The questions of social equity arising from the current medical malpractice insurance system and how these questions are handled by insurance regulation are explored in this article. The medical malpractice rating classification system is examined in terms of the distinctions between the medical specialties and the resulting liability exposure. The theoretical fairness of the system is questioned and a potential new approach to medical malpractice insurance rating is suggested.
This paper reviews the growing literature on the market for private long-term care insurance, a market notable for its small size despite the fact that long-term care expenses are potentially large and highly uncertain. After summarizing long-term care utilization and insurance coverage in the United States, the paper reviews research on the supply of and the demand for private long-term care insurance. It concludes that demand-side factors impose important limits on the size of the private market and that we currently have a limited understanding of how public policies could be designed to encourage the growth of this market.
The "crisis" in medical malpractice insurance has prompted several studies of medical malpractice claims closed during a specified period. However, the set of all claims brought to final settlement during, say, a year likely will give a distorted picture of the underlying distributions of frequency and severity. In this paper, procedures are developed for adjusting closed claim data for biases caused by the upward trend in claim frequency over time, inflation, and the relationship between size of claim and time to settlement. The problem of describing the revised severity distribution in terms of only a few parameters also is addressed.
To counter the exceptionally high inefficiency and cost inflation in the U.S. health sector, some health economists advocate a consumer cost-consciousness strategy to be implemented by patient cost-sharing under income-related major-risk (catastrophic) national health insurance (MR-NHI). These economists generally recognize that their strategy would fail if most households obtain complete supplementary private health insurance (SI), thereby eliminating patient cost-sharing. Nevertheless, the optimal treatment of SI under MR-NHI has begun to receive attention only recently. This paper develops a criterion for the optimal treatment of SI under MR-NHI, and uses it to derive the optimal treatment under an MR-NHI proposal that may be enacted.
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.
We examine the effects of 9/11 on the insurance industry, hypothesizing a short-run claim effect, resulting from insufficient premium "ex ante" for catastrophic losses, and a long-run growth effect, resulting from "ex post" insurance supply reductions and risk updating. Following Yoon and Starks (1995) we use short- and long-run abnormal forecast revisions to measure both effects, analyzing them as a function of firm-specific characteristics. We find that firm type, loss estimates, reinsurance use, and tax position are important determinants of the short-run position. Firm type, loss estimates, financial strength, underwriting risk, and reinsurance are key determinants of the firm's long-run position. Copyright The Journal of Risk and Insurance, 2008.
This study uses data from the Insurance Research Council to investigate changes in the use of attorneys and in the filing of legal claims to resolve automobile third-party bodily injury claims between 1977 and 1997. We find results consistent with the general public perception that the use of attorneys and the filing of legal claims have increased over the study period. In addition, we find evidence that tort reforms enacted by the states have slowed the rates of increase in the use of attorneys and in the filing of legal claims to resolve automobile insurance claim disputes. Copyright The Journal of Risk and Insurance, 2008.
This article examines the efficiency changes of U.S. life insurers before and after demutualization in the 1980s and 1990s. We use two frontier approaches (the value-added approach and the financial intermediary approach) to measure the efficiency changes. In addition, we use Malmquist indices to investigate the efficiency and productivity change of converted life insurers over time. The results using the value-added approach indicate that demutualized life insurers improve their efficiency before demutualization. On the other hand, the evidence using the financial intermediary approach shows the efficiency of the demutualized life insurers relative to mutual control insurers deteriorates before demutualization and improves after conversion. The difference in the results between the two approaches is due to the fact that the financial intermediary approach considers financial conditions. The results of both approaches suggest that there is no efficiency improvement after demutualization relative to stock control insurers. There is, however, efficiency improvement relative to mutual control insurers when the financial intermediary approach is used. Copyright The Journal of Risk and Insurance, 2007.
