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Low income households in agrarian developing economies face considerable livelihood risks, which have negative impacts on welfare. A growing literature focuses on internal constraints on development, which can negatively affect saving and investment behavior. Here I propose that internal constraints may also hinder risk management. Specifically, I present a theoretical model that explores how fairness preferences may create an internal constraint on risk sharing, particularly in a context of wealth inequality, and thereby also affect demand for formal insurance. To test this theory, I utilize a lab experiment, conducted in Ghana, to investigate the impact of wealth inequality on utilization of risk‐management tools, interpersonal risk sharing and formal insurance, and explore how fairness preferences may mediate this effect. I find that inequality reduces risk sharing and increases demand for insurance. Moreover, I find suggestive evidence that fairness preferences create an internal constraint on risk sharing under inequality. [ABSTRACT FROM AUTHOR]

Despite the growing demand for long‐term care (LTC), the uptake of private LTC insurance (LTCI) is low and even declining in the United States. One reason is the complexity of LTCI decisions. Researchers have therefore suggested to support decision‐making abilities. This paper shows, however, that such support would not unambiguously enhance functioning of the LTCI market. We analyze whether selection arises from two correlated but different decision‐making abilities at old age, education and numeracy, and interactions thereof with private information. Using historical data from the Health and Retirement Survey we find that education generates adverse selection, which is only partially offset by advantageous selection due to numeracy. In addition, individuals with greater decision‐making abilities make better LTCI choices, amplifying selection by education and numeracy. This points at a trade‐off between decision simplicity and selection in insurance markets and suggests other steps are needed to enhance the performance of private LTCI markets. [ABSTRACT FROM AUTHOR]

We propose a multiperiod insurance model under a bonus–malus system with two rate classes and consider an insured who has purchased full insurance for her losses. To explore the potential advantage of underreporting her insurable losses, the insured follows a barrier strategy and only reports lossses above the barrier to the insurer. We obtain a unique equilibrium declaration strategy in closed form for a risk‐neutral insured who maximizes her expected wealth, and in semiclosed form for a risk‐averse insured who maximizes her expected exponential utility of wealth, both over an exogenous random horizon. We find that the equilibrium barriers for the two classes are equal and strictly greater than zero, offering a theoretical explanation for the underreporting of insurable losses, a form of ex post moral hazard. Finally, we consider the case of three rate classes and show, through numerical examples, that the equilibrium barriers are not equal. [ABSTRACT FROM AUTHOR]

We perform a textual analysis of insurers' climate risk disclosures and construct a climate change risk management quality index. Our index captures to what extent insurers identify, manage, and adjust their business model to climate change risk. We find that natural disasters in an insurer's home state lead to an increase in climate change risk management quality. The effect of natural disasters in an insurer's geographic markets on climate change risk management seems to be less pronounced. Overall, these results are consistent with salience theories of choice. [ABSTRACT FROM AUTHOR]

Premium subsidies can be used to address low demand for natural hazard insurance when it is partly caused by governmental disaster relief payments. We analyze how the introduction of ex ante premium subsidies affects the frost insurance demand of German winegrowers after the government changed insurance regimes to avoid ex post disaster relief payments. We find that the implementation of a premium subsidy in an immature market with low levels of participation, presumably caused by strong anticipation of disaster relief, is effective in increasing overall frost insurance demand. Receiving disaster relief payments 3 years before the introduction of the subsidy seems to make farmers more responsive toward the premium subsidy. [ABSTRACT FROM AUTHOR]

Centralized insurance can be found in both the private and public sectors. This paper provides a microeconomic study of the risk‐sharing mechanisms in these markets, where multiple policyholders interact with a centralized monopolistic insurer. With minimal assumptions on the risk preferences of the market participants, we characterize Pareto optimality in terms of the agents' risk positions and their assessment of the likelihoods associated with their loss tail events. We relate Pareto efficiency in this market to a naturally associated cooperative game. Based on our theoretical results, we then consider a model of flood insurance coverage via an illustrative example. The lessons drawn from our theoretical results and this example lead to important policy implications for the existing National Flood Insurance Program in the United States. [ABSTRACT FROM AUTHOR]

