The privacy implications of insurers' information practices

Insurers and their support organizations are among the largest collectors and users of personally identifiable information in the United States, yet little attention has been focused historically on the implications of insurers' information practices to individuals' privacy. Moreover, these practices are virtually opaque from the subject individual's point of view--in other words, individuals do not realize the full implications to their privacy when they enter into relationships with insurers. Thus, individuals may be at a disadvantage from a privacy protection standpoint in dealing with insurers. This paper analyzes insurers' information practices from a privacy protection perspective and suggests several areas that need improvement.     

Technology's Effect on Property–Casualty Insurance Operations

The post-Glass–Steagall era has presented insurers with new opportunities and risks during a time when information flows and business processes are being impacted by changing technology. In this article, we explore how insurers use and perceive current technology to carry out their operations by reporting results from a sample of insurers that includes some of the nation's largest property and casualty insurers. We find among insurers in our sample that an online channel is having a significant impact on customer retention and revenue enhancement, but a lesser impact on cost reduction. Interestingly, about two-thirds of our sample has experienced an increase in their overall number of transactions following the adoption on an online channel. Moreover, while the Internet is perceived as giving marketing benefits it is not being used as a substitute for agents. We find that 65 percent of respondents have used technology to integrate customer data across functional areas and another 23 percent plan to do so in the next 3 years. Nearly 71 percent of respondents have or plan to adopt service-oriented architecture in their technology infrastructure.     

Regulating Genetic Information in Insurance Markets

The debate on whether insurance companies should be allowed to use results of genetic tests for underwriting purposes is both lively and increasingly relevant as both technology and lawmaking efforts are progressing rapidly. In this article we outline the primary economic and non-economic arguments made in favor of and against allowing insurers to risk-rate premiums on the basis of genetic test results. While economic analysis has much to offer in enlightening this debate and informing policy makers, we argue that such work must be cast within the overall perspective of the genetic testing debate. Moreover, despite substantial strides by economists in understanding the role of information in the way insurance markets operate, much work still needs to be done in order for economic analysis to be confidently applied to the looming social issues of the continuing genetic revolution.     

Relative Hedging of Systematic Mortality Risk

A number of problematic issues have arisen in anticipation of the potential role of molecular tests for genetic predispositions to illness in risk assessment by insurance underwriters. We argue in this paper that the regrettable history and current risks of genetic discrimination warrant a presumption that genetic predisposition status should not be used in any nonmedical contexts, unless compelling evidence can demonstrate that serious harm will result to third-party interests without such use. We argue that insurers should not be able to initiate testing for genetic predisposition. We also argue that there are many reasons to doubt whether patients’ test results will result in such serious adverse selection as to cause substantial harm to insurance markets, except possibly at higher policy amounts in life or disability income insurance. We conclude that the burden of proof must be on insurers to demonstrate necessity of use in specific cases in which test availability shows high probability of imminent, serious harm to insurance markets.     

State regulation and the structure,conduct, efficiency and performance of US auto insurers

This research investigates the impact of regulation on state automobile insurance markets while controlling for other state insurance market characteristics that may be related to performance. Data for a large sample of insurers are analyzed. The results suggest that insurers in competitive and non-stringently regulated states may benefit from market power by charging higher unit prices, however insurers in these states are on average more cost X-efficient and cost X-efficient insurers charge lower prices and earn smaller profits. The empirical results also suggest that insurers in some rate regulated states are less revenue and cost-scale efficient than in competitive states.     