The objective of this study is to assess empirically what impact introduction of the bonus-malus system (BMS) has had on road safety in Tunisia. The results of the Tunisian experiment are of particular importance since, during the last decade, many European countries decided to eliminate their mandatory bonus-malus scheme. These results indicate that the BMS reduced the probability of reported accidents for good risks but had no effect on bad risks. Moreover, the reform's overall effect on reported accident rates is not statistically significant, but the exit variable is positive in explaining the number of reported accidents. To avoid any potential selectivity bias, we also made a joint estimate of the reported accident and selection equations. The reform has a positive effect on the exit variable but still does not affect the accidents reported. This indicates that policyholders who switch companies are those attempting to skirt the imposed incentive effects of the new rating policy. Some of the control variables are statistically significant in explaining the number of reported accidents: the vehicle's horsepower, the policyholder's place of residence, and the coverages for which policyholders are underwritten. Copyright The Journal of Risk and Insurance.
The Environmental Protection Agency and other government agencies use the willingness-to-pay concept in labor market studies to estimate the value of a life for evaluating regulatory policies and projects. This study uses new data from the Bureau of Labor Statistics for the period 1992-1999 on industry injury and illness rates and fatality rates to examine the relationship between changes in occupational mortality rates and in hourly wages. The analysis finds that there is no statistically significant evidence that changes in occupational mortality are associated with changes in wages and, thus, there is no empirical basis for using the willingness-to-pay concept as a reliable method for valuing a life or evaluating regulatory policies. Copyright The Journal of Risk and Insurance.
This article evaluates the relative significance of research published in 16 risk, insurance, and actuarial journals by examining the frequency of citations in these risk, insurance, and actuarial journals and 16 of the leading finance journals during the years 1996 through 2000. First, the article provides the frequency with which each sample risk, insurance, and actuarial journal cites itself and the other sample journals so as to communicate the degree to which each journal's published research has had an influence on the other sample journals. Then the article divides the 16 journals into two groups: (1) the risk and insurance journal group, and (2) the actuarial journal group, and ranks them within their group based on their total number of citations, including and excluding self-citations. A ranking within each group is based on the journals' influence on a per article published basis. Finally, this study observes and reports on the most frequently cited articles from the sample risk, insurance, and actuarial journals. Copyright 2003 The Journal of Risk and Insurance.
The bibliographies of 17 "risk" journals were evaluated to determine the relative influence of these "risk" journals on risk, insurance, and actuarial research published during the years 2001 through 2005. Tables are provided that show the frequency with which each of these journals cites itself and the other sample journals. The journals are ranked, within two groups (risk and insurance group and actuarial group), based on their total influence (total citations including and excluding self-citations) and their per article influence (per article citations including and excluding self-citations). Finally, the most frequently cited articles from each "risk" journal are reported. Copyright (c) The Journal of Risk and Insurance, 2009.
This research provides a comprehensive historical analysis of articles published in "The Journal of Risk and Insurance" over the 75-year period from 1932 to 2006. Historical statistics are provided including the number of articles, number of authors per article, geographic location of contributors, leading contributors, author affiliation (industry or academic), the proportion of articles that are theoretical and empirical, and topics covered. Statistics relating to the entire 75-year period are provided as well as breakdowns by decade. The results indicate that the contributors to "The Journal of Risk and Insurance" have become more international over time, average article length and average number of authors per article have increased over time, and empirical articles appear more frequently than theoretical articles. Copyright (c) The Journal of Risk and Insurance, 2008.
We extend the research on postinjury employment by estimating productivity losses for workers with permanent partial disabilities (PPDs) in the first three years after injury. Our method distinguishes between productivity losses attributed to spells of work absence versus reduced earnings during spells of employment. The method is applied to data for 800 Ontario workers with PPDs. The results document large productivity losses persisting at least three years after injury, with different loss patterns for workers returning to stable versus unstable employment. Human capital investments or job accommodations can reduce productivity losses, but the significant determinants of losses differ for the stable versus unstable employment groups. Copyright The Journal of Risk and Insurance, 2006.
The "hunger for bonus" is a well-known phenomenon in insurance, meaning that the insured does not report all of his accidents to save bonus on his next year's premium. In this article, we assume that the number of accidents is based on a Poisson distribution but that the number of claims is generated by censorship of this Poisson distribution. Then, we present new models for panel count data based on the zero-inflated Poisson distribution. From the claims distributions, we propose an approximation of the accident distribution, which can provide insight into the behavior of insureds. A numerical illustration based on the reported claims of a Spanish insurance company is included to support this discussion. Copyright (c) The Journal of Risk and Insurance, 2009.
