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Full-Text Articles in Insurance Law
Third Party Moral Hazard And The Problem Of Insurance Externalities, Gideon Parchomovsky, Peter Siegelman
Third Party Moral Hazard And The Problem Of Insurance Externalities, Gideon Parchomovsky, Peter Siegelman
All Faculty Scholarship
Insurance can lead to loss or claim-creation not just by insureds themselves, but also by uninsured third parties. These externalities—which we term “third party moral hazard”—arise because insurance creates opportunities both to extract rents and to recover for otherwise unrecoverable losses. Using examples from health, automobile, kidnap, and liability insurance, we demonstrate that the phenomenon is widespread and important, and that the downsides of insurance are greater than previously believed. We explain the economic, social and psychological reasons for this phenomenon, and propose policy responses. Contract-based methods that are traditionally used to control first-party moral hazard can be welfare-reducing in …
The Paradox Of Insurance, Gideon Parchomovsky, Peter Siegelman
The Paradox Of Insurance, Gideon Parchomovsky, Peter Siegelman
All Faculty Scholarship
In this Article, we uncover a paradoxical phenomenon that has hitherto largely escaped the attention of legal scholars and economists, yet it has far-reaching implications for insurance law: loss-creation by uninsured parties caused by the presence of insurance. Contrary to the conventional wisdom, we show that insurance can create significant negative externalities by inducing third parties to engage in antisocial, illegal and unethical activities in order to extract money from insureds or insurers. Moreover, as the amount and scope of insurance grows, so does its distortionary effect on third parties. We term this phenomenon the paradox of insurance. The risk …
Private Equity Value Creation In Finance: Evidence From Life Insurance, Divya Kirti, Natasha Sarin
Private Equity Value Creation In Finance: Evidence From Life Insurance, Divya Kirti, Natasha Sarin
All Faculty Scholarship
This paper studies how private equity buyouts create value in the insurance industry, where decentralized regulation creates opportunities for aggressive tax and capital management. Using novel data on 57 large private equity deals in the insurance industry, we show that buyouts create value by decreasing insurers' tax liabilities; and by reaching-for-yield: PE firms tilt their subsidiaries' bond portfolios toward junk bonds while avoiding corresponding capital charges. Previous work on affiliated or "shadow" reinsurance and capital management misses the important role that private equity buyouts play as recent drivers of these phenomenon. The trend we document is of growing importance in …
Transforming The Insurance Sector In Nigeriain Using The Fss 2020 Platform, Chris O. Muo
Transforming The Insurance Sector In Nigeriain Using The Fss 2020 Platform, Chris O. Muo
Bullion
The National lnsurance Commission (NAICOM) is the statutory Regulatory body of insurance business created to ensure the effective administration, supervision and regulation of insurance business and regulate transactions between insurers and reinsurers within and outside Nigeria. FSS 2020 Insurance Sector, in collaboration with NAICOM aims to deepen the insurance market; ensure lnsurance credibility and protect policy holders; Embed governance and risk management framework for the lnsurance Companies; Enhance access to finance (financial inclusion) with business development support and new products; and risk-based capitalization of lnsurance Companies.
Medicare Secondary Payer And Settlement Delay, Eric Helland, Jonathan Klick
Medicare Secondary Payer And Settlement Delay, Eric Helland, Jonathan Klick
All Faculty Scholarship
The Medicare Secondary Payer Act of 1980 and its subsequent amendments require that insurers and self-insured companies report settlements, awards, and judgments that involve a Medicare beneficiary to the Centers for Medicare and Medicaid Services. The parties then may be required to compensate CMS for its conditional payments. In a simple settlement model, this makes settlement less likely. Also, the reporting delays and uncertainty regarding the size of these conditional payments are likely to further frustrate the settlement process. We provide results, using data from a large insurer, showing that, on average, implementation of the MSP reporting amendments led to …
Inference Under Stability Of Risk Preferences, Levon Barseghyan, Francesca Molinari, Joshua C. Teitelbaum
Inference Under Stability Of Risk Preferences, Levon Barseghyan, Francesca Molinari, Joshua C. Teitelbaum
Georgetown Law Faculty Publications and Other Works
We leverage the assumption that preferences are stable across contexts to partially identify and conduct inference on the parameters of a structural model of risky choice. Working with data on households' deductible choices across three lines of insurance coverage and a model that nests expected utility theory plus a range of non-expected utility models, we perform a revealed preference analysis that yields household-specific bounds on the model parameters. We then impose stability and other structural assumptions to tighten the bounds, and we explore what we can learn about households' risk preferences from the intervals defined by the bounds. We further …
Mandatory Rules And Default Rules In Insurance Contracts, Tom Baker, Kyle D. Logue
Mandatory Rules And Default Rules In Insurance Contracts, Tom Baker, Kyle D. Logue