Gendiagnostikgesetz und Versicherung: Anspruch und Wirklichkeit

With the new German Gene Diagnostic Act (Gendiagnostikgesetz) the legislator aims at improving the protection of insurance applicants by prohibiting private insurers from collecting and using genetic information. However, the analysis of the new provisions shows that the provisions pertaining to insurance neither provide a comprehensive protection against genetic discrimination of insurance applicants and insured nor do they protect their right of gene-informational self-determination. Cuts of insurance benefits of the insured in private health insurance as well as incoherent disclosure obligations for insurance applicants unconstitutionally limit the rights of affected people as compared to the time before the Gene Diagnostic Act came into force. In summary, the new Gene Diagnostic Act does not only fail to meet its claims and thus falls short of the expectations, but also, due to numerous unclear provisions, poses a series of grave problems for insurance applicants, privately insured and private insurers.     

Adult Polycystic Kidney Disease and Critical Illness Insurance

Abstract

Adult polycystic kidney disease (APKD) is a single-gene autosomal dominant genetic disorder leading to end-stage renal disease (ESRD, meaning kidney failure). It is associated with mutations in at least two genes, APKD1 and APKD2, but diagnosis is mostly by ultrasonography. We propose a model for critical illness (CI) insurance and estimate rates of onset of ESRD from APKD using two studies. Other events leading to claims under CI policies are included in the model, which we use to study (a) extra premiums under CI policies if the presence of an APKD mutation is known, and (b) the possible costs arising from adverse selection if this information is unavailable to insurers. The extra premiums are typically very high, but because APKD is rare, the possible cost of adverse selection is low. However, APKD is just one of a significant number of single-gene disorders, and this benign conclusion cannot be assumed to apply to all genetic disorders taken together. Moreover, ignoring known genetic risks in underwriting sets a precedent that could have unintended consequences for the underwriting of nongenetic risks of similar magnitude.     

Capital Structure Decisions in the Insurance Industry: Stocks versus Mutuals

Mutual insurers generally face higher costs of raising new capital than stock insurers. Other things being equal, the higher costs of raising capital should cause mutual insurers to have higher ex ante target capital to liability ratios than stock insurers. Mutual insurers' capital ratios also should be more sensitive to income than capital ratios for stock insurers and therefore adjust more slowly toward their long-run targets. We provide evidence concerning these issues using aggregate time series data for stock and mutual insurers during 1984–1999 and a large panel data set during 1991–1998. Our regressions provide strong evidence that annual changes in capital to liability ratios are more sensitive to income for mutual insurers than for stock insurers. We also provide evidence that mutual insurers' capital ratios are on average higher than those for stock insurers after controlling for several factors that could influence capital ratios.     

Capital-based regulation,portfolio risk and capital determination: Empirical evidence from the US property–liability insurers

This paper examines the impact of capital-based regulation on the insurer’s risk and capital adjustments in the US property–liability insurance industry. We conduct the three-stage least squares (3SLS) procedure to estimate a simultaneous equations model. The key finding is that undercapitalized insurers increase capital to avoid regulatory costs and take more risks to generate higher returns. We also investigate firm characteristics that determine the insurer’s capital structure. The results indicate that insurers appear to rely heavily on retained earnings to make up their capital shortage and insurers with greater growth opportunity may hold high levels of capital to control for agency problems. Robustness tests with an alternative risk measure and subsamples present consistent results.     

Cash holdings between public and private insurers ‒ a partial adjustment approach

Cash holdings of financial institutions, especially private firms, have been understudied in existing literature. This paper fills that gap by examining the cash holdings of US property-liability insurers in order to analyze the difference in cash holdings and cash adjustments between public and private stock insurers and between mutual and stock insurers within the private insurer category. We find that public insurers hold much less cash than private stock insurers, which differs from the findings for non-financial firms. Additionally, we find that mutual insurers hold less cash than private stock insurers. Public insurers adjust their cash holdings much faster toward their target cash levels than private stock insurers do when facing an extreme cash shortfall, but their adjustment speed is indifferent from that of private stock insurers when both having excess cash. Mutual insurers are able to adjust cash holdings slightly faster than private stock insurers when there is an extreme cash shortfall but are indifferent in adjustment speed from private stock insurers when having excess cash in hand. Overall, our results are more consistent with the financing frictions hypothesis of cash holdings and are inconsistent with the owner-manager agency problems of free cash flow.     

