Citicorp–Travelers Group merger: Challenging barriers between banking and insurance

The Citicorp–Travelers Group merger increased the prospects for new legislation to remove the barriers between banking and insurance, resulting in a positive wealth effect for institutions most likely to gain from deregulation. Analysis of abnormal returns surrounding the merger show that life insurance companies and large banks (excluding Citicorp and Travelers Group) have significant stock price increases, while the returns of small banks, health insurers, and property/casualty insurers are insignificantly different from 0. This analysis provides evidence that investors expect large banks and insurance companies to receive significant benefits from recent congressional legislation removing barriers to bancassurance.     

Performance of the Life Insurance Industry Under Pressure: Efficiency,Competition, and Consolidation

This article investigates efficiency and competition in the Dutch life insurance market by estimating unused scale economies and measuring efficiency‐market share dynamics during 1995–2010. Large unused scale economies exist for small‐ and medium‐sized life insurers, indicating that further consolidation would reduce costs. Over time average scale economies decrease but substantial differences between small and large insurers remain. A direct measure of competition confirms that competitive pressure is lower than in other markets. We do not observe any impact of increased competition from banks, the so‐called investment policy crisis or the credit crisis, apart from lower returns in 2008.     

Federal Regulation of Use of Genetic Information by Insurers

This paper analyzes policy developments at the national level during 1997, including proposed federal legislation and the response of the insurance industry. With broad bipartisan support, it appears that some form of federal regulation is likely within the next two sessions of Congress. The debate appears to be centering on two issues: the definition of genetic information and whether regulation will extend to a blanket prohibition on testing. The insurance industry is suggesting that restrictions based on an “unfair discrimination” standard would permit coverage and cost distinctions based on actuarially sound data, while the health care industry is opposed to any discrimination based on genetic information. A utilitarian ethical perspective would likely support restrictions on testing for life insurance but not health insurance.     

Financing long-term care: employee needs and attitudes, and the employer's role.

Because of increasing life expectancies, high costs for nursing home and home health care, declining levels of informal family care, and the stated policy of the federal and state governments to foster self-reliance, individuals are increasingly exposed to the risk of financial ruin from long-term care (LTC) expenses. Yet, because of psychological barriers and aversions, particularly to thinking about residing in a nursing home, most individuals have not purchased LTC insurance. Hence, it may be the responsibility of employers to provide education to employees about LTC and to sponsor either individual or group plans of LTC insurance. Educational efforts may be particularly effective at the time of retirement when employees are in a more serious mood to consider the contingencies of retired life. A formal and perhaps more economical response for employers would be to offer combined life annuity and LTC insurance benefits through the retirement plan, provided certain regulatory and tax barriers can be removed.     

THE FUTURE OF STATE INSURANCE REGULATION: CAN IT SURVIVE?

Abstract: As Congress continues to debate the future of financial services affiliations, state insurance regulators are faced with blurred lines of regulatory authority and the opportunity of federal banking regulators to preempt their decisions and their enforcement of consumer protection statutes. This article attempts to remind readers of the history and significance of state insurance regulation and provide clear evidence of its continued importance in the future of the conglomerated financial services marketplace.     

On the application of finance theory to the insurance firm

The primary argument set forth in this article is that the theory of finance can and should be rigorously applied to the study of the insurance firm. In order to illustrate this point, we turn our attention to the insurance solvency literature, where the implications of default risk for insurance company decision-making and regulatory policy are widely discussed but not nearly as widely understood. Rather than treat the probability of ruin as an exogenous constraint that is arbitrarily imposed by regulators, the approach taken here is to endogenize the probability of ruin with respect to a complex contracting process undertaken by a variety of self-interested claim holders. This treatment enables us to evaluate regulatory constraints such as minimum capital requirements within a rigorous theoretical framework. Our analysis suggests that even in an unregulated market, insurers would voluntarily limit their premium-capital ratios in an effort to economize on contracting costs. Furthermore, mutual insurers are likely,ceteris paribus, to employ less leverage than insurers organized as stock corporations.     

