Search

This paper studies how private equity creates value and its consequences for consumer welfare in the insurance industry, where PE investments grew tenfold following the financial crisis. PE firms add value through regulatory and tax arbitrage that increases profits relative to their non-PE counterparts. Crucially, the impact on consumer welfare is nuanced: in the short run, consumers benefit from more favorably priced products. But the arbitrage strategy also exposes them to more risk, as annual expected losses scaled by capital buffers rise by 50 percentage points. This creates the possibility of consumer harm in the event of a downturn. Authors have furnished an Internet Appendix , which is available on the Oxford University Press Web site next to the link to the final published paper online. [ABSTRACT FROM AUTHOR]

Purpose: According to the market competition theory, a firm's decision-making is influenced by the behaviors or strategies of its competitors. The repercussions of competition include market-stealing and spillover effects. Relatively few studies in the reinsurance literature discuss the effect of competitors on an insurer's decision-making. This study aims to fill a gap in the reinsurance literature by comparing insurers' reinsurance demand to their competitors' reinsurance purchases. Design/methodology/approach: This study uses unbalanced panel data for the US property-liability insurance industry from 2006 to 2017 to determine the impact of competitors' reinsurance purchases on insurers' reinsurance demand. This study employs the Mixed Effect Model and the Quantile Regression to test the proposed hypotheses. Findings: The evidence suggests that the affiliated reinsurance purchases of competitors have a positive and substantial effect on the affiliated reinsurance demand of insurers, crediting mimicking the reinsurance strategy. Interestingly, the market-stealing effect is supported while the non-affiliated reinsurance metric is used. Remarkably, given insurers with low non-affiliated reinsurance purchases, the finding sustains the mimicking reinsurance strategy. Nevertheless, the market-stealing effect remains a concern for insurers with a high non-affiliated reinsurance purchase. Originality/value: The new findings concerning competitor effects analysis fill a void in the reinsurance literature. Risk diversification, capital substitution, and real services demand may play a crucial role in determining the market-stealing effect, leading to a decrease in market share. Insurers can mitigate the market-stealing effect of competitors by accessing expertise and capital substitution through non-affiliated reinsurance purchases. [ABSTRACT FROM AUTHOR]

Variable annuities, the largest liability of U.S. life insurers, are investment products containing long-dated minimum return guarantees. I show that guarantees with similar economic risks are treated differently by regulation and these differences impact insurers' hedging behavior. When the regulatory regime recognizes certain risks, insurers start to hedge these risks in a substantial way. For some guarantees, this involves hedging both interest rate and equity market risks. However, for others, it involves hedging only equity market risk. As the regulatory regime still does not recognize the interest rate risk of all guarantees, insurers remain exposed to substantial interest rate risk. Authors have furnished an Internet Appendix , which is available on the Oxford University Press Web site next to the link to the final published paper online. [ABSTRACT FROM AUTHOR]

This paper attempts to analyse the effect of insurance development on sophistication measured by the economic complexity index. Empirical analyses are carried out on a sample of 36 African countries over the period 2003-2019. In order to limit potential endogeneity biases, we run the two-step system Generalized Method of Moments and the Lewbel estimator. Empirical results, robust to a set of sensitivity analyses, show that insurance development can foster economic complexity in Africa. Moreover, when distinguishing between life and non-life insurance, empirical results remain globally unchanged, with a greater effect of non-life insurance as compared to that of life insurance. Furthermore, the mediation analysis enabled us to identify innovations and investments as some transmission channels through which insurance development may affect economic complexity in Africa. Thus, African leaders would do well to improve the regulation of the insurance business to enable it to participate effectively in financing the economy and managing risks, thereby stimulating economic complexity. [ABSTRACT FROM AUTHOR]

