Solvency regulation in the property-liability insurance industry

This paper evaluates guaranty funds and solvency regulations. One main question addressed is how solvency regulations will benefit consumers. Many previous studies have found that most forms of solvency regulations do not have significant deterrent effects on insolvency. Even when solvency regulations are effective, they might still adversely affect consumers. This could happen because increasing the probability of solvency usually requires raising premiums. Therefore, it is interesting to see how regulators should design insurance regulations that benefit consumers. Insolvency of insurance firms provides a unique environment under which one is able to analyze the effects of solvency regulations and guaranty funds on the quality of insurance products and on consumers. This paper shows that guaranty funds are always desirable, but solvency regulations are of certain value only when they have the effect of protecting guaranty funds and alleviating the disincentives which they create.     

THE DEFECTIVE DESIGN OF FEDERAL DEPOSIT INSURANCE

Deposit insurance funds, especially the Federal Savings and Loan Insurance Corporation, are currently in visible trouble. Two central defects of the existing deposit insurance system are identified: (1) mispricing of the insurance premiums and (2) incentives for both the industry and the insurance agencies to postpone recognizing and realizing losses.
Insurance premiums are mispriced because they are assessed at the same rate for all institutions, which creates a bias for banks to take greater risks. Practical difficulties of setting an appropriate risk-based premium for each bank are real but not necessarily insurmountable. In particular, the sale by the bank of unsecured and uninsured debt could provide a market measure of default risk, under a given failure rule.
The choice of a failure rule is also a critical matter. Current failure rules are poorly defined and permit insolvent institutions to continue in operation. Specifying a market value test of insolvency in the statutes would be helpful, but it would have to be supported by market-value accounting requirements and stronger pressures on banking authorities not to defer action.     

Endogenous Categorization in Insurance

This paper analyzes the welfare properties of equilibrium when insurers use observable actions to classify consumers into different risk categories, and consumers' choice is influenced by the insurance market consequences of their actions. Specifically, we analyze this problem at the example of a car insurance market, in which individual preferences over car types are correlated with risk type and used by insurance firms for ratemaking. Equilibrium premiums for each car are determined by the losses that it generates. Consumers take insurance premiums into account when deciding which car to buy. This creates an incentive to buy the car that is preferred by more low risk individuals. From a utilitarian point of view, this incentive is excessive. Depending on parameters, it may even be possible to construct a tax‐subsidy scheme with balanced budget that Pareto improves on the market equilibrium.     

Life insurer efficiency and state regulation: evidence of optimal firm behavior

Proponents of an optional federal charter for life insurers argue that the current state-based system of insurer regulation increases insurer costs and reduces their revenues and profits. This study examines the impact of multi-state regulation on life insurer cost, revenue and profit efficiency. The main findings suggest that insurer cost efficiency is inversely related to the number of states licensed and directly related to total assets, after controlling for geographic concentration, insolvency risk and other firm-specific characteristics. Further, the results support the expectation that insurer expansion into additional states is optimal in that the additional regulatory and other costs associated with operating in more states are offset by higher revenues to the extent that insurer profit efficiency is not affected. A robustness test is conducted using an indicator variable for New York licensed insurers to examine the relation between regulatory stringency and insurer efficiency. This test confirms the results, even in the presence of the more stringent regulation of New York. These findings are consistent with the expectation that any regulatory cost savings that result from an optional federal charter, or single regulator, will be passed along to insurance consumers in a competitive insurance market.     

Broker monitoring of premium adequacy: the role of contingent commissions

Contingent commissions, which are payments made by an insurer to brokers based on the volume and profitability of insurance placed with the insurer, have been criticized as damaging to the relationship between the insured and its broker. The argument is made that contingent commission payments encourage brokers to select insurers for their clients based on the potential to earn contingent commissions, rather than on the needs of the insured. We argue that contingent commission payments, which while directly paid by the insurer are ultimately paid by the insured through higher premiums, are beneficial to insureds because they provide an incentive for the broker to place their coverage with an insurer that is charging an adequate premium. We contend that although inadequate premiums are perhaps good for the insured in the short term, in the longer term, inadequate premiums will result in price hikes or coverage restrictions that are harmful to the insureds. Our empirical analysis demonstrates that insurers who pay contingent commissions experience less price fluctuation over the underwriting cycle than insurers who do not pay contingent commissions in the US property and casualty insurance industry.     

保险资金持股与股价崩盘风险——市场“稳定器”还是崩盘“加速器”?

