Search

This article comments on two papers which discussed the problems of insurance regulation. The patterns of insurance regulation have emerged in a desultory and disjointed fashion which do not fit into the orderly, rational structure of the academic mind. In this connection, I find the paper of Professor Belth on Insolvency in the Context of Life Insurance Regulation to be a highly theoretical discussion of rather involved technical life insurance concepts. The speculative and highly academic treatment of these life insurance issues seems a long way from the real world in which the average life insurance man lives. Whatever validity there is to Professor Belth's thesis it is a little puzzling to see it developed as part of the structure of a rational regulatory system. Essentially, Professor Belth tells us that the standards for maintaining solvency in the life insurance business result in a considerable amount of fat or surplus, which is acting as a drag on the life insurance business in its efforts to compete with other financial institutions for the savings dollars of America. In the property and casualty field, the standards for establishing and measuring solvency are frequently under attack because they are not sufficiently stringent to achieve the goals desired--namely, to prevent company failures.

Comments on the comparison of the rates of return earned in the property and liability insurance industry with the returns earned in other sectors of the U.S. economy. Basis in the existence of difficulties in the measurement of the rate of return; Consideration of the totality of the profits in a firm or industry's rate of return; Appropriateness of excluding from the denominator the assets offset by current liabilities.

This article presents a comment by Dale H. Gustafson on the article A New Concept of the Economics of Life Value and the Human Life Value: A Rationale for Term Insurance as the Cornerstone of Insurance Marketing by professors Juan B. Aponte and Herbert S. Denenberg (A-D), published in the September 1968 issue of the Journal of Risk and Insurance. Gustafson will quote four sentences from the paper that seem to clearly identify the implicit assumptions. The first one is the last complete sentence in column 1 on page 347: Income insurance plus medical expense insurance represents the complete life insurance portfolio for the individual The second one is the first full sentence in the next paragraph: The all-inclusive system would provide complete insurance for full insurable value against all contingencies. The third one is the sentence which begins at the bottom of column 2 on page 348: It should he realized, however, that investment life insurance is merely insurance with an investment adjunct. Finally, there is the last sentence in the second paragraph in column 1 on page 353: What is needed is savings, and it is strictly an investment decision as to the form this savings should take. Gustafson read into these sentences and the import of the whole article that the basic assumptions are that life insurance is concerned with the risk of death prior to retirement, and savings solely as an investment. Gustafson doubt that very many people associated with the life insurance business would agree with this as an exhaustive listing of the interests of life insurance. In the vernacular generally used in sales training materials, the mortality hazard that life insurance is concerned with is most often described as a two-faceted problem--the risk of dying too soon and the risk of living too long.

In this paper the expected utility hypothesis of choice under uncertainty, developed by Daniel Bernoulli and popularized by Friedman and Savage, is applied to the explanation of the optimal amount of life insurance for a rational individual. The empirical implications of the expected utility hypothesis for the demand for life insurance are then tested by multiple regression analysis using data for the decade of the 1960s. The theoretical model developed implies that three key cyclical variables should explain cyclical variations in the quantity of life insurance demanded: the rate of discount, the amount of nonproperty income (i.e., wages and salaries) expected to be received over the period of analysis, and the amount of nonhuman wealth held at the time the decision to purchase insurance is made. Our empirical results confirm the importance of these variables and are consistent with behavior according to the expected utility hypothesis. [ABSTRACT FROM AUTHOR]

The paper formulates and tests a methodology for evaluating the extent and nature of potential conflict between life insurance agents and home office personnel charged with the supervision or evaluation of agent performance. The dual survey of agents and executives not only identifies incongruent perceptions but also facilitates the management of conflict before it becomes dysfunctional. In addition to providing an insurer with surrogate measures of disaccordance, the paper suggests a method for evaluating the relationship between the degree of accordance and individual agent performance. [ABSTRACT FROM AUTHOR]

The purposes of this paper are to describe a variety of deceptive sales practices used in the life insurance business and to suggest ways in which such practices might be modified so as to eliminate the element of deception. All of the practices discussed in the paper involve numbers, and also utilize improper statements about either the price of life insurance protection or the rate of return on the savings element of a cash-value life insurance contract. The conclusion is that the widespread use of such practices constitutes a national scandal, and that the entire subject should be examined carefully by those interested in the welfare of the life insurance business. [ABSTRACT FROM AUTHOR]