We explore whether life insurers use a unique reinsurance arrangement to manage assets tied to their regulatory capital. Typical reinsurance allows insurers to reduce their regulatory capital by transferring liabilities (reserves), and the associated assets, to reinsurers. With modified coinsurance (ModCo), insurers maintain control of their liabilities and assets while transferring regulatory capital requirements to the reinsurer. Holding fixed an insurer's reported capital, we find that ModCo allows insurers to report higher risk‐based capital ratios. Insurers with ModCo are less likely to fire sale downgraded bonds. We also find suggestive evidence of regulatory arbitrage, as most ModCo is purchased from reinsurers in countries with low capital requirements or within the same insurance group. [ABSTRACT FROM AUTHOR]

Using an exogenous drop in analyst coverage introduced by broker closures and mergers, we test for the causal impact of analyst coverage on corporate risk‐taking, in an opaque industry. We document an increase in risk using several book‐based and market‐based risk measures, including tail and default risk measures. Results are driven by firms with stronger managerial risk‐taking compensation incentives. The increase in risk is stronger in more opaque firms, and firms with weaker policyholder monitoring. Firm risk increases through at least one risk‐taking action, such as investing firm assets in higher‐risk bonds. Our study highlights the importance of stock analysts in affecting corporate risk‐taking, especially in the presence of stronger managerial, compensation risk‐taking incentives. [ABSTRACT FROM AUTHOR]

On‐demand insurance is an innovative business model from the InsurTech space, which provides coverage for episodic risks. It makes use of a simple fact in a practical way: People differ in their frequency of exposure as well as the probability of loss. The extra dimension of heterogeneity can be used to screen the insured and shifts the utility‐possibility frontier outward. We provide a sufficient condition under which type‐specific full insurance at the actuarially fair price is incentive compatible. We also show that our results hold for various real‐world implementations of on‐demand insurance. [ABSTRACT FROM AUTHOR]

We analyze insurance demand when insurable losses come with an uninsurable zero‐mean background risk that increases in the loss size. If the individual is risk vulnerable, loss‐dependent background risk triggers a precautionary insurance motive and increases optimal insurance demand. Prudence alone is sufficient for insurance demand to increase in two cases: the case of fair insurance and the case where the smallest possible loss exceeds a certain threshold value (referred to as the large loss case). We derive conditions under which insurance demand increases or decreases in initial wealth. In the large loss case, prudence determines whether changes in the background risk lead to more insurance demand. We generalize this result to arbitrary loss distributions and find conditions based on decreasing third‐degree Ross risk aversion, Arrow–Pratt risk aversion, and Arrow–Pratt temperance. [ABSTRACT FROM AUTHOR]

About a quarter of long‐term care insurance (LTCI) policy holders aged 65 let their policies lapse before death, forfeiting all benefits. We find that lapse rates are substantially higher among the cognitively impaired in the Health and Retirement Study. This generates a pernicious form of dynamic advantageous selection, as the cognitively impaired are more likely to use care. Simulations show that an inappropriately optimistic asset drawdown path further increases the individual welfare cost of unanticipated lapses. Meanwhile, we find evidence of a significant but very small role for either strategic or financial motives for lapsing. [ABSTRACT FROM AUTHOR]

I formulate expected‐utility‐maximizing models for health insurance with a single optimal coinsurance (C*) and (separately) a single optimal deductible (D*). While so‐doing, I formalize Nyman's challenge to standard welfare‐loss models, clarifying when and by how much this alters unadjusted models. Using MEPS‐calibrated lognormal distributions and incorporating skewness and kurtosis measures of financial risk, I show how C* shifts as various economic parameters change. For reasonable parameter values, C* < 0.1, much lower than variance‐only estimates would conclude. Omitting higher‐order risk parameters importantly understates risk and hence understates optimal insurance coverage. I separately develop methods to determine D*, showing that it is approximately a fixed percentage of income that falls as the distribution of financial risks rise. This finding contrasts with existing US public policy regarding high‐deductible health plans, which employ fixed deductibles, independent of income. [ABSTRACT FROM AUTHOR]

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. [ABSTRACT FROM AUTHOR]

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. [ABSTRACT FROM AUTHOR]

In this paper we discuss the concept of the cost‐of‐capital (CoC) rate for an insurance company as an equilibrium in the economic triangle of policyholders, shareholders, and the regulator. This provides a possible rationalization and an economic foundation for a quantity that is widely used in practice but whose value is typically neither technically nor economically well justified. We show how it can be well founded in such a triangular equilibrium. Under a simple one‐period model and a valuation procedure of a two‐price economy for illiquid assets we provide a corresponding economic‐theoretical quantification for the CoC rate. The resulting rates are illustrated by a number of concrete numerical examples. [ABSTRACT FROM AUTHOR]