现阶段,有关保险资金持股与资本市场稳定相互关系的讨论多止于推测,少有学者以大样本数据进行实证考察。在理论上,保险资金持股上市公司,一方面可以抑制经理人负面信息隐藏,作为市场“稳定器”降低股价暴跌风险;另一方面,也能引发投资者跟风炒作,导致市场情绪高涨和股价高估,成为股价崩盘风险的“加速器”。本文基于2007—2016年中国沪深两市A股上市公司的数据,实证分析保险资金持股上市公司是否加剧市场暴跌及其作用机制。结果显示:保险资金持股加剧了股价崩盘风险,是公司股价崩盘的“加速器”。这一结论在经过DID模型、工具变量回归、PSM+OLS等内生性分析,以及稳健性检验之后依然成立。进一步研究表明,相比于民营、小型和财产保险公司,在股市投资规模更大的国有、大型和人寿保险公司更能引发市场跟风炒作,加剧股价崩盘风险;不过,当保险资金作为前十大股东参与公司治理时则能够降低股价崩盘风险。本文不仅为保险资金持股与资本市场稳定相互关系的讨论提供了经验证据,也为规范保险资金股权投资,维护资本市场稳定提供有益借鉴。     

The effect of ceded reinsurance on solvency of primary insurers

Primary insurance companies diversify their underwriting risk and thus improve their financial stability through buying reinsurance contracts. However, excessive use of reinsurance by an insurance company may signal the presence of financial difficulties. In fact, as research shows, a less solvent insurer tends to use more reinsurance because of its inability to raise needed capital in the financial market. Thus, regulators need to pay extra attention to insurers that overly use reinsurance since such behavior could signal an insurer's disproportionately high risk and its eventual probability of insolvency.     

Price dispersion in the private health insurance industry: The case of Catalonia

This paper presents a vertical and horizontal product differentiation model that explains price dispersion among different kinds of health care insurance firms. Our model shows large insurance firms engaging in price competition with small mutual organizations that serve only a local area and charge lower premiums. We found that, although the market allows the entry of an excessive number of firms, the presence of local insurance companies increases social welfare by increasing the range of products available to consumers. Our conclusions are applicable to OECD countries in general although we rely on Catalonia's data.     

Financial Instability under a Flexible Exchange Rate*

Many governments in developing countries contemplate the possibility of increasing the flexibility of their exchange rates despite having accumulated substantial dollar‐denominated debt. Using a model of corporate dollar debt in which the future exchange rate is uncertain, this paper studies the financial risks that might arise as a consequence of increased exchange rate flexibility. Since a firm may default on its debt either because its dollar income is too low or because investors refuse to roll over its debt, the measure of the overall risk of default should take into account both factors, as well as their interaction. Solving the model for the no‐default rational expectations equilibrium, we find that a small risk of insolvency may bring about a substantial risk of illiquidity.     

Insurance market games: Scale effects and public policy

We propose a game-theoretic model to study various effects of scale in an insurance market. After reviewing a simple static model of insurer solvency (in which all customers have inelastic demand), we present a one-period game in which both the buyers and sellers of insurance make strategic bids to determine market price and quantity. For the case in which both buyers and sellers are characterized by constant absolute risk aversion, we show that a unique market equilibrium exists under certain conditions. For the special case of risk-neutral insurers, we then consider how both the price and quantity of insurance, as well as other quantities of interest to public-policy decision makers, are affected by the number of insurance firms, the number of customers, and the total amount of capital provided by investors.     

A Critique of the Private Health Insurance Regulations

The private health insurance sector is one of the most regulated sectors in Australia. The Private Health Insurance Incentives Scheme, along with community rating, is intended to make private insurance equitable, profitable and popular. We argue that the subsidy to health insurance ought to be a very effective tool for increasing insurance–but it was ineffective because community rating was ineffective. Using data from the Household Expenditure Survey we find that despite community rating rules which prohibit age‐adjusted premiums, young adults paid considerably less for their insurance than older adults. We conclude that insurers circumvented community rating through plan design, screening older consumers into more expensive plans. We also find that the penalty of 2 per cent per year for delaying insurance, introduced as part of the lifetime cover plan, is too low to be effective. We reflect on the New Zealand experience, where a completely deregulated insurance industry continues to be profitable and enjoys similar rates of coverage to those of Australia, and we ask whether Australia too could not benefit from complete deregulation.     

Investment risk taking by institutional investors

According to theory, institutional investors face both risk-management and risk-shifting incentives. This article assesses the relevance of these conflicting incentives for Dutch pension funds and insurance firms over the period 1995 to 2009. Using a unique and extended data set, we observe a significant positive relationship between capital and asset risk for insurers, indicating that risk-management incentives dominate in the Dutch insurance industry. Risk-shifting incentives, however, also seem relevant, as stock insurers take more investment risk than their mutual peers. For Dutch pension funds, we conclude that overall neither risk-shifting nor risk-management incentives seem to dominate. Interestingly, we find that professional group pension funds take significantly less investment risk than other types of pension funds. This finding is in line with expectations, as in professional group pension funds potential incentive conflicts between pension fund participants and the employer are effectively internalized.     