The purpose of this paper is to report on the results of an attempt to measure the price of credit life insurance in comparison with the prices of other forms of life insurance coverage, together with the necessary qualifications. The conclusions to be drawn from the study depend on whether the person making the comparison feels that the appropriate basis is individual cash-value life insurance, or individual term insurance, or association group life insurance, or regular group life insurance. The conclusions also depend on the nature of the age and loan amount distributions of the borrowers, and on whether the comparison is made with low, medium, or high credit life rates. This paper provides some data that can be used to make comparisons on several bases, and describes a methodology that can be employed to generate data on many other bases. [ABSTRACT FROM AUTHOR]

Insurance that lowers the cost of insured services to the insured may increase the usage of those services. This phenomenon is called ‘moral hazard’ in the insurance literature. This paper demonstrates how price elasticities of demand can be utilized to provide quantitative estimates of moral hazard. Empirical estimates of moral hazard, which are based on hospital patients in Iowa and their demand for hospital services, are presented. It is shown that the amount of moral hazard varied significantly with age class, type of illness, type of accommodation, and whether there were complications, but not with the sex of the patient. [ABSTRACT FROM AUTHOR]

The essence of this paper was presented to the 1970 Risk Theory Seminar as ‘A Progress Report on an Investigation Concerned With Relating Chebyshev's Inequality to Insurance Theory’. A first approximation to a comprehensive, yet relatively simple theory of the financial behavior of the non-life stock insurer is presented. The paper models the quantitative relationship between selected administrative policies prescribed by top management and the financial welfare of both policyholders and shareholders. In its capacity as an estimator of the probability of ruin for the combined insurance and investment operation, Chebyshev's inequality may be the key to simplifying the analysis to the point where it may be applied to practical management problems. [ABSTRACT FROM AUTHOR]

Companies wishing to offer variable life insurance policies will have a range of choice as to various aspects of the actual product design, and the purpose of this paper is to discuss a number of the areas involved. The three main types of variable life insurance benefit designs which have recently been proposed for issuance in the United States are described. Tables are presented and discussed which show illustrative face amounts under these three designs for various assumed levels of actual net investment performance. Other aspects of product design, apart from selection of the basic design to be used, are outlined and various alternative approaches are set forth. The final section of the paper deals with the main aspects involved in pricing variable life insurance policies. [ABSTRACT FROM AUTHOR]

This paper reports on a comprehensive study of the profitability of the P and L insurance industry undertaken as part of a general investigation of insurance prices and investment income. From a socio-economic point of view it compares risk and returns on invested capital with numerous other financial and nonfinancial sectors of the American economy. In measuring return, all possible sources of income have been considered including unrealized capital gains as well as incomes attributable to the use of mixed cash/accrual accounting systems. The risk/return comparisons are based on a 60-industry, 16-year econometric study. The conclusions are based not on a sample but on industry aggregates, as well as on several measures of financial return. No evidence of excessive return was found. These theoretical conclusions are examined against and verified by current industry experience. The paper concludes with a plea for responsible academic treatment of this highly political and emotional subject. It urges the shunning of both the shibboleths and traditions of the industry as well as the cries and pressures of the consumerism movement. [ABSTRACT FROM AUTHOR]

This paper explores the possibilities of making fairly complex multi-variable demand forecasts for life insurance sold by utilizing readily available published data, plus an existing computer program available to everyone. The thinking behind this experiment was that if a good demand forecast could be made in this manner, insurance companies could have a cheap, quick, yet sophisticated method of estimating demand in advance. This estimate could be used to check more complicated demand forecasts made at greater cost. The demand forecast presented in the paper used as dependent variables the relative price of life insurance; number of marriages; number of births; personal income; population; and employment. These variables, when used with the U.C.L.A. Biomedical 03R--Multiple Regression with Case Combinations program, proved able to forecast insurance demand with reasonable accuracy in most cases. The authors experimented with various combinations of these and other variables, but this set proved the most accurate forecaster. All of the dependent variables are widely available and estimated for the near future by many competent forecasters. Much time was consumed preparing this forecast, but once it was set up, it proved to be very easy to utilize. It is estimated that less than one man day of skilled work would be required to make this estimate annually. Executives can judge whether or not such estimates would be worthwhile for their companies. [ABSTRACT FROM AUTHOR]