Should I Stay or Should I Go? The Impact of Natural Disasters and Regulation on U.S. Property Insurers’ Supply Decisions

In this article, we identify the main factors that drive insurers’ willingness to offer coverage in catastrophe‐prone property insurance lines. We compare insurers’ supply decisions in personal and commercial lines, with an emphasis on insurers’ responses in the aftermath of natural disasters. Our empirical results suggest important policy implications with regard to improving the availability of insurance against catastrophic threats. Concerning the impact of regulatory constraints, we present empirical evidence that certain regulatory responses may unintentionally impede insurers’ willingness to provide coverage against natural disasters.     

Proposal: a position for the insurance industry on genetic testing

Proposed legislation to limit the use of genetic test results in insurance underwriting has appeared with increasing frequency at the state and federal level. The proponents seek to protect consumers from unfair discrimination by insurers. Can we not develop a proactive approach, acknowledging that we do not need to do prospective testing while we assert that we must retain the current status of equivalency of information between the underwriter and the applicant?     

Household Response to Government Debt: Evidence from Life Insurance Holdings

We use state‐level panel data on life insurance in force in the United States and find that a $1 increase in government debt, at either the state or federal level is associated with a $0.96 increase in the face value of the average life insurance holdings per capita for a household in the average state. This increase represents an intention to save that would almost completely offset the government debt in specific states of the world (i.e., if the insured dies). Because this state of the world is rare, the immediate increase in actual savings is only about $0.03, the cost of the additional insurance. We find, in addition, that this response occurs mainly on the intensive margin, meaning that the size of the average life insurance policy increases when government debt increases. Along the extensive margin, we find the number of policies in force falls slightly with federal debt, and rises slightly with state debt increases. The results show altruistic planning in response to changes in government debt that are consistent with Ricardian Equivalence and the long‐run neutrality of government debt.     

Production Efficiency in the Austrian Insurance Industry: A Bayesian Examination

This paper examines the developments in the production efficiency of the Austrian insurance market for the period 1994‐1999 using firm‐specific data on life/health and non‐life insurers obtained from the Austrian insurance regulatory authority. The article uses a Bayesian stochastic frontier to obtain aggregate and firm‐specific estimates of production efficiency across insurer types and time. The study provides strong evidence that the process of deregulation had positive effects on the production efficiency of Austrian insurers. The life/health and non‐life firms showed similar patterns of development in that they were less efficient during the years 1994‐1996 and significantly more efficient in 1997‐1999. If the Austrian experience is representative, similar benefits from deregulation may be expected for the Central and Eastern European countries that prepare for the accession to the European Union.     

Neue Wege in der Kapitalanlage: Die Symbiose zwischen Banken und Versicherungen im Bereich der ‚Alternative Assets‘

The current low interest rates pose a major challenge in particular for life insurers. The introduction of Basel III in the banking and Solvency II in the insurance sector will have major impacts on both industries. This paper provides insight into possible products supplied by banks, which offer the possibility for life insurers to invest in ‘alternative assets’, especially in infrastructure projects. The focus lies on investments in infrastructure loans. If these are placed in a SPV, which itself emits bonds, the lowest amount of regulatory equity capital for both, the bank and the insurance company is required.     

Insurance Redlining and Disparate Impact: The Application of a Federal Civil Rights Doctrine to Homeowners Insurance

ABSTRACT: Allegations of inner-city insurance redlining are increasingly facilitated through the jurisprudence of "disparate impact," a legal doctrine holding that a policy or practice based on race-neutral criteria may nevertheless constitute illegal discrimination if it has a disproportionate adverse impact on racial minorities or women. Disparate impact analysis would require insurers to document a precise cause-and-effect relationship between a challenged underwriting variable and its associated risk. Moreover, they would be required to show that no "less discriminatory" risk-assessment technique is available. If it is not possible—or too costly—to meet this burden, insurers will have no choice but to abandon the use of those risk-selection practices and cost-based pricing mechanisms that yield a disparate racial impact. This will result in higher premiums and less insurance availability for consumers. Furthermore, dubious charges of unfair discrimination will exacerbate racial tensions and divert attention from the social and economic pathologies of which insurance costs are merely symptomatic.     

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。     

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.     