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. [ABSTRACT FROM AUTHOR]

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. [ABSTRACT FROM AUTHOR]

This paper offers a systematic treatment of risk‐sharing rules for insurance losses, based on a list of relevant properties. A number of candidate risk‐sharing rules are considered, including the conditional mean risk‐sharing rule proposed in Denuit and Dhaene and the newly introduced quantile risk‐sharing rule. Their compliance with the proposed properties is established. Then, methods for building new risk‐sharing rules are discussed. The results derived in this paper are helpful in the development of peer‐to‐peer insurance (or crowdsurance), as well as to manage contingent risk funds where a given budget is distributed among claimants. [ABSTRACT FROM AUTHOR]

This paper examines the long‐term evolution of the linkages of the insurance sector with financial and nonfinancial companies. We develop a measure of connectedness using a multifactor model of weekly equity returns. The empirical analysis is conducted from 1973 to 2018, for 16 developed countries, at both the sectoral and institution levels. The results indicate that, unlike other sectors, the connectedness level of the insurance industry has strengthened over time. We also find that the linkages of the largest insurance companies with financial and nonfinancial firms are structurally different but as high as those of the largest banks. [ABSTRACT FROM AUTHOR]

This paper extends the theoretical literature on underwriting cycles by assuming insurers have heterogeneous exposure to a catastrophe. Distinct from the existing literature on insurance cycles, we model optimal contracting by competitive insurers. Since losses take time to pay out, and insurers are better informed about their catastrophe exposure than external investors, catastrophes compromise the capital‐raising ability of insurers by increasing asymmetric information. Capital is restricted following a catastrophe because investors do not know the catastrophe exposure of each insurer, not because of explicit costs of raising capital. Thus, insurers decide to hold less capital following a catastrophe, giving rise to the insurance cycle. [ABSTRACT FROM AUTHOR]

Households' insurance coverage against severe losses is central to their financial resilience. Features of the US National Flood Insurance Program offer insights into consumers' coverage over large stakes that are not typically possible in other markets. We examine the coverage limits (the amount of a home's value that is insured) of over 100,000 households. We determine the optimal coverage based on a standard expected utility calibration. This model indicates that consumers should purchase a low limit and retain much of their exposure due to the high premium loads in our sample. Instead, households in the sample typically fully insure their homes, paying premiums well above their contract's expected value. We investigate possible explanations for homeowners' coverage limits and conclude that some combination of industry practices that emphasize fully insuring and probability distortions in decision‐making are likely explanations. [ABSTRACT FROM AUTHOR]

The presentation of objective information should not affect a rational decision‐maker; however, in practice, it often does. This paper studies the effect of the framing of contingencies on insurance choices. In several experiments, we presented participants with differently framed insurance tasks, where they had to choose deductibles against two different types of losses. The treatment group received a broad description of the risky situation and was asked to decide on the deductibles jointly, whereas the control group received a narrow description of the same task and was asked to decide on the deductibles separately. We discovered that the distribution of the insurance premium paid was identical in all groups, but the actual choices of the insurance plans were significantly diverse: On average, the treatment group preferred more similar deductibles than did the control group. These results indicate the importance of framing in insurance decision‐making. [ABSTRACT FROM AUTHOR]

Can measured risk attitudes and associated structural models predict insurance demand? In an experiment (n = 1730), we elicit measures of utility curvature, probability weighting, loss aversion, and preference for certainty and use them to parameterize seventeen common structural models (e.g., expected utility, cumulative prospect theory). Subjects also make 12 insurance choices over different loss probabilities and prices. The insurance choices show coherence and some correlation with various risk‐attitude measures. Yet all the structural models predict insurance poorly, often less accurately than random predictions. This is because established structural models predict opposite reactions to probability changes and more sensitivity to prices than people display. Approaches that temper the price responsiveness of structural models show more promise for predicting insurance choices across different conditions. [ABSTRACT FROM AUTHOR]

