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Full-Text Articles in Insurance

Non-Exclusive Dynamic Contracts, Competition, And The Limits Of Insurance, Laurence Ales, Pricila Maziero Nov 2016

Non-Exclusive Dynamic Contracts, Competition, And The Limits Of Insurance, Laurence Ales, Pricila Maziero

Finance Papers

We study how the presence of non-exclusive contracts limits the amount of insurance provided in a decentralized economy. We consider a dynamic Mirrleesian economy in which agents are privately informed about idiosyncratic labor productivity shocks. Agents sign privately observable insurance contracts with multiple firms (i.e., they are non-exclusive). Contracts specify both labor and savings requirements. Firms have no restriction on the contracts they can offer and interact strategically. In equilibrium, contrary to the case with exclusive contracts, a standard Euler equation holds, and the marginal rate of substitution between consumption and leisure is equated to the worker's marginal ...


Demand For Fixed-Price Multi-Year Contracts: Experimental Evidence From Insurance Decisions, Howard Kunreuther, Erwann Michel-Kerjan Oct 2015

Demand For Fixed-Price Multi-Year Contracts: Experimental Evidence From Insurance Decisions, Howard Kunreuther, Erwann Michel-Kerjan

Finance Papers

Do individuals prefer a fixed-price multi-year insurance (MYI) policy to current annual contracts with fluctuating prices? If so, are they willing to pay more for these policies? In a web-based 2-period repeated game with significant real money at stake, individuals have an opportunity to purchase 1-period insurance contracts, 2-period contracts or no insurance against the risk of a hurricane causing damage to their property. When premiums for both insurance options are actuarially fair, more than five times as many people favor the 2-period contract over the 1-period contract. The demand for a 2-period contract remains high even with a loading ...


What Drives Households To Buy Flood Insurance? Evidence From Georgia, Ajita Atreya, Susana Ferreira, Erwann Michel-Kerjan Sep 2015

What Drives Households To Buy Flood Insurance? Evidence From Georgia, Ajita Atreya, Susana Ferreira, Erwann Michel-Kerjan

Finance Papers

Benefiting from access to detailed data on the federally run National Flood Insurance Program for the entire state of Georgia, USA, we analyze residential flood insurance purchasing behavior in that state over more than three decades (1978–2010). The demand for flood insurance on an extensive margin, based on take-up rates, is found to be relatively price inelastic. Aligned with the behavioral economics literature, recent flood events temporarily increase purchases, but this effect fades after 3 years. We also find that the proportion of developed area in floodplains has a significant positive impact on insurance take-up rates. Contrary to what ...


Could Flood Insurance Be Privatised In The United States? A Primer, Erwann Michel-Kerjan, Jeffrey Czajkowski, Howard Kunreuther Apr 2015

Could Flood Insurance Be Privatised In The United States? A Primer, Erwann Michel-Kerjan, Jeffrey Czajkowski, Howard Kunreuther

Finance Papers

Since 1968, homeowners’ flood insurance in the United States has been mainly provided through the federally-run National Flood Insurance Program (NFIP). The Flood Insurance Reform Act of 2012 raises the possibility of moving coverage to the private sector, assuming the market can price this risk effectively and that premiums reflect risk. This paper provides the first large-scale quantification of risk-based premiums for over 300,000 residences prone to either storm surge or inland flooding using commercially developed probabilistic catastrophe models, and compares these premiums with those currently charged by the NFIP. Our findings reveal significant differences between the two. In ...


Financial Valuation Of Pbgc Insurance With Market-Implied Default Probabilities, Jules H. Van Binsbergen, Robert Novy-Marx, Joshua Rauh Jan 2014

Financial Valuation Of Pbgc Insurance With Market-Implied Default Probabilities, Jules H. Van Binsbergen, Robert Novy-Marx, Joshua Rauh

Finance Papers

In this paper, we use financial valuation techniques to measure the unfunded liabilities associated with the Pension Benefit Guaranty Corporation (PBGC) single-employer pension insurance program. This is an alternative approach to the calculations of expected future PBGC payouts in the PBGC exposure reports. The PBGC insurance is akin to an exchange option, a financial instrument that allows a party to exchange one risky asset for another. Calculating the value of this option for each PBGC-covered plan provides a measure of the fair market price of the PBGC guarantee that is consistent with the finance principles of risk-neutral pricing. That is ...


