debt issues. This study shows that (a) motives for issuing the CB and (b) its rating (and to a less extent the riskiness of the issuing firm) help explain the stock market reaction to CB issue announcements. Specifically, announcement of a CB issue with an explicitly stated motive for the use of proceeds, when coupled with a high (low) bond rating, generates a stock market response similar to a straight debt (common stock) issue. On the other hand, the preference of CB holders is dictated by the motive for the use of proceeds and the conversion premium. These findings highlight the critical importance of the motive of issue in determining reactions in both the stock and bond markets.     

Insurance and Incentive Effects of Transfers among Regions: Equity and Efficiency

When productivity shocks across regions are less-than-perfectlycorrelated, there are gains from federation, even if the regionsare identical ex ante. For the federation to provide insurancefor these productivity shocks, it must introduce some sort ofequalizing transfer programme among regions. But any suchtransfer programme induces a form of moral hazard as well, ifregions still have some control over their own policies. Oneof the implications of this moral hazard is that the progressivityof the overall (regional together with federal) tax system willbe increased when the federal transfer programme is expanded.     

The Effects of Regulated Premium Subsidies on Insurance Costs: An Empirical Analysis of Automobile Insurance

State regulation of rates is sometimes used as a means to make automobile insurance more affordable to consumers by restricting insurer profits and pricing practices. Incentive distortions arising from this type of rate regulation might lead to higher accident rates and higher insurance loss costs. Annual state‐level panel data for the time period 1980–1998 are used to investigate these effects, using empirical methods that recognize the endogenous determination of states’ regulatory choices. Results suggest that rate regulation that systematically suppresses (some or all) drivers’ insurance premiums is associated with significantly higher average loss costs and higher insurance claim frequency.     

Regulation of Insurance Markets

There have been major changes in the way European insurance markets are regulated, and there is still considerable debate about what the form and scope of regulation should be. This article examines the arguments for solvency regulation when consumers are fully informed of the insurer's insolvency risk. It is shown firms always provide enough capital to ensure solvency, unless there are restrictions on the composition of their asset portfolios. The conclusion holds even when competition means that only normal profits can be earned. This suggests that the role of regulation in insurance markets should be confined to providing consumers with information about the default risk of insurers.