Incentives to manage accounting information are examined within 63 property-liability insurance company conversions from mutual ownership to common stock charter. In the conversion process, policyholders' embedded equity claims must be valued. Since mutuals have no separately traded equity, accounting numbers are a critical input in this valuation. Incentives for surplus management vary across firms; the strongest evidence of surplus management is observed among firms where the mutual's executives become the firm's principal stockholders following conversion. The evidence suggests that converting firms manage accounting information primarily by adjusting liabilities and selectively establishing investment losses-not by altering claims settlement policy. Copyright The Journal of Risk and Insurance.
Incentives to manage accounting information are examined within 63 property-liability insurance company conversions from mutual ownership to common stock charter. In the conversion process, policyholders' embedded equity claims must be valued. Since mutuals have no separately traded equity, accounting numbers are a critical input in this valuation. Incentives for surplus management vary across firms; the strongest evidence of surplus management is observed among firms where the mutual's executives become the firm's principal stockholders following conversion. The evidence suggests that converting firms manage accounting information primarily by adjusting liabilities and selectively establishing investment losses - not by altering claims settlement policy.
We model flexible spending accounts (FSAs) as a special type of insurance policy. We prove the following results given losses drawn from a continuous distribution: (1) the optimal election amount, "F"-super-*, is increasing in the consumer's level of risk aversion; (2) "F"-super-* is increasing in the level of the maximum loss; If utility is decreasing in absolute risk aversion (DARA), then "F"-super-* is (3) decreasing in income and (4) increasing in the marginal tax rate. Copyright 2003 The Journal of Risk and Insurance.
This article aims to quantify the "aggregate subjective economic" risk to which beneficiaries would be exposed if a retirement pension system based on notional account philosophy were introduced. We use scenario generation techniques to make projections of the factors that determine the real expected internal rate of return (IRR) and the expected replacement rate (RR) for the beneficiary according to six retirement formulae based on the most widely accepted rates or indices. We then apply the model to the case of Spain. Our projections are based on Herce and Alonso's macroeconomic scenario 2000-2050 (2000) and include information about the past performance of the indices and the time period the forecast is to cover. The results of the IRR calculation-average value, standard deviation, and value-at-risk (VaR)-are analyzed both in objective terms and for different degrees of participants' risk aversion. Copyright The Journal of Risk and Insurance, 2006.
I model the interaction of flexible spending accounts (FSAs) and conventional insurance in a simple discrete loss setting with asymmetric information. I show that FSA availability can break a separating equilibrium, even when one would otherwise exist, because high-risk types might prefer the lower-coverage contract supplemented with FSA funds. In this case there may exist a Pareto-inferior separating equilibrium. It is also shown that FSA availability alters the optimal pooling contract. Employers can reduce coverage levels, raising expected utility for low-risk types, and can compensate high-risk types by offering supplemental FSA coverage. Thus, it is possible that FSAs strengthen pooling contracts. Copyright (c) The Journal of Risk and Insurance, 2010.
Consider individuals facing an uncertain lifetime (and hence uncertain future income). Each individual must go through (identical) medical checkups. The choice of a medical expert who interprets the results, and hence provides more information about the random lifetime, must be made before the checkup. We show that, in the absence of a life insurance market, a better medical expert is preferred by all individuals. However, when a life insurance market exists, and the medical checkup is carried out before purchasing a life insurance policy, some individuals may choose the inferior medical expert even though the checkup has not yet taken place. 1.
This short article provides an overview of the Patient Protection and Affordable Care Act, which was approved by the U.S. Congress and signed by President Barack Obama in March 2010, with an emphasis on provisions related to the expansion of health insurance. It highlights key provisions concerning coverage expansion, insurance market reforms, and the projected costs and financing of the legislation. Copyright (c) The Journal of Risk and Insurance, 2010.
We examine the market's reaction to New York Attorney General Eliot Spitzer's civil suit against mega-broker Marsh for bid rigging and inappropriate use of contingent commissions within a generalized autoregressive conditionally heteroskedastic (GARCH) framework. Effects on the stock returns of insurance brokers and insurers are tested. The findings are: (1) GARCH effects are significant in modeling broker/insurer returns; (2) the suit generated negative effects on the brokerage industry and individual brokers, suggesting that contagion dominates competitive effects; (3) spillover effects from the brokerage sector to insurance business are significant and mostly negative, demonstrating industry integration; and (4) information-based contagion is supported, as opposed to the pure-panic contagion. Copyright (c) The Journal of Risk and Insurance, 2009.