The purpose of this paper is to analyze the provocative proposition of substituting for investment life insurance a program of term insurance and separate investment. The approach is to calculate an expected-return equivalent, that is, the rate of return net of taxes and investment expenses that one would have to expect from a separate investment fund plus term insurance over some duration, such as twenty or thirty years, in order to attain at least the equivalent of the performance of investment life insurance, taking into account the probability of persisting in either scheme and the time value of money. [ABSTRACT FROM AUTHOR]

The purpose of this paper is to measure the effect of changes in lapse rates on the price of life insurance protection to policyholders. The magnitude of the changes in lapse rates to be considered is determined by reference to data on lapse rates in various companies. Then, the impact of changes in lapse rates is compared to the impact of changes in mortality rates. The conclusions are that lapse rates have a substantial effect on price, and that consideration should be given to the use of expected lapse experience in the classification of life insurance applicants. [ABSTRACT FROM AUTHOR]

The article focuses on the expected utility hypothesis and the selection of optimal deductibles for a given insurance policy. In their paper using the Von Neumann-Morgenstern expected-utility hypothesis to determine the optimal deductible for a given insurance policy, economists B. Peter Pashigian, Lawrence L. Schkade, and George H. Menefee (PSM) hold that the results of the preliminary tests suggest that consumers do not act in accordance with the expected utility hypothesis when selecting a deductible for collision losses. The authors base this essentially negative result on the assumption that the consumer's utility function is well approximated by a quadratic. Before accepting the above conclusion, therefore it is natural to ask if there exist any plausible utility function which are consistent with observed consumer choices of a deductible for collusion losses but which are not well approximated by a quadratic function. The purpose of this paper is to provide an affirmative answer to this question and to indicate those properties of the quadratic utility function which lead to its failure to explain the data.

The optimum coupon schedule for serial bonds issued by municipalities has been solved as a knapsack problem, and is widely implemented in bank and nonbank underwriting firms. A large subset of issues carries the additional requirement that limits the number of distinct coupons which the underwriters may assign to the issue. The paper formulates this problem as a dynamic programming model and discusses the computational aspects relating to this formulation by comparing it with a direct 0/1 integer programming model. Some computational experience is also provided. [ABSTRACT FROM AUTHOR]

In this paper, the problem of completing a contract between a buyer and a seller of insurance is presented as a two-person, zero-sum game, and previous results concerning optimal insurance contracts are reviewed from the viewpoint of game theory. While this point of view seems unrealistic, it is seen to lead to theorems which involve contracts actually encountered in the real world. It is shown that an insurance agreement which splits each loss proportionately between the insurer and the insured is optimal from the viewpoint of a risk averting insurance company that seeks to maximize its expected utility when the net insurance premium is fixed. [ABSTRACT FROM AUTHOR]

As our provisions for economic security expand to cover more risks and more people, the American social security "system" grows increasingly complex. Much has been written on the relationships — actual and theoretical — between public and private pension programs, but only scanty information is available on the relationships between private health, welfare, and pension plans and our oldest social security program, workmen's compensation insurance. There are good reasons for this lack of information. Workmen's compensation has well-developed traditions of separatism. It functions under the aegis and direction of insurance companies, physicians, and attorneys. Until recently, compensation issues have received limited consideration from economists, political scientists, and industrial relations specialists. This paper, therefore, proposes to do two things: (1) It will describe and analyze some of the private plan provisions which are supplementing, duplicating, or perhaps undercutting state workmen's compensation plans and benefits. (2) It will discuss the implications these private provisions may have for the future of workmen's compensation. [ABSTRACT FROM AUTHOR]

Comments on an article by Daniel P. Kedzie concerning corporate planning and the importance of a holding company. Decision of major insurance firms to establish holding companies; Lack of arguments with respect to the dangers of broadening market activities; Analysis of the return on investment of the insurance industry.

This article presents views of the author on mathematical models for insurance. According to the author it almost goes without saying that the ever growing number of models applicable to the selection of an investment portfolio, to the control of the quality of clerical operations, and to market analysis also are candidates for application to insurance operations. it is appropriate in any discussion of mathematical model building in insurance to make a standard acknowledgment that models concerning the random risk aspect of the business are relevant to the considerations of only a part of the spectrum of problems that face insurance managers. Even when considering questions involving vital quantitative decisions that are unique to the insurance business, it- is a common actuarial practice to suppress the random nature of benefit costs and premium income and to work exclusively with expected values. For example, the involved asset share computations by which life insurance actuaries check the degree of balance among the components of the price aid benefit structure for the ordinary life insurance product presuppose the precise realization of an elaborate set of assumptions.