The renewed perception that a pandemic may have catastrophic consequences just makes the appeal to new science-based health policy guidelines more urgent. PANDEMIC RISK MANAGEMENT ISSUES Two types of issues should be considered here: preventive actions before the virus occurrence, and the management of the pandemic itself. Gross domestic product (GDP) losses measure at the macrolevel the magnitude of the pandemic risk in its economic and financial dimension. Pandemics are as old as humanity, from the Black Death in Eurasia in the XIVth century to the worldwide Spanish flu after the first World War. [Extracted from the article]

This study examines adverse retention using guaranteed renewable level term life insurance policies as a sample. No additional underwriting or physical examination is performed at the time of renewal. Our results show adverse retention exists in retention decisions. Further, we also find that the degree of adverse retention increases with age and policy amount and decreases with time elapses. Our results are robust with respect to the trend of before and after the renewal. During the prerenewal period, we find the prerenewal mortality rate is not higher than the nonrenewal mortality rate which is opposite to the evidence of postrenewal period. We also find correlation between "residuals of lapse" and "residuals of fatalities" is positive, also implying adverse retention exists. Most empirical studies on adverse selection often face problems such as the role of underwriting, entanglement of adverse selection, moral hazard, and regulations. Our study is free of these problems. [ABSTRACT FROM AUTHOR]

This paper investigates whether corporations purchase insurance for the real services that insurers provide. We examine the real‐service efficiency hypothesis in the insurance industry by exploiting within firm‐year variation in reinsurance usage and experience at the line of business level. Our results show that insurers purchase reinsurance to access reinsurers' expertise and specialized knowledge. We find that, within the same year, the average multi‐line insurer purchases 2.4%–3.3% points more reinsurance for new lines relative to existing lines. The demand for reinsurance declines by 0.55%–0.80% points with each additional year of experience. The size of these effects differs by the line of business, indicating that the development of internal expertise and specialized knowledge varies by line. [ABSTRACT FROM AUTHOR]

Random effects are particularly useful in insurance studies, to capture residual heterogeneity or to induce cross‐sectional and/or serial dependence, opening hence the door to many applications including experience rating and microreserving. However, their nonobservability often makes existing models computationally cumbersome in a multivariate context. In this paper, it is shown that the multivariate extension to the Gamma distribution based on Wishart distributions for random symmetric positive‐definite matrices (considering diagonal terms) is particularly tractable and convenient to model correlated random effects in multivariate frequency, severity and duration models. Three applications are discussed to demonstrate the versatility of the approach: (a) frequency‐based experience rating with several policies or guarantees per policyholder, (b) experience rating accounting for the correlation between claim frequency and severity components, and (c) joint modeling and forecasting of the time‐to‐payment and amount of payment in microlevel reserving, when both are subject to censoring. [ABSTRACT FROM AUTHOR]

This paper investigates the predictors of trust in insurance and the importance of experiences in a cross‐country setting using a recent insurance industry survey conducted in seven industrialized countries. Preliminary data analysis reveals a very high prevalence of bad experiences with insurance whereby more than 50% of respondents acknowledge having had a bad experience with insurance. Our main findings show that experiences with insurance are one of the most important factors influencing trust in insurance, with the negative effect of a bad experience being more pronounced than the positive effect of a good experience. We also find that trust in insurance is higher among females, younger and less educated individuals, while being lower among individuals with higher insurance literacy. Additionally, access to insurance information through the internet is associated with lower trust in insurance, while higher trust is observed among individuals using newspapers and magazines. [ABSTRACT FROM AUTHOR]

This paper develops a dynamic theoretical model to assess the impact of asset insurance on poverty and the cost of social protection in developing countries. We analyze the model under two technological assumptions: a standard, globally concave production technology, and a fixed cost technology that creates a non‐convex production set and admits the possibility of multiple equilibria and a poverty trap. Under both assumptions, the introduction of an asset insurance market reduces poverty and the costs of social protection. Under the non‐convex production set, there is a strong public finance case for insurance premium subsidies that target poor and vulnerable households and bring them into the insurance market. While the challenges of making microinsurance markets work are multiple, this analysis suggests the potential gains to solving these challenges are substantial. [ABSTRACT FROM AUTHOR]