In this article, we propose several applications of fuzzy regression techniques for actuarial problems. Our main analysis is motivated, on the one hand, by the fact that several articles in the financial and actuarial literature suggest using fuzzy numbers to model interest rate uncertainty but do not explain how to quantify these rates with fuzzy numbers. Likewise, actuarial literature has recently focused some of its attention in analyzing the Term Structure of Interest Rates (TSIR) because this is a key instrument for pricing insurance contracts. With these two ideas in mind, we show that fuzzy regression is suitable for adjusting the TSIR and discuss how to apply a fuzzy TSIR when pricing life insurance contracts and property-liability policies. Finally, we reflect on other actuarial applications of fuzzy regression and develop with this technique the "London Chain Ladder Method" for obtaining Incurred But Not Reported Reserves. Copyright The Journal of Risk and Insurance.
This article analyzes the problem of designing Pareto-optimal insurance policies when both the insurer and the insured are risk averse and the premium is calculated as a function of the actuarial value of the insurer's risk. Two models are considered: in the first, the set of admissible policies is constrained by a given size of the premium; in the second, the premium size is not constrained so that it varies with the actuarial value of a policy chosen by the agents. For both cases a characterization of the Pareto-optimal policies is derived. The corresponding optimality equations for the Pareto-optimal policies are obtained and compared with the results on the classical risk exchange model. Copyright The Journal of Risk and Insurance, 2006.
It is sometimes argued that road safety measures or automobile safety standards fail to save lives because safer highways or safer cars induce more dangerous driving. A similar but less extreme view is that ignoring the behavioral adaptation of drivers would bias the cost-benefit analysis of a traffic safety measure. This article derives cost-benefit rules for automobile safety regulation when drivers may adapt their risk-taking behavior in response to changes in the quality of the road network. The focus is on the financial externalities induced by accidents because of the insurance system as well as on the consequences of drivers' risk aversion. We establish that road safety measures are Pareto improving if their monetary cost is lower than the difference between their (adjusted for risk aversion) direct welfare gain with unchanged behavior and the induced variation in insured losses due to drivers' behavioral adaptation. The article also shows how this rule can be extended to take other accident external costs into account. Copyright The Journal of Risk and Insurance.
This article demonstrates the possibility of an alternative approach for risk-adjustment models. In the proposed model the risk characteristics of the beneficiary's health within the same cohort classified by Self-Organizing Map network are highly homogeneous, whereas the numbers of individuals within each cohort remain sufficient to allow further investigation of the causal effect from clustered data. A comparison of different models by the 10-fold cross-validation reveals that the performance improvement in the proposed integration model is both significant and stable across the estimation and validation sampling. Copyright (c) The Journal of Risk and Insurance, 2008.
Administrative costs per participant appear to vary widely across pension funds in different countries. These costs are important because they reduce the rate of return on the investments of pension funds, and consequently raise the cost of retirement security. Using unique data on 90 pension funds over the period 2004–2008, this paper examines the impact of scale, the complexity of pension plans, and service quality on the administrative costs of pension funds, and compares those costs across Australia , Canada , the Netherlands , and the US . We find that, except for Canada , large unused economies of scale exist. Analyses on a disaggregated level confirm economies of scale for small and medium pension funds. Even though the pension funds in the sample are among the largest in the world, further cost savings appear to be possible. Higher service quality and more complex pension plans significantly raise costs, whereas offering only one pension plan reduces costs, as does a relatively large share of deferred (or sleeping) participants. Administrative costs vary significantly across pension fund types, with differences amounting to 100%.
This article has two objectives. The first is the documentation of the relative importance of the largest insurance or reinsurance companies in the world and changes that may have occurred in the past 15 years. The second objective is to identify some of the factors that may explain the increased internationalization and most-favored locations of the world's largest insurance groups in transition and developing economies. The results of this study have important implications. First, they indicate that as expected, location-specific factors such as the size of a market, human capital, and good governance do provide an explication of the internationalization of insurance groups. Second, they also show that other factors, such as cultural distance, regulatory barriers, and competitiveness have a significant impact on the choice of countries. Copyright (c) The Journal of Risk and Insurance, 2008.