The Distributions of Policy Reserves Considering the Policy-Year Structures of Surrender Rates and Expense Ratios

In this article, we examine how the policy-year structures of expense ratios and surrender rates affect the distributions of policy reserves. Our results show that a convex expense ratio curve, though reduces the mean and the uncertainty of reserves, could make the beneficial impact of surrenders on insurers become detrimental. Our results also show that the convexity of the surrender rate curve is favorable to insurers while the volatilities of surrender rates are unfavorable. We further find that neglecting the policy-year structures of surrender rates and expense ratios may result in overestimation of the mean and the uncertainty of reserves.     

Catastrophe Bonds and Reinsurance: The Competitive Effect of Information-Insensitive Triggers

We identify a new benefit of index or parametric triggers. Asymmetric information between reinsurers on an insurer's risk affects competition in the reinsurance market: reinsurers are subject to adverse selection, since only high-risk insurers may find it optimal to change reinsurers. The result is high reinsurance premiums and cross-subsidization of high-risk insurers by low-risk insurers. A contract with a parametric or index trigger (such as a catastrophe bond) is insensitive to information asymmetry and therefore alters the equilibrium in the reinsurance market. Provided that basis risk is not too high, the introduction of contracts with parametric or index triggers provides low-risk insurers with an alternative to reinsurance contracts, and therefore leads to less cross-subsidization in the reinsurance market.     

基于有限理性的农业巨灾保险主体行为分析及优化

基于有限理性的进化博弈分析框架,本文分析了农业巨灾保险主体群落基因复制动态变化过程。研究发现,农民个体是否购买农业巨灾保险关键取决于个体的比较预期收益和其所要承担选择成本的大小。而保险公司与投保农民的博弈轨迹不存在使博弈双方共同稳定的进化稳定策略,只能实现农业巨灾保险市场上平均意义上较优策略。同时,由于农业巨灾风险强破坏性和发生概率分布厚尾性的影响,政府的有效行为具有优化农业巨灾保险主体行为变迁轨迹的效能。     

Adult Polycystic Kidney Disease and Insurance

Abstract

Adult Polycystic Kidney Disease (APKD) is a single-gene autosomal dominant genetic disorder leading to end-stage renal disease (ESRD, meaning kidney failure). It is associated with mutations in either of two genes, APKD1 and APKD2, and although diagnosis is still mostly by ultrasonography rather than DNA-based tests, this may change in the future. Recent studies have shown that the rates of onset of ESRD associated with APKD1 mutations are much greater than those associated with APKD2 mutations, a form of genetic heterogeneity that differs from, for example, familial breast cancer. In this paper we model the the impact of mutations in APKD1 or APKD2 on critical illness insurance, extending the work of Gutiérrez and Macdonald (2003), which was based on studies predating DNA-based tests. We then extend the model to life insurance and show that the financial impact is strongly dependent on the availability of treatment (dialysis and transplant), but that if it is available, extra premiums for life insurance are modest. We show that genetic heterogeneity introduces a novel problem, because carrying an APKD2 mutation is less risky than having a family history of APKD. Thus, in jurisdictions where family history may be used in underwriting but genetic tests may not, it may be illegal to use knowledge that benefits the applicant.     

Information technology and the social construction of information privacy

This paper examines how the conflict between information technology and information privacy is socially constructed and enacted through judicial decisions, legislative mandates, and private sector initiatives such as WebTrust^SM/TM and other privacy seal programs. We first identify some reasons individuals may have for wanting to control their personal information, how such privacy is eroded by advances in information technology, and the currently limited role of informed consent in managing the conflict between privacy and technology. We then argue that the existing judicial, legislative, and private sector initiatives in North America and Europe do not adequately achieve the goals of informed consent and other fair information practices. We further argue that privacy attestation will likely play a limited privacy protection role because it is only one of several social practices that manage the tensions between information technology and information privacy. Finally, we discuss some policy implications of information technology and the erosion of society's expectations about privacy, some difficult tradeoffs between private and public interests, and whether interested parties (including accountants in public practice) can become effective agents of social change in the information privacy arena.     