Recent research in contract theory on the effects of behavioral biases implicitly assumes that they are stable, in the sense of not being affected by the contracts themselves. In this paper, we provide evidence that this is not necessarily the case. We show that in an insurance context, being insured against losses that may be incurred in a real‐effort task changes subjects' self‐confidence. Our novel experimental design allows us to disentangle selection into insurance from the effects of being insured by randomly assigning coverage after subjects revealed whether they want to be insured or not. We find that uninsured subjects are underconfident while those that obtain insurance have well‐calibrated beliefs. Our results suggest that there might be another mechanism through which insurance affects behavior than just moral hazard. [ABSTRACT FROM AUTHOR]

Guaranteed renewability (GR) is a prominent feature in many health and life insurance markets. We develop a model that includes unpredictable (and unobservable) fluctuations in demand for life insurance as well as changes in risk type (observable) over individuals' lifetimes. The presence of demand type heterogeneity leads to the possibility that optimal GR contracts may have a renewal price that is either above or below the actuarially fair price of the lowest risk type in the population. Individuals whose type turns out to be high risk but low demand renew more of their GR insurance than is efficient due to the attractive renewal price. This results in imperfect insurance against reclassification risk. Although a first‐best efficient contract is not possible in the presence of demand type heterogeneity, the presence of GR contracts nonetheless improves welfare relative to an environment with only spot markets. [ABSTRACT FROM AUTHOR]

Even the highest‐rated life‐annuity providers have a nonzero probability of becoming insolvent during an annuitant's retirement, and many potential annuitants are unaware of the state guaranty associations (SGAs) which provide insurance against the associated financial consequences. We study the theoretical implications of insolvency risk—real and perceived—for annuitization. Then, using a disciplined calibration of annuitant misperceptions in a standard life cycle model, we show that even the modest perceived risk of default associated with highly‐rated providers can—absent awareness of the SGAs—reduce annuitization and significantly reduce welfare. We further consider the implications of information frictions which prevent retirees from discerning true insolvency risk and we find that these frictions have plausibly large additional quantitative implications for annuitization and welfare. Simulations of our model further suggest that the general lack of awareness of the SGA backstop by potential annuitants can erode a sizable fraction of the potential welfare benefits thereof. [ABSTRACT FROM AUTHOR]

Economists, regulators, and consumer protection agencies have highlighted the welfare losses for consumers who purchase high‐load insurance against modest stakes risks. Mandatory information disclosure is a potentially attractive public policy tool that might improve consumers' choices, but has not been widely tested in insurance settings. We conduct an incentive‐compatible insurance demand experiment, in which we manipulate the information disclosed to subjects. We test whether any of the three most commonly suggested disclosures affect insurance demand, disclosing either (1) the true probability of loss, (2) the contract's expected loss, or (3) the insurer's profit on the transaction. Similar to consumers in naturally occurring insurance markets, subjects in the laboratory demonstrate significant demand for high‐load insurance against modest stakes. However, we find no effect of any of the three disclosure treatments on subjects' insurance choices. We discuss the implications of our results for possible public policy initiatives in insurance markets. [ABSTRACT FROM AUTHOR]

Medicaid provides a critical source of insurance for long‐term care, and individuals may strategically offload assets (typically to children) to meet the means‐tested eligibility requirement. In this article, we quantify the extent of such behavior using variation in the penalty for improper parent‐to‐child transfers induced by the Deficit Reduction Act of 2005. We estimate difference‐in‐differences models based on the hypothesis that only individuals with high levels of nursing home risk (high risk) will alter transfers because of the Act. We find that over a 2‐year horizon, high‐risk individuals reduced transfers to children on the extensive margin by 11 percent and that the average total amount of transfers decreased by $4,860. The results hold only for coupled respondents. We also conduct a triple‐differences analysis to examine heterogeneity with financial literacy and find that even those with a low level of financial literacy responded to the penalty. [ABSTRACT FROM AUTHOR]

States levy insurance premium taxes, which are essentially gross receipt taxes on premiums. An unusual characteristic of insurance premium taxes is that in each state in which an insurance company writes premiums, the firm pays the higher of the tax rate in the state in which the company is domiciled and the state in which the policy is written. Thus, the choice of location has a significant effect on the firm's tax liability. Using firm‐level data for the property‐casualty (P‐C) insurance industry, we calculate the firm‐specific tax rate for each P‐C firm for every possible state of domicile. We estimate conditional logistic models to analyze the effect of insurance premium taxes on the choice of the state of domicile of existing and relocated firms. We find robust evidence of a small, negative, and statistically significant effect of these taxes on the choice of the state of domicile. [ABSTRACT FROM AUTHOR]