We take a dynamic perspective on insurance markets under adverse selection and study a dynamic version of the Rothschild and Stiglitz model. We investigate the nature of dynamic insurance contracts by considering both conditional and unconditional dynamic contracts. An unconditional dynamic contract has insurance companies offering contracts where the terms of the contract depend on time, but not on the occurrence of past accidents. Conditional dynamic contracts make the actual contract also depend on individual past performance (such as in car insurances). We show that dynamic insurance contracts yield a welfare improvement only if they are conditional on past performance. With conditional contracts, the first-best can be approximated if the contract lasts long. Moreover, this is true for any fraction of low-risk agents in the population. Copyright The Journal of Risk and Insurance.
Consumer groups fear that the use of genetic testing information in insurance underwriting might lead to the creation of an underclass of individuals who cannot obtain insurance; thus, these groups want to ban insurance companies from accessing genetic test results. Insurers contend that such a ban might lead to adverse selection that could threaten their financial solvency. To investigate the potential effect of adverse selection in a term life insurance market, a discrete-time, discrete-state, Markov chain is used to track the evolution of twelve closed cohorts of women, differentiated by family history of breast and ovarian cancer and age at issue of a 20-year annually renewable term life insurance policy. The insurance demand behavior of these women is tracked, incorporating elastic demand for insurance. During the 20-year period, women may get tested for BRCA1/2 mutations. Each year, the insurer calculates the expected premiums and expected future benefit payouts which determine the following year's premium schedule. At the end of each policy year, women can change their life insurance benefit, influenced by their testing status and premium changes. Adverse selection could result from (i) differentiated benefits following test results; (ii) differentiated lapse rates according to test results; and (iii) differentiated reactions to price increases. It is concluded that with realistic estimates of behavioral parameters, adverse selection could be a manageable problem for insurers. Copyright The Journal of Risk and Insurance, 2007.
Earlier studies reported that an insurance industry index of personal-injury claims rose after automobiles adopted driver's side airbags and that drivers of airbag-equipped vehicles were more likely to be at fault in fatal multivehicle accidents. These findings can be explained by the offsetting behavior hypothesis or by at-risk drivers systematically selecting vehicles with airbags (i.e., adverse recruitment). We test for offsetting behavior and adverse recruitment after airbag adoption using a database containing information on fatal accidents including information on drivers' previous records and drivers' actions that contributed to the occurrence of the accident. Further, we reexamine the personal injury claims index data for newly airbag-equipped vehicles and show that the rise in the index after airbag adoption may be attributable to moral hazard and a new vehicle ownership pattern. Rental car drivers are much more likely to commit grievous acts than other drivers, and the proportion of new automobiles in daily rental service more than doubled during the period of airbag adoption. Copyright The Journal of Risk and Insurance.
There is an emerging consensus among macro-economists that differences in technology across countries account for the major differences in per-capita GDP and the wages of workers with similar skills across countries. Accounting for differences in technology levels across countries thus can go a long way towards understanding global inequality. One mechanism by which poorer countries can catch up with richer countries is through technological diffusion, the adoption by low-income countries of the advanced technologies produced in high-income countries. In this survey, we examine recent micro studies that focus on understanding the adoption process. If technological diffusion is a major channel by which poor countries can develop, it must be the case that technology adoption is incomplete or the inputs associated with the technologies are under-utilized in poor, or slow-growing economies. Thus, obtaining a better understanding of the constraints on adoption is useful in understanding a major component of growth.
In this article, we analyze the rationale for introducing outlier payments into a prospective payment system for hospitals under adverse selection and moral hazard. The payer has only two instruments: a fixed price for patients whose treatment cost is below a threshold and a cost-sharing rule for outlier patients. We show that a fixed-price policy is optimal when the hospital is sufficiently benevolent. When the hospital is weakly benevolent, a mixed policy solving a trade-off between rent extraction, efficiency, and dumping deterrence must be preferred. We show how the optimal combination of fixed price and partially cost-based payment depends on the degree of benevolence of the hospital, the social cost of public funds, and the distribution of patients severity. Copyright (c) The Journal of Risk and Insurance, 2009.