Although potentially useful for financially hedging systemic weather-related risks, weather contracts/derivatives (also referred to as parametric insurance) have not seen wide adoption in agriculture outside of applications in developing countries, frequently supported by governments and non-governmental organizations (NGOs). A significant impediment is the lack of financial firms willing to stand ready to sell weather derivatives to individual agricultural producers in the over-the-counter market who, due to the localized nature of weather, face idiosyncratic weather-related risks. In particular, the administrative and reinsurance costs of supplying relatively small contracts with specific terms to many different producers are often prohibitive. The current study considers the potential use of weather derivatives in hedging the aggregate yield/revenues of viticulture producers represented by an industry association located in the province of Ontario, Canada. We examine the sensitivity of aggregate industry yields to several relevant weather-related risks employing copula function analysis. We then consider the potential of a weather derivative in hedging the financial risk associated with cold winter temperatures, which pose the greatest risk to aggregate vinifera yields. The issue of attributing costs and payouts to individual association members remains unresolved, and several alternatives are suggested. [ABSTRACT FROM AUTHOR]

Copyright of Zeitschrift für die gesamte Versicherungswissenschaft is the property of Springer Nature and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

Insurance companies and banks regularly have to face stress tests performed by regulatory instances. To model their investment decision problems that includes stress scenarios, we propose the worst-case portfolio approach. Thus, the resulting optimal portfolios are already stress test prone by construction. A central issue of the worst-case portfolio approach is that neither the time nor the order of occurrence of the stress scenarios are known. Even more, there are no probabilistic assumptions regarding the occurrence of the stresses. By defining the relative worst-case loss and introducing the concept of minimum constant portfolio processes, we generalize the traditional concepts of the indifference frontier and the indifference-optimality principle. We prove the existence of a minimum constant portfolio process that is optimal for the multi-stress worst-case problem. As a main result we derive a verification theorem that provides conditions on Lagrange multipliers and nonlinear ordinary differential equations that support the construction of optimal worst-case portfolio strategies. The practical applicability of the verification theorem is demonstrated via numerical solution of various worst-case problems with stresses. There, it is in particular shown that an investor who chooses the worst-case optimal portfolio process may have a preference regarding the order of stresses, but there may also be stress scenarios where he/she is indifferent regarding the order and time of occurrence. [ABSTRACT FROM AUTHOR]

With the commencement of the Solvency II directive, insurers in the European Union need to provide a projection of their solvency figures into the future (as part of the Own Risk and Solvency Assessment, ORSA). This is a highly complex task since future solvency figures depend on the development of numerous (stochastic) risk factors. The required evaluations are numerically challenging, which in practice forces companies to limit their analyses to only a few selected deterministic scenarios. These deterministic scenarios clearly cannot describe the full probability distribution of a company's future solvency situation. The focus of this paper is on financial guarantees in participating life insurance products. In particular, we study two major types of interest rate guarantees in life insurance, a maturity guarantee and a (path-dependent) cliquet-style guarantee. In order to derive entire probability distributions of future solvency ratios, we limit the model framework to two sources of risk (a Hull–White model for interest rates and a geometric Brownian motion for stocks). This partly leads to closed-form solutions of the market-consistent valuation of the liabilities, ensures higher accuracy in computations and less numerical effort. Furthermore, the model allows for a detailed analysis of the impact of the different types of interest rate guarantees on the future solvency situation. Our results suggest that the type of guarantee has a significant impact on the long-term solvency of the company. [ABSTRACT FROM AUTHOR]

Organizational form in insurance has been widely studied in the prior literature. Although researchers have recognized sub-types of stock insurers, mutuals have always been considered as a single homogeneous category. To the extent that mutual sub-types behave differently, considering all mutuals the same can result in misleading conclusions. The present study aims to remedy this gap in the literature by considering the full range of mutual firm types. Mutuals are classified as family-controlled, association-controlled, and pure mutuals with various sub-types within each group. We analyze corporate governance among mutual sub-types in the U.S. property–casualty (P–C) insurance industry by studying CEO turnover, particularly nonroutine turnover. Multinomial probit analysis is used to test for relationships between mutual sub-types and turnover. The principal finding is that all mutuals are not the same. The probability of nonroutine CEO turnover is lowest for family-controlled, non-association mutuals and highest for association-controlled mutuals. Non-association mutuals with family-member CEOs have the lowest turnover rates among all ownership types. Thus, future research should utilize more detailed organizational form categories than the traditional literature. [ABSTRACT FROM AUTHOR]