Private Information in Life Insurance,Annuity, and Health Insurance Markets

Economic theory predicts that private information on risks in insurance markets leads to adverse selection. To counterbalance private information, insurers collect and use information on applicants to assess their risk and to calculate premiums in an underwriting process. Using data from the English Longitudinal Study of Ageing (ELSA), this paper documents that differences in the information used in underwriting across life insurance, annuity, and health insurance markets attenuate private information to different extents. The results are in line with – and might help to reconcile – the mixed empirical evidence on adverse selection across these markets.     

Courts,scheduled damages,and medical malpractice insurance

We study how the functioning of the judicial system affects the availability and affordability of medical liability insurance, as proxied by the number of insurers and the premiums paid. We use two unique datasets collected in Italy from 2000 to 2010. Using the first dataset—insurance contracts for hospitals—we estimate the average treatment effect of schedules on insurers and premiums paid, conditional on judicial efficiency and proxied by different measures. Our identification rests on the partial overlap between healthcare districts and judicial districts, meaning that the caseload of a court and malpractice events at the healthcare provider level are not perfectly correlated. On average, the adoption of schedules does not produce any significant effect on insurers or on premiums paid. However, adopting schedules has a robust and significant effect on the number of insurers, but only in inefficient courts. We further investigate these findings using a second dataset comprising 17,578 malpractice insurance claims. We find evidence of a composition effect among claims that is triggered by higher levels of judicial inefficiency: As a court’s inefficiency increases, the likelihood for a case to not be decided on the merits decreases and the levels of reserve and recovery per claim decrease.     

中国居民医疗保险购买行为研究-基于商业健康保险的角度

本文通过健康保险市场供需双方行为分析,构建居民医疗保险购买行为模型,利用中国健康与营养调查数据(2000—2006),运用部分观测的二元Probit估计方法(Bivariate Probit with partial observability),从实证的角度分析商业健康保险市场中供需双方各自的风险选择行为,以及城乡地区居民对商业健康保险的潜在需求行为及其宏微观影响因素。本文发现:(1)城乡居民都存在显著的逆向选择行为;(2)城乡社会医疗保障对居民商业健康保险需求行为有显著的促进作用;(3)影响居民商业健康保险行为的其他因素还包括,个人的风险偏好和经济购买力。     

Short-termism of long-term investors? The investment behaviour of Dutch insurance companies and pension funds

Countercyclical investment strategies of large institutional investors such as insurance companies and pension funds can support financial stability, while procyclical investment behaviour is considered as destabilizing at a macro level. Yet, there is limited understanding of how insurance companies and pension funds invest during market shocks, such as the global financial crisis. Investigating the equity and fixed income portfolios of Dutch non-life insurers, life insurers and pension funds, we find evidence for procyclical behaviour by insurance companies (both life and non-life). For pension funds, we find evidence for countercyclical behaviour during market upturns.     

Risk adjustment and prevention

Abstract Widespread integration of market‐based incentives into healthcare systems calls for – and has elicited – increasing adoption of risk adjustment. By deterring selection, risk adjustment helps to assure fair and efficient payments among health insurers or capitated provider groups. However, since conventional risk adjustment allocates funds among regions or insurers according to current population health status, it does not reward – indeed, it penalizes – preventive efforts that improve population health. This prevention penalty of risk adjustment represents a hidden cost of unclear magnitude, undermining provider incentives for health promotion. We develop a theoretical model of selection and prevention demonstrating this problem with conventional risk adjustment and suggesting a simple alternative: risk adjustment should be linked to pay‐for‐performance for prevention.     

财险公司防范利率风险的策略研究

财险公司在防范利率风险时,需要采用对利率变动反应灵敏的策略。大多数的研究都不太重视这个问题,认为财险公司可以通过再保险安排来解决利率风险问题。本文利用期望效用理论证明了财险公司不能依靠再保险来防范利率风险。而后．通过一个算例直观地说明了利率变动与财险公司保费策略之问的关系．并结合我国的保险实践提出了解决方案。     

Consumer default with complete markets: default-based pricing and finite punishment

This paper studies economies with complete markets where there is positive default on consumer debt. In a simple tractable two-period model, households can default partially, at a finite punishment cost, and competitive intermediaries price loans of different sizes separately. This environment yields only partial insurance. The default-based pricing of debt makes it too costly for the borrower to achieve full insurance, and there is too little trade in securities. This framework is in contrast to existing literature. Unlike the literature with default, there are no restrictions on the set of state contingent securities that are issued. Unlike the literature on lack of commitment, limited trade arises without need of debt constraints that rule default out. Compared with the latter, the present approach appears to imply more consumption inequality. An extended model with an infinite horizon, idiosyncratic risk and more realistic assumptions is used to demonstrate the general validity of this approach and its main implications.