Journal of Risk and Insurance最新文献

Flooding is the most common and costly natural disaster, with losses escalating due to climate change. For millions of US homes exposed to flood risk, property-level investments in flood resilience offer an attractive strategy to manage losses. But financing such investments remains a challenge. One option is to harness insurance. We use field data of residential flood insurance purchases from a private insurer that offered a supplemental policy (FloodReady) to cover the costs of rebuilding with flood-resilient materials. We exploit a change in the default purchase option to estimate how default enrollment in FloodReady influences take-up. We estimate that autoenrollment increases take-up from 12% to 32%. This dramatic increase suggests that behavioral interventions can be used to improve the financial capacity of homeowners to reduce future flood losses. That said, the fact that most policyholders still actively opt-out even under autoenrollments indicates the limits of default effects in this context. We discuss potential moderators and implications for default effects across settings.

Insurer investment returns are taxed in the United States at the corporate level and at the personal level when they are distributed to shareholders. This paper examines the implications of personal taxes for the tax cost on insurers equity capital and how these tax costs have varied over time under different tax regimes and with different asset portfolios. The paper also discusses how personal taxes provide tax incentives to form offshore hedge fund reinsurers, which provide an interesting case study illustrating the relevance of personal taxes. Finally, the paper discusses the tax treatment of alternative capital arrangements, such as collateralized reinsurance and sidecars.

We analyze an insurance demand experiment conducted in two different settings: in-person at a university laboratory and online using a crowdworking platform. Subject demographics differ across the samples, but average insurance demand is similar. However, choice patterns suggest online subjects are less cognitively engaged—they have more variation in their demand and react less to changes in exogenous factors of the insurance situation. Applying data quality filters does not lead to more comparable demand patterns between the samples. Additionally, while online subjects pass comprehension questions at the same rate as in-person subjects, they show more random behavior in other questions. We find that online subjects are more likely to engage in “coarse thinking,” choosing from a reduced set of options. Our results justify caution in using crowdsourced subjects for insurance demand experiments. We outline some best practices which may help improve data quality from experiments conducted via crowdworking platforms.

We investigate the benefits of risk pooling for the policyholders of stock insurance companies under different solvency standards. Using second-degree stochastic dominance, we document that the utility of risk-averse policyholders is increasing in the pool size if the equity capital is proportional to the premiums written. To the contrary, an increase in the pool size can reduce the policyholders' utility if the equity capital is determined using the Value-at-Risk (VaR). We show that pooling with a larger number of risks is also beneficial for all risk-averse policyholders under a VaR-based regulation if the pool satisfies an excess tail risk restriction. Our analysis provides new insights for the design of solvency standards and reveals a potential disadvantage of risk-based capital requirements for policyholders.

Low insurance take-up in low-income populations is not easily explained by the standard single-period expected utility model of insurance that overlooks the relevance of time preference when liquidity is constrained. We design field survey instruments to elicit quasi-hyperbolic time preferences, as well as prospect theory risk preferences, and use them to examine whether time preferences explain health insurance behavior of low-income Filipinos. Consistent with theory, those with stronger parameterized time preference are less likely to insure and the partial association is most pronounced at low wealth where liquidity is most likely to be constrained. Among those with better understanding of insurance, lower take-up is also associated with present bias. We do not find that insurance is significantly associated with risk preferences.

Analyzing major US property–liability insurers, we find that their cost of equity capital is negatively associated with their underwriting performance, but not with their investment performance. We provide cross-sectional evidence that the difference is attributable, at least in part, to investor learning about opaque insurer liabilities. We also find that capital market and product market imperfections are important determinants of insurers' cost of equity capital. Overall, our evidence contributes to the important literature examining insurers' cost of equity capital, and it suggests that opaque liabilities are a distinguishing feature of insurers in determining their cost of equity capital.

Typical Variable Annuity products combine complex baseline contracts at substantial fees with optional guarantees. We argue this product design aligns with the benefits of bundling to the provider, to the extent that the baseline option features can reduce total replication value. This is possible due to market frictions, and particularly taxation rules, affecting policyholder exercise behavior. We demonstrate the relevance of this mechanism in the context of popular withdrawal guarantees, both theoretically and empirically. Specifically, we show that in the presence of personal taxes, adding on a common death benefit at baseline may decrease the total contract value to the provider.

Little academic work has examined the labor supply response to pension incentives at the intensive margin. We explore this issue using individual-level administrative and pension data for Philadelphia city employees, where workers have some choice about whether or not to perform overtime, which is pensionable. We document large variations across workers in the incentives to do overtime provided by pension rules. Although standard regressions show that worker overtime is positively associated with own expected pension compensation, a robust nonparametric approach that exploits the discontinuities in expected wages due to pensions shows that the elasticity of worker labor supply to expected pension compensation is likely zero: Our standard regression results are likely the consequence of the rule by which overtime is allocated in Philadelphia. We estimate that this rule adds 4% to pension costs and raises total compensation costs by around 0.7% of payroll, and examine the implications for pension underfunding.