The National Flood Insurance Program: Is It Financially Sound?

This article uses data provided by the Federal Emergency Management Agency, which implements the NFIP, to estimate the difference between annual premiums and expected costs associated for the program as a whole and for inland and coastal regions. In addition, we examine the role of discounts, cross‐subsidies, and FEMA's method of setting what it considers to be full‐risk rates in explaining the outcomes that we observe.     

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.     

Do Property–Casualty Insurance Firms Locate to Minimize Insurance Premium Taxes?

States levy insurance premium taxes, which are essentially gross receipt taxes on premiums, with insurance companies paying the higher of the tax rate in the state in which the company is domiciled and the state in which the policy is written. Using firm‐level data for the property–casualty (P‐C) insurance industry, we estimate the extra insurance premium tax that P‐C insurance firms pay by not locating in the state that minimizes their insurance premium taxes. We find that only 4.78 percent of P‐C firms are located in the state that minimizes their insurance premium taxes. We explore the relationship between the extra tax paid and other factors that are thought to be associated with firm location choice. We find that P‐C firms appear to trade off higher taxes to locate in a state that is more urban.     

Insurance Tips System to Be Launched in June

From June 1 on, the system of Insurance Tips will be implemented, which requires insurance companies or agencies to perform their obligations for informing in their sales and service activities, and tips will be given to the consumers for purchasing insurance policy. According to the requirements of Beijing Insurance Supervision Bureau, the current insurance for automobiles, and life insurance, dividends life insurance, joint life insurance and omnipotent life insurance will adopt this system first. It is disclosed by an insider of Beijing Insurance Supervision Bureau that this system is mainly to advise insurance consumers to be careful in buying an insurance policy to avoid risks caused by carelessness.     

An Approach to Fair Valuation of Insurance Liabilities Using the Firm’s Cost of Capital

Abstract

There are two competing and seemingly different methodologies for calculating fair values—the direct and indirect methods. The direct approach has the advantage of providing a more reliable assessment of the risk of financial leverage. The indirect method can be structured to adjust for financial leverage, however, the methodology becomes excessively complex. The advantage of the indirect method is that it can be more easily related to exit prices. Intuitively, an exit price should reflect both the creditworthiness of the firm and the cost of capital of the firm. How are these two concepts related? This paper attempts to advance the fair valuation methodology by addressing these questions and presenting a methodology for deriving the firm or own credit risk assumption (to be used with the direct method) that is consistent with the cost of capital assumption used with the indirect method.     

Assessments of ‘Greenhouse Insurance’: A Methodological Review

In this paper I review methodologies to assess strategies of greenhouse gas emissions reduction by installing existing technologies and by investing in research and development of advanced technologies, expressed as ‘greenhouse insurance’ by Manne and Richels (Buying greenhouse insurance: the economic costs of CO₂ emissionlimits. The MIT Press, Cambridge, 1992), under several sorts of uncertainty. While the authors of some advanced studies have applied exogenous and endogenous stochastic processes to deal with the uncertainty in their mathematical models on the economic assessment of climate change, this review points out some room for improving these approaches in ways that will result in more reasonable hedging strategies to cope with uncertain climate change, taking into account up-to-date research trends.     

Equilibrium in Insurance Markets: An Empiricist’s View

Empirical models of insurance markets would greatly enhance our ability to understand policy-relevant questions. Yet they are still quite rare. This paper sketches such a model and surveys its basic elements. While much progress has been made in recent years in our understanding of insurance demand in particular, the most crying need is for market-wide data.     

Genetics,Alzheimer’s Disease,and Long-Term Care Insurance

Abstract

This paper applies a model of Alzheimer’s disease (AD) developed by Macdonald and Pritchard (2000) to the question of the potential for adverse selection in long-term care (LTC) insurance introduced by the existence of DNA tests for variants of the ApoE gene, the ε4 allele of which is known to predispose one to earlier onset of AD. It computes the expected present values (EPVs) of model LTC benefits with respect to AD for each of five ApoE genotypes, weighted average EPVs with and without adverse selection, and sample underwriting ratings. The paper concludes that adverse selection could increase costs significantly in a small LTC insurance market only if current population genetic risk is not much smaller than that observed in case-based studies, and if carriers of the ε4 allele are very much more likely to buy LTC insurance. Finally, the paper considers the cost of a combined retirement package, providing both pension and LTC insurance, and shows that it can reduce adverse selection.     

Insurance and Endogenous Bankruptcy Risk: When is it Rational to Choose Gambling,Insurance, and Potential Bankruptcy?

We examine the coexistence of insurance and gambling in the context of limited liability. We develop a model where actuarially fair insurance is available to a risk-averse decision maker for a liability risk with non-bankrupting severity. The remaining wealth may be invested in a zero expected value risky project (i.e., gambled). The risk of bankruptcy is endogenous since either fully insuring or forgoing the project will guarantee solvency. We show that, for a range of parameters, it is optimal to both insure and gamble. The amounts insured and invested are chosen to create the potential for bankruptcy. Our results are robust to the cases where the risky project can cause bankruptcy without a liability loss and where the risky project’s expected return is nonzero.     

Insurance companies’ trading behaviour during the European sovereign debt crisis: Flight home or flight to quality?

This paper empirically investigates if insurers exhibited a flight home or flight to quality during the European sovereign debt crisis and other stages of the financial crisis. Our dataset consists of over sixty insurance companies, for which we separately observe trading behaviour and portfolio revaluations at a quarterly frequency during 2006–2013. When explaining insurers’ trading behaviour we explicitly control for country risk and momentum strategies. The results show that insurers exhibited a flight to quality during the European sovereign debt crisis, while we find no evidence of a flight home. The flight to quality was not present before the European sovereign debt crisis and disappeared after ECB chairman Draghi's speech mid-2012. Interestingly, supervisory data suggests that the observed flight to quality was not driven by regulatory solvency constraints.     

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.     

Australian Rural Accountants’ Views on How Locally Provided CPD Compares with City-based Provision

Abstract

This paper analyses Australian rural accountants’ attitudes and levels of satisfaction with continuing professional development (CPD), based on whether the CPD was delivered by a professional accounting body in a rural or metropolitan area. The paper responds to prior research that finds rural accountants are dissatisfied with professional accounting bodies [Rural and regional Australian public accounting firm services: Service provision, concerns and tensions. Australian Accounting Review, 23(23), 163–176]. Findings of a survey to which 156 rural accountants responded were that when CPD is delivered into the rural areas, there are greater levels of CPD satisfaction. The study also found that cost was significantly better for rural-delivered CPD and that when more rural-based CPD was attended differences became more significant across a number of satisfaction measures. The findings have important implications for both rural accountants and professional accounting bodies.     

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.     

Does Insurance Help to Escape the Poverty Trap?—A Ruin Theoretic Approach

Poverty trapping refers to the fact that poor people in developing countries cannot escape their poverty without help from outside. This is worsened by extreme events, for example, floods or hurricanes, sending people to poverty who have not been poor before. Often, insurance is seen as a way out. This article studies poverty trapping in the context of catastrophic risk and introduces a ruin‐type model, combining deterministic growth with a stochastic loss model. We analyze the properties of the resulting piecewise deterministic Markov process, especially its trapping risk, and discuss for which groups of people insurance can reduce trapping probability.