All Faculty Scholarship
The economic analysis of contract law can be organized around two general questions: (1) what are the efficient or welfare-maximizing substantive rules of contract law; and (2) once those rules have been identified, when if ever should they be made mandatory and when should they be merely “default rules” that the parties can contract around if they wish? Much of contract theory over the past twenty years has been devoted to developing answers to those two questions. The same two questions can be posed with respect to the rules of insurance law. Although previous scholars have examined particular substantive doctrines …
Behavioral Economics And Insurance Law: The Importance Of Equilibrium Analysis, Tom Baker, Peter Siegelman
Behavioral Economics And Insurance Law: The Importance Of Equilibrium Analysis, Tom Baker, Peter Siegelman
All Faculty Scholarship
Because choosing insurance requires consumers to assess risks and probabilities, the demand for insurance has proven to be fertile ground for identifying deviations from rational behavior. Consumers often shun the insurance against large losses that they rationally should want (e.g., floods); and they are attracted to insurance against small losses (extended warranties, low deductibles) that no rational individual should purchase. But the welfare consequences of behavioral anomalies in insurance are complex, because consumers’ irrational behavior takes place in a market profoundly shaped by informational asymmetries. Under some conditions, deviations from rational behavior may actually generate insurance market equilibria that produce …
Distinguishing Probability Weighting From Risk Misperceptions In Field Data, Levon Barseghyan, Francesca Molinari, Ted O'Donoghue, Joshua C. Teitelbaum
Distinguishing Probability Weighting From Risk Misperceptions In Field Data, Levon Barseghyan, Francesca Molinari, Ted O'Donoghue, Joshua C. Teitelbaum
Georgetown Law Faculty Publications and Other Works
The paper outlines a strategy for distinguishing rank-dependent probability weighting from systematic risk misperceptions in field data. Our strategy relies on singling out a field environment with two key properties: (i) the objects of choice are money lotteries with more than two outcomes and (ii) the ranking of outcomes differs across lotteries. We first present an abstract model of risky choice that elucidates the identification problem and our strategy. The model has numerous applications, including insurance choices and gambling. We then consider the application of insurance deductible choices and illustrate our strategy using simulated data.
The Nature Of Risk Preferences: Evidence From Insurance Choices, Levon Barseghyan, Francesca Molinari, Joshua C. Teitelbaum, Ted O'Donoghue
The Nature Of Risk Preferences: Evidence From Insurance Choices, Levon Barseghyan, Francesca Molinari, Joshua C. Teitelbaum, Ted O'Donoghue
Georgetown Law Faculty Publications and Other Works
The authors use data on insurance deductible choices to estimate a structural model of risky choice that incorporates "standard" risk aversion (diminishing marginal utility for wealth) and probability distortions. They find that probability distortions--characterized by substantial overweighting of small probabilities and only mild insensitivity to probability changes--play an important role in explaining the aversion to risk manifested in deductible choices. This finding is robust to allowing for observed and unobserved heterogeneity in preferences. They demonstrate that neither Kőszegi-Rabin loss aversion alone nor Gul disappointment aversion alone can explain our estimated probability distortions, signifying a key role for probability weighting.
Are Risk Preferences Stable Across Contexts? Evidence From Insurance Data, Levon Barseghyan, Jeffrey Prince, Joshua C. Teitelbaum
Are Risk Preferences Stable Across Contexts? Evidence From Insurance Data, Levon Barseghyan, Jeffrey Prince, Joshua C. Teitelbaum
Georgetown Law Faculty Publications and Other Works
Using a unique data set, the authors test whether households' deductible choices in auto and home insurance reflect stable risk preferences. Their test relies on a structural model that assumes households are objective expected utility maximizers and claims are generated by household-coverage specific Poisson processes. They find that the hypothesis of stable risk preferences is rejected by the data. Their analysis suggests that many households exhibit greater risk aversion in their home deductible choices than their auto deductible choices. They find that their results are robust to several alternative modeling assumptions.
Health Insurance, Risk, And Responsibility After The Patient Protection And Affordable Care Act, Tom Baker
Health Insurance, Risk, And Responsibility After The Patient Protection And Affordable Care Act, Tom Baker
All Faculty Scholarship
This essay explores the new social contract of healthcare solidarity through private ownership, markets, choice, and individual responsibility embodied in the Patient Protection and Affordable Care Act. This essay first explains the four main health care risk distribution institutions affected by the Act – Medicare, Medicaid, the individual and small employer market, and the large group market – with an emphasis on how the Act changes those institutions and how they are financed. The essay then describes the “fair share” approach to health care financing embodied in the Act. This approach largely rejects the actuarial fairness vision of what constitutes …