Ankle/arm blood pressure index: an insurance perspective

Recent studies conclude that the ankle/arm blood pressure index (AAI) is a useful clinical tool for refining cardiovascular risk classification in the elderly. A reduction in the AAI to 0.9 or less is associated with increased risk for both coronary heart disease and total cardiovascular disease morbidity and mortality, as well as all-cause mortality. This relationship persists after adjusting for traditional risk factors and known cardiovascular disease. AAI will appear more common in attending physician's statements, prompting a need to educate underwriters about this technology. AAI may be of particular interest to insurers dealing in the elderly market, to those with strong physician examiner systems, and in markets where blood or urine tests are not commonly used in underwriting.     

Deregulation,Pricing Strategies,and Claim Behavior in the Taiwan Automobile Insurance Market

Stringent pricing regulations have long been in effect in the Taiwan automobile insurance market. In April 2009, a pricing deregulation was adopted, enabling insurers to establish their own auto insurance premium rates. This study examines the effects of deregulation in terms of three hypotheses that we propose pertaining to market shares, loading factors, and last policy month claims. The quantitative analysis results show that pricing deregulation prompts insurers to lower their rates. The effects of deregulation for insurers are determined by not only the decision to deduct premiums and the deduction percentages, but also by policy type.     

COST EFFICIENCY IN AUSTRALIAN GENERAL INSURERS: A NON-PARAMETRIC APPROACH

Data envelopment analysis is used to calculate pure technical, scale, allocative and cost efficiency indices for a sample of forty-six Australian general insurers. The inputs used are labour, physical capital (in the form of both information technology and plant and equipment), and financial capital. The outputs are net premium revenues for housing-related, transport-related, indemnity-related, mortgage-related, and other insurance, along with invested assets. The results indicate that the major source of overall cost inefficiency would appear to be allocative inefficiency rather than technical inefficiency and that the largest 20% of insurers are significantly more efficient than the remaining firms. A second-stage analysis uses limited dependent variable regression techniques to relate efficiency scores to firm-specific information. Cost efficiency appears to be closely related to asset size but not to stock exchange listing or product diversification or specialization.     

A Cautionary Note on Natural Hedging of Longevity Risk

In this article, we examine the so-called natural hedging approach for life insurers to internally manage their longevity risk exposure by adjusting their insurance portfolio. In particular, unlike the existing literature, we also consider a nonparametric mortality forecasting model that avoids the assumption that all mortality rates are driven by the same factor(s).

Our primary finding is that higher order variations in mortality rates may considerably affect the performance of natural hedging. More precisely, although results based on a parametric single factor model—in line with the existing literature—imply that almost all longevity risk can be hedged, results are far less encouraging for the nonparametric mortality model. Our finding is supported by robustness tests based on alternative mortality models.     

The Capital Structure of Firms Subject to Price Regulation: Evidence from the Insurance Industry

Automobile and workers' compensation insurance are relatively homogeneous products sold under varying regulatory systems among the states. This paper investigates how price regulation affects the capital structure decisions of profit-maximizing insurers who sell insurance in both competitive and/or regulated markets. Specifically, we test the hypothesis that insurers subject to price regulation will choose to hold less capital. In addition, we hypothesize insurers subject to more stringent regulatory pricing constraints will choose even higher degrees of leverage because the benefits of holding additional amounts of capital are suppressed. We conduct empirical tests using cross-sectional data on insurers and find evidence consistent with both hypotheses. These findings have important implications for insurance price and solvency regulation. Stricter price regulation increases the default risk (i.e., reduces the financial quality) of insurance contracts purchased by individuals and firms.