Want More Value From Prescription Drugs? We Need To Let Prices Rise And Fall, Dana. P. Goldman, Adam Leive, Darius Lakdawalla Dec 2013

Want More Value From Prescription Drugs? We Need To Let Prices Rise And Fall, Dana. P. Goldman, Adam Leive, Darius Lakdawalla

Health Care Management Papers

The high price of some cancer drugs has recently come under attack by the medical profession. We examine the reasons behind the pricing strategies of cancer drugs. On the one hand, prices should reflect value and research demonstrates that the health benefits from novel cancer drugs have been enormous in terms of additional years of life patients can now enjoy. This provides some justification for the high price tag of these drugs. On the other hand, drug pricing is also a product of a hidebound reimbursement system that does a poor job in letting prices adjust to new information about ...


The Effects Of Government Intervention On The Market For Corporate Terrorism Insurance, Erwann Michel-Kerjan, Paul A. Raschky Dec 2011

The Effects Of Government Intervention On The Market For Corporate Terrorism Insurance, Erwann Michel-Kerjan, Paul A. Raschky

Finance Papers

Nine OECD countries presently have national terrorism insurance programs based on some type of public–private risk sharing. While such arrangements have helped provide the necessary insurance capacity in the post-September 11, 2001 era, little is known about the effect of such governmental intervention on terrorism insurance markets. This paper focuses on the United States, where the Terrorism Risk Insurance Act of 2002 (TRIA) provides insurers with no cost federal reinsurance up to an industry-wide loss of $100 billion. We present an empirical analysis to compare how insurers' diversification behavior varies between property coverage (no governmental intervention) and terrorism coverage ...


Essays In Retirement Security, Hungyee Fong May 2011

Essays In Retirement Security, Hungyee Fong

Publicly Accessible Penn Dissertations

The first chapter “Investment Patterns in Singapore’s Central Provident Fund System” investigates how plan participants in a national defined contribution system invest their pension accumulations. I find that only a small fraction of participants elects to invest in outside investment products like professionally-managed mutual funds. Simulation results using cost data from over 200 funds demonstrate that the minimum hurdle rate of return a fund must generate is about five percent a year. Accordingly, more policy attention can be devoted to lowering fund commission charges and rationalizing the investment menu offered to participants.

In the second chapter “Longevity Risk Management ...


Managing Catastrophic Risk By Alternative Risk Transfer Instruments, Chieh Ou Yang Aug 2010

Managing Catastrophic Risk By Alternative Risk Transfer Instruments, Chieh Ou Yang

Publicly Accessible Penn Dissertations

Chapter 1 analyzes hybrid-trigger CAT bonds, a new CAT bond deal that can reduce basis risk and eliminate moral hazard simultaneously. It is the first research that provides analytical evidence on the condition under which the hybrid trigger has lower basis risk. Simulation results support my analyses. Major findings in this study provide insights to insurers who would proactively manage the basis risk of CAT bonds. Chapter 2 examines whether the parimutuel mechanism can hedge risk-averse people against catastrophic losses. Two optimal stake choice models are constructed. In the first model where the stakes of other players are exogenous, the ...


“Out With The Old Covenants, In With The Loose”: What Is The Fallout Related To Covenant-Lite Loans Of 2005-2007?, Jessica Tung Apr 2010

“Out With The Old Covenants, In With The Loose”: What Is The Fallout Related To Covenant-Lite Loans Of 2005-2007?, Jessica Tung

Wharton Research Scholars

...Since the onset of the credit crunch at the end of 2007 and accompanying significant decrease in liquidity however, the trend has reversed and banks have begun imposing more traditional (stiffer) covenants8. Standard & Poor’s “The Leveraging of America: Covenant-Lite Loan Structures Diminish Recovery Prospects” lists U.S. Foodservice and Thomson Learning as examples of transactions in even 2007 that had trouble getting through syndication without more conventional covenant packages. This said, even though the trend may have already reversed, it is worth wondering whether there were negative repercussions felt in relation to those covenant-lite loans- if any.


Executive Incentives And Corporate Decisions: The Risk Management Channel, Jeremy O. Skog Dec 2009

Executive Incentives And Corporate Decisions: The Risk Management Channel, Jeremy O. Skog

Publicly Accessible Penn Dissertations

This paper provides evidence that insurance executives respond to their compensation incentives by adjusting observable risk-management policy variables – the reinsurance purchase decision, type of business conducted, and firm leverage. Executive incentives are modeled by the executive sensitivity of wealth to stock price (Delta) and stock volatility (Vega). Firms respond to increased executive incentives to bear risk by purchasing less reinsurance, but also conducting less business in long-tailed lines – a change which rewards the executive through increased market volatility. The cost of altering executive incentives to effect firm policy is much less than a similar change in firm structural variables.