This article examines the impact of varying mandatory pensions on saving, life insurance, and annuity markets in an adverse selection economy. Under reasonable restrictions, we find unambiguous effects on market size, participation rates, and equilibrium prices. The degree of adverse selection, whether a market is active or inactive, and social welfare are analyzed. Copyright The Journal of Risk and Insurance.
The focus of genetics is shifting its contribution to common, complex disorders. New genetic risk factors will be discovered, which if undisclosed may allow adverse selection. However, this should happen only if low-risk individuals would reduce their expected utility by insuring at the average price. We explore this boundary, focusing on critical illness insurance and heart attack risk. Adverse selection is, in many cases, impossible. Otherwise, it appears only for lower risk aversion and smaller insured losses, or if the genetic risk is implausibly high. We find no strong evidence that adverse selection from this source is a threat. Copyright (c) The Journal of Risk and Insurance, 2010.
This paper proposes a new test for adverse selection in insurance markets based on observable characteristics of insurance buyers that are not used in setting insurance prices. The test rejects the null hypothesis of symmetric information when it is possible to find one or more such %u201Cunused observables%u201D that are correlated both with the claims experience of the insured and with the quantity of insurance purchased. Unlike previous tests for asymmetric information, this test is not confounded by heterogeneity in individual preference parameters, such as risk aversion, that affect insurance demand. Moreover, it can potentially identify the presence of adverse selection, while most alternative tests cannot distinguish adverse selection from moral hazard. We apply this test to a new data set on annuity purchases in the United Kingdom, focusing on the annuitant%u2019s place of residence as an %u201Cunused observable.%u201D We show that the socio-economic status of the annuitant%u2019s place of residence is correlated both with annuity purchases and with the annuitant%u2019s prospective mortality. Annuity buyers in different communities therefore face different effective insurance prices, and they make different choices accordingly. This is consistent with the presence of adverse selection. Our findings also raise questions about how insurance companies select the set of buyer attributes that they use in setting policy prices. We suggest that political economy concerns may figure prominently in decisions to forego the use of some information that could improve the risk classification of insurance buyers.
The analysis considers an insurance market with adverse selection where individuals' loss distributions may differ with respect to both the frequency and severity of loss. We show that the combination of deductibles and coinsurance can be used to sort rationed policyholders. Because of their screening properties, coinsurance and deductibles may both be equilibrium forms of risk sharing for a particular insurer facing asymmetric information, with different rationed consumers choosing different risk-sharing provisions. Copyright (c) The Journal of Risk and Insurance, 2008.
While adverse selection problems between insureds and insurers are well known to insurance researchers, few explore adverse selection in the insurance industry from a capital markets perspective. This study examines adverse selection in the quoted prices of insurers' common stocks with a particular focus on the opacity of both asset portfolios and underwriting liabilities. We find that more opaque underwriting lines result in greater adverse selection costs for property-casualty (P-C) insurers. A similar effect is not apparent for life-health (L-H) insurers and we find no effect of asset opaqueness on adverse selection for either L-H or P-C insurers. Copyright (c) The Journal of Risk and Insurance, 2009.
We consider a competitive insurance market with adverse selection. Unlike the standard models, we assume that individuals receive the benefit of some type of potential government assistance that guarantees them a minimum level of wealth. For example, this assistance might be some type of government-sponsored relief program, or it might simply be some type of limited liability afforded via bankruptcy laws. Government assistance is calculated "ex post" of any insurance benefits. This alters the individuals' demand for insurance coverage. In turn, this affects the equilibria in various insurance models of markets with adverse selection. Copyright The Journal of Risk and Insurance.
This article uses the nonparametric frontier method to examine differences in efficiency for three unique organizational forms in the Japanese nonlife insurance industry-keiretsu firms, nonspecialized independent firms (NSIFs), and specialized independent firms (SIFs). It is not possible to reject the null hypothesis that efficiencies are equal, with one exception. Keiretsu firms seem to be more cost-efficient than NSIFs. The results have important implications for the stakeholders of the NSIFs. An examination of the productivity changes across the different organizational forms reveals deteriorating efficiency for all three types of firms throughout the 1985-1994 sample period. Finally, the evidence also suggests that the value-added approach and the financial intermediary approach provide different but complementary results. Copyright The Journal of Risk and Insurance.