In a recent paper in this Journal Roland Robinson provided a perceptive, well-balanced review of some major aspects of the Report of the Hunt Commission (HC). Professor Robinson indicated that his review would "focus on those subjects the HC seemed to give highest priority: ... lesser topics must, unfortunately, be neglected" Other reviewers of the HC Report have followed the same procedure. This has meant almost complete neglect for those aspects of the report that deal with life insurance companies, trust departments and pension funds. This neglect is unfortunate because the analysis in these latter sections of the Report is extremely weak and recommendations are presented almost totally without support. It seems inappropriate for such treatment in so important a document to escape without critical comment by the economics profession. The purpose of this note is to provide some critical comments concerning aspects of the Report which have been neglected by both professional and popular reviews of the HC Report. [ABSTRACT FROM AUTHOR]

In this paper three major points are made: (1) The continuing upward trend in conglomerate insurance mergers has both positive and negative aspects to it;1 (2) The McCarran-Ferguson Act, granting the insurance industry a fairly broad exemption from federal antitrust laws, is not an insuperable obstacle to antitrust litigation against conglomerate insurance mergers; and (3) While it is not apodictic that Section 7 of the Clayton Act can be used against conglomerate insurance mergers, a recent FTC decision—involving American General Insurance Company's 1969 acquisition of Fidelity and Deposit Company of Maryland—suggests that such acquisitions are not sui generis. The paper analyzes the amended Section 7 of the Clayton Act and the McCarran-Ferguson Act, and on the basis of statutory language, legislative history, economic analysis, and the available decisions undertakes to formulate criteria for evaluating the legality of a conglomerate acquisition by an insurance firm. [ABSTRACT FROM AUTHOR]

The variable life insurance models developed to date do not have an explicit tie with an inflation index, and according to historically-based simulations of these products, their face value is not likely to keep pace with inflation in the early years of the policy. This paper develops and tests several variable life insurance models which are designed to minimize the difference between the face of the policy and an inflation index. It is concluded that the modified level additions model is likely to be the most effective inflation based variable life insurance design. [ABSTRACT FROM AUTHOR]

This paper evaluates alternative measures for mitigating losses to residential structures from natural disasters. The first part focuses on the effect of liberalized federal disaster relief policies on the types of structures which will be built in hazard-prone areas. Both physical losses from disasters as well as intangible costs, such as the value of a human life, are considered in the evaluation of two alternative type structures. The second part of the paper discusses four extreme cost-bearing approaches to cover losses from natural disasters: (i) Total federal responsibility, (ii) Self insurance by the homeowner, (iii) Required insurance protection, (iv) Land use restrictions and building codes. The concluding section suggests a plan for mitigating future losses based on comprehensive disaster insurance coupled with land use measures and building codes regulations. A critical question which remains to be answered is whether disaster insurance should be voluntary or required. [ABSTRACT FROM AUTHOR]

This paper describes a computer simulation of insurer financial behavior, based upon a risk-theoretic model previously reported in the Journal The simulation can be used to study the impact of a great variety of managerial policy combinations--in a great variety of circumstances-upon specified financial results. This discussion is limited to a study of the consequences of complying with the one-to-one solvency rule as opposed to adhering to a .001 ruin criterion. In four of the five eases studied the .001 criterion yields distinctly different consequences for policyowners, shareholders or both. The fifth case permits an indefinitely large premium volume with comparable results for both criteria. More generally, simulation emerges as a potentially useful tool for refining both the theoretic and empirical aspects of scientific study. [ABSTRACT FROM AUTHOR]

This paper surveys and interprets the applications of operation research in the insurance industry. [ABSTRACT FROM AUTHOR]

This paper presents an application of operations-research techniques to managing claims in workmen's compensation insurance. It describes the investigative studies and their conclusions, outlines the systems design and implementation, and gives a sample of the validation studies. Implementation of the proprietary claims-management system described has provided dramatic reductions in case durations and paid dollar losses, while returning the injured worker to his ultimate level of rehabilitation in a shorter time. [ABSTRACT FROM AUTHOR]