On the Lack of Participating Policy Usage by Stock Insurance Companies

Stock insurers can reduce or eliminate agency conflicts between policyholders and stockholders by issuing participating insurance. Despite this benefit, most stock companies don't offer participating contracts. This study explains why. We study an equilibrium with both stock and mutual insurers in which stockholders set premiums to provide a fair expected return on their investment, and with a policyholder who chooses the insurance contract that maximizes her expected utility. We demonstrate that stockholders cannot profitably offer fully participating contracts, but can profitably offer partially participating insurance. However, when the policyholder participation fraction is high, the fair‐return premium is so large that the policyholder always prefers fully participating insurance from the mutual company. Policies with lower levels of policyholder participation are optimal for policyholders with relatively high risk aversion, though such policies are usually prohibited by insurance legislation. Thus, the reason stock insurers rarely issue participating contracts isn't because the potential benefits are small or unimportant. Rather, profitability or regulatory constraints simply prevent stock insurers from exercising those benefits in equilibrium.     

Winners and Losers as Financial Service Providers Converge: Evidence from the Financial Modernization Act of 1999

The Financial Modernization Act of 1999 dramatically increased insurers' and investment banks' authority to provide an array of financial services and allowed commercial banks to offer investment banking and insurance services. In this paper we examine the market response to this legislation. We find a strong positive response among insurance companies and investment banks, and no significant response among commercial banks. Larger institutions in all three financial sectors earn higher abnormal returns. Additionally, better performing banks earn higher abnormal returns. Our results suggest that allowing financial convergence can add value through synergies and that large players are needed to exploit the scope economies.     

FROM COMPETITION TO REGULATION: THE SIX-YEAR BATTLE TO REGULATE CALIFORNIA'S INSURANCE MARKETS

Abstract: The passage of California's Proposition 103 in November 1988 changed the State's regulatory structure for insurers from a competitive to a heavily regulated system. The six-year legal battle that followed resulted in several California Supreme Court and United States Supreme Court rulings and an ultimate implementation of rate roll backs on property-liability insurers on November 22, 1994. The study examines both property-liability and life insurers' returns. While only property-liability insurers are affected by the rale rollback and prior approval rate regulation, both life and property-liability insurers are affected by the proposition's other provisions. This paper examines the effect of successive changes on both types of insurance companies and analyzes the differential impact of the changes in regulatory structure.     

The economics of delegated regulation: The EEC and the case of insurance

It is the stated objective of the European Commission to open hitherto protected industries to international competition by the end of 1992. To this end, national governments have ceded regulatory authority over insurance to the Commission. Rather surprisingly however, the Commission in its turn appears to delegate this authority to insurance associations in EEC member countries. In this contribution, an attempt is made to explain why a supranational government might take the dual decision not to wield newly-won powers and to choose industry associations rather than governments as its partners in the regulatory process. The paper also sheds some light on the implications of such delegated regulation both for the Commission and insurers.     

The Application of Monoline Insurance Principles to the Reregulation of Investment Banks and the GSEs

This article explores the benefits of reregulating the investment banks and government-sponsored enterprises (GSEs, namely, Fannie Mae and Freddie Mac) by applying the monoline principle that has been long established in regulating insurers that offer coverage against mortgage and bond default risks. The monoline regulatory principle was created to ensure that losses on a risky insurance line would not endanger other safe lines. The principle is applicable to both investment banks and the GSEs because both sets of institutions have operated with two basic divisions: a hedge fund division that maintained a highly risky investment portfolio and an infrastructure division that carried out activities with high direct value for the overall financial or mortgage markets. The monoline principle involves placing the two divisions in a new regulatory structure whereby the infrastructure division is bankruptcy remote from any losses that might occur within the hedge fund division.     

The Financial Crisis, Systemic Risk, and the Future of Insurance Regulation

This article considers the role of American International Group (AIG) and the insurance sector in the 2007–2009 financial crisis and the implications for insurance regulation. Following an overview of the causes of the crisis, I explore the events and policies that contributed to federal government intervention to prevent bankruptcy of AIG and the scope of federal assistance to AIG. I discuss the extent to which insurance in general poses systemic risk and whether a systemic risk regulator is desirable for insurers or other nonbank financial institutions. The last two sections of the article address the financial crisis's implications for proposed optional and/or mandatory federal chartering and regulation of insurers and for insurance regulation in general.