Aggregate mortality risk-the risk that the mortality trend in a population changes in a nondeterministic way-and its implications for corporate decisions has recently been the subject of lively scientific discussion. We show that aggregate mortality risk is also a key determinant for individual annuitization decisions. Aggregate mortality risk appears to be a risk very difficult to transfer for individuals. Whether its existence leads to a higher or lower annuity demand depends on objective factors (e.g., insurers' vulnerability to aggregate mortality changes). Subjective factors (i.e., individuals' preferences) determine only the intensity of the annuity demand reaction to aggregate mortality risk. Our results are of significant importance not only for financial planning approaches of individual annuity buyers but also for strategic decisions in insurance companies and for solvency regulators. Furthermore, consideration of aggregate mortality risk may alleviate, but also intensify, the annuity puzzle. Copyright (c) The Journal of Risk and Insurance, 2009.
Estimating the duration gap of a life insurer demands the knowledge on the durations of liabilities and assets. The literature analyzed the durations of assets extensively but rendered limited analyses on the durations of insurance liabilities. This article calculated the reserve durations for individual policies and estimated the duration of the aggregate reserves. The results showed that the duration of the policy reserve might be negative and/or have a large figure. They further revealed an interesting pattern of the reserve duration with respect to the policy's time to maturity. A term structure with abnormal durations, however, does not result in an abnormal duration of the aggregate reserves. Copyright (c) The Journal of Risk and Insurance, 2009.
This article estimates the aggregate demand for private health insurance coverage in the United States using an error correction model for the period 1966-1999. Both short- and long-run price and income elasticities of demand are estimated. The empirical findings indicate that both private insurance enrollment and the completeness of insurance are relatively inelastic with respect to changes in price and income in the short and long run. Moreover, the results suggest that an increase in the number cyclically and frictionally uninsured generates less welfare loss than an increase in the number of structurally uninsured. Copyright (c) The Journal of Risk and Insurance, 2009.
We examine the Laplace transform of the distribution of the shot noise process using the martingale. Applying the piecewise deterministic Markov processes theory and using the relationship between the shot noise process and the accumulated/discounted aggregate claims process, the Laplace transform of the distribution of the accumulated aggregate claims is obtained. Assuming that the claim arrival process follows the Poisson process and claim sizes are assumed to be exponential and mixture of exponential, we derive the explicit expressions of the actuarial net premiums and variances of the discounted aggregate claims, which are the annuities paid continuously. Numerical examples are also provided based on them. Copyright The Journal of Risk and Insurance.
Traditionally, insurance companies attempt to reduce (or even eliminate) fraud via audit strategies under which claims may be investigated at some cost to the insurer, with a penalty imposed upon insureds who are found to report claims fraudulently. However, it is also clear that, in a multiperiod setting, bonus-malus contracts (increases in subsequent premiums whenever a claim is presented) also provide an incentive against fraud. In this article, we consider a model in which, conditional upon the client renewing his contract, the "only" mechanism used to combat fraud is bonus-malus. In this way, our model provides the opposite pole to the pure audit model. We show that in our simplified setting there exists a bonus-malus contract that will eliminate all fraud in all periods, while guaranteeing nonnegative expected profits to the insurer and participation by the insured. We also consider the dynamics of the solution, the effect of an increase in risk aversion on the solution, and the welfare implications. Copyright The Journal of Risk and Insurance, 2006.
We investigate the incentives states have to provide insurance regulatory services in an efficient manner. Regulation of the insurance industry in the United States is unique, as it is conducted primarily at the state level whereas the majority of insurance sales are interstate. Consistent with predictions from the federalism literature, we find evidence of trans-state externalities, as states with small domestic insurance markets are less efficient producers of insurance regulation and appear to allow states that choose to expend the greatest resources to regulate for them. In addition, states with more profitable domestic insurers are shown to export greater levels of regulation, suggesting extraterritorial regulation may erect modest barriers to entry. We find evidence of increasing economies of scale in the production of insurance regulation after controlling for these regulatory externalities. Copyright The Journal of Risk and Insurance, 2007.