We propose a model of narrow framing in insurance and test it using data from a new module we designed and fielded in the Health and Retirement Study. We show that respondents subject to narrow framing are substantially less likely to buy long‐term care insurance than average. This effect is much larger than the effects of risk aversion or adverse selection, and it offers a new explanation for why people underinsure their later‐life care needs. [ABSTRACT FROM AUTHOR]

This article studies long‐term care (LTC) insurance in the presence of family altruism. We first explore whether family solidarity affects the application of Arrow's (1963) deductible theorem, shown to apply in models without family in earlier work. We find that Arrow's theorem generally holds, but departures from the standard model exist. Our analysis highlights complex interplay between parents' insurance and children's aid, implying that some intuitive conjectures are not always verified. For instance, while one expects deductible to increase with children's altruism, this is unambiguously confirmed only under certain conditions. We then study empirically the relation between LTC insurance and children's altruism using data from "Health and Retirement Study" (HRS). [ABSTRACT FROM AUTHOR]

We characterize the design of insurance schemes when policyholders face several insurable risks in a context of adverse selection. Splitting risks emerges as a feature of second‐best Pareto optimality. This may take the form of risk‐specific contracts, or of contracts where risks are bundled but subject to differential coverage rules, such as risk‐specific copayments combined with a deductible or a cap on coverage. [ABSTRACT FROM AUTHOR]

This article investigates how a particular type of personal experience—"no‐loss" experience with minor earthquakes—affects financial decisions such as insurance purchases. We find a small temporary increase in insurance demand in areas that experience a shaking with moderate intensity, or multiple shakings with light intensity. An analysis of Google Trends data confirms an immediate increase in interest in insurance though not in seismic retrofit. These findings extend the applicability of the availability bias and hot‐hand fallacy to a broader context: financial decisions may be motivated by not only loss experience, but also recent no‐loss experience, as people may extrapolate their "feeling" to something worse. However, such experience does not motivate long‐term behavioral change. [ABSTRACT FROM AUTHOR]

This article considers lender‐level index insurance as a means of expanding access to credit in disaster‐prone communities. In this approach, the lender transfers the disaster risk of loans in its portfolio by contracting on an observable measure of the catastrophe. I develop and calibrate a dynamic, stochastic model using data from a community lender in Peru that is vulnerable to El Niño–related flooding. The modeled lender can insure against El Niño using an index‐based product that is available for purchase by financial intermediaries in Peru. I examine how premium rates, basis risk, and background risk may influence the lender's insurance decision and credit supply. Overall, the results suggest that lender‐level index insurance holds promise for reducing disaster‐related credit supply shocks and expanding credit access in vulnerable communities. [ABSTRACT FROM AUTHOR]

Government‐subsidized insurance is ubiquitous, yet estimation of demand in such markets remains challenging. The premium charged for a given deductible is determined by actuarial construction; thus, observed choice‐pairs are endogenous leading to biased estimation under standard econometric approaches. A theoretical model and simulation study are developed, and a new identification strategy proposed. An empirical application using Federal Crop Insurance Program—a $100 billion/year program—data reveals that demand is quite elastic after accounting for this endogeneity. Mistreatment of such endogeneity is likely partly responsible for pervasive faulty findings of inelastic insurance demand in related applications. Policy implications are also discussed. [ABSTRACT FROM AUTHOR]

This article examines how the Affordable Care Act (ACA) would change financial resources for and transfers to the previously uninsured if they were to purchase coverage in the ACA insurance exchanges (marketplaces) in 2014. The results suggest that the law provides gains to some, relative to their spending in the pre‐ACA period, particularly those in poor health and with very low incomes, but it also potentially imposes financial losses on many, again compared to their experience when uninsured. We estimate changes in expected payments—defined as premiums plus expected out‐of‐pocket costs—from purchasing coverage and paying cost sharing post‐ACA, relative to expected out‐of‐pocket payments when being uninsured pre‐ACA, across population subgroups characterized by income, age, and health status. We also estimate changes in expected transfers to the previously uninsured under alternative assumptions on how much health care spending increases after the ACA. [ABSTRACT FROM AUTHOR]

In a large sample of private credit agreements of publicly traded firms, nearly all agreements contain at least a boilerplate provision requiring the borrower to purchase insurance. In about 80 percent of the agreements, the insurance covenant is more explicit. Four additional features of the insurance covenant are quite common: requirements of coverage for specific risks, naming the lender as a loss payee, mandating that any insurance proceeds be used to repay the loan, and explicit permission for the borrower to self‐insure. Credit agreements contain more stringent insurance requirements for borrowers that pose higher credit risk. The insurance requirements are strongly positively correlated with the loan being secured by collateral, which suggests that insurance creates value by protecting lenders from unexpected changes in seniority that might happen following the destruction of collateral. Insurance covenants are an important ingredient of credit agreements designed to create a very safe claim for senior, secured lenders. [ABSTRACT FROM AUTHOR]

This article makes two contributions to the insurance literature by studying optimal insurance policy indemnity schedules with policyholders' limited liability and background risk. First, generalizing a prominent approach by Huberman, Mayers, and Smith (1983), it is shown that a welfare subsidy in the case of a ruinous loss may make the insurance premium "overly fair" for nonbankrupting losses and full insurance for this event becomes optimal. Second, introducing correlated background risk into this limited liability framework relativizes or even turns results by Doherty and Schlesinger (1983) as to the impact of background risk on optimal coverage into its opposite. [ABSTRACT FROM AUTHOR]

This article investigates market discipline in the reinsurance market by examining the sensitivity of reinsurance demand to reinsurer counterparty risk for a sample of U.S. property–liability insurance companies. Using the financial strength rating of reinsurers as a proxy for reinsurance counterparty risk, we find evidence of market discipline that reinsurance demand is sensitive to counterparty risk. Specifically, reinsurance demand reacts negatively to reinsurer rating downgrades, with the reduction being the largest when a "weak" reinsurer gets "weaker," followed by a reinsurer being downgraded below a benchmark rating. The sensitivity is higher for authorized reinsurance than for unauthorized reinsurance. Reinsurance demand sensitivity to counterparty risk is found to be lower for ceding insurers with higher leverage. Ceding insurers with high reinsurer sustainability are less sensitive to noncritical rating downgrades of reinsurers. Additionally, reinsurance demand is found to be less sensitive to reinsurer upgrading than to reinsurer downgrading. [ABSTRACT FROM AUTHOR]

We show that an equilibrium always exists in the Rothschild–Stiglitz insurance market model with adverse selection and an arbitrary number of risk types, when insurance contracts include policy dividend rules. The Miyazaki–Wilson–Spence state‐contingent allocation is an equilibrium allocation (defined as a set of type‐dependent lotteries sustained at a symmetric equilibrium of a market game), and it is the only one when out‐of‐equilibrium beliefs satisfy a robustness criterion. It is shown that stock insurers and mutuals may coexist, with stock insurers offering insurance coverage at actuarial price and mutuals cross‐subsidizing risks. [ABSTRACT FROM AUTHOR]

Index triggers have enabled the extension of insurance to a wide range of risks, by providing a simple mechanism to determine payment. However, the resulting coverage generates basis risk, the variability over time in the level of insurance payouts relative to the level of losses. We analyze basis risk to rank binary and multivalue indices for any risk‐averse individual. Our ranking provides methods to select an index that is optimal for a heterogeneous group and illustrates that higher correlation between loss and index, does not necessarily equate to a better index. [ABSTRACT FROM AUTHOR]

Private export credit insurance—covering the risk of nonpayment—plays an important role in facilitating international trade, especially within Europe. Due to lack of data, however, little is known about the influence of loss shocks on export credit insurance markets. This article studies the effect of claims on the availability and premium of export credit insurance, using unique bilateral country‐level data covering worldwide insurance underwriting from 1992 to 2006 by a leading trade credit insurance group. Applying fixed effects models at the country subsidiary level, I find that a doubling of the claims ratio on insured exports between a pair of countries results, on average, in a decline in the subsidiary's share of bilateral exports insured by about 11 percent and rise in premium level by about 4 percent. These claims effects increase when the insurer makes a loss and rise with the size of the loss. Importantly, evidence shows that an extreme loss shock in one market also increases the claims sensitivity of insurance coverage on exports to other markets, suggesting a role for capital constraints. Overall, these results help our understanding of potential trade finance constraints in times of crisis, such as during the 2008–2009 global trade collapse. [ABSTRACT FROM AUTHOR]

An introduction is presented in which the editor discusses articles in the issue on topics including insurance; lotteries; and experimental economics.