We examine businesses' financial management of a rare, severe event using detailed firm‐level data collected following Hurricane Sandy in the New York area. Credit played a prominent role in financing recovery; more negatively affected firms took on debt because of Sandy (39%) than received insurance payments (15%) in our data. Negatively affected firms were frequently credit constrained after the shock. We also find that the most credit‐constrained firms after the event, younger firms, and smaller firms, were the least likely to insure before it. Our findings align with the predictions of dynamic risk management theory (Rampini and Viswanathan 2010, 2013). [ABSTRACT FROM AUTHOR]

The aim of this paper is to define the market-consistent multi-period value of an insurance liability cash flow in discrete time subject to repeated capital requirements, and explore its properties. In line with current regulatory frameworks, the presented approach is based on a hypothetical transfer of the original liability and a replicating portfolio to an empty corporate entity, whose owner must comply with repeated one-period capital requirements but has the option to terminate the ownership at any time. The value of the liability is defined as the no-arbitrage price of the cash flow to the policyholders, optimally stopped from the owner's perspective, taking capital requirements into account. The value is computed as the solution to a sequence of coupled optimal stopping problems or, equivalently, as the solution to a backward recursion. [ABSTRACT FROM AUTHOR]

Warren Buffett has had extraordinary success as an investor, but there is no agreement as to why. Some academic researchers attribute his performance to mere luck. Frazzini et al. (Financ Anal J 74(4):35–55, 2018), concluded that his alpha is due to leveraging safe, high-quality, and cheap stocks. However, there has been no analysis to date of Buffett's performance from a behavioral perspective. We argue that Buffett's success is partly due to qualitative and psychological factors, including tenacity, patience, avoidance of overconfidence, organizational culture, and the reputation effect. Using information from shareholder letters, writings, interviews, and speeches by Buffett and his colleague Charlie Munger, we demonstrate how such psychological factors, together with the quantitative findings of Frazzini et al., render a more complete and satisfying explanation of Buffett's alpha. [ABSTRACT FROM AUTHOR]

In various fields of applications such as capital allocation, sensitivity analysis, and systemic risk evaluation, one often needs to compute or estimate the expectation of a random variable, given that another random variable is equal to its quantile at some prespecified probability level. A primary example of such an application is the Euler capital allocation formula for the quantile (often called the value‐at‐risk), which is of crucial importance in financial risk management. It is well known that classic nonparametric estimation for the above quantile allocation problem has a slower rate of convergence than the standard rate. In this paper, we propose an alternative approach to the quantile allocation problem via adjusting the probability level in connection with an expected shortfall. The asymptotic distribution of the proposed nonparametric estimator of the new capital allocation is derived for dependent data under the setup of a mixing sequence. In order to assess the performance of the proposed nonparametric estimator, AR‐GARCH models are proposed to fit each risk variable, and further, a bootstrap method based on residuals is employed to quantify the estimation uncertainty. A simulation study is conducted to examine the finite sample performance of the proposed inference. Finally, the proposed methodology of quantile capital allocation is illustrated for a financial data set. [ABSTRACT FROM AUTHOR]

We use an event study approach to estimate the burden of the financial regulations associated with Systemically Important Financial Institution (SIFI) designation. On March 30, 2016, the US District Court determined that MetLife's SIFI designation was arbitrary and capricious because the Financial Stability Oversight Council (FSOC) failed to weigh the economic cost of the financial regulation on MetLife against the benefits of increased financial stability. We find significant positive abnormal returns for MetLife and AIG on the date of the ruling. We estimate that the lifting of the SIFI designation created $1.4 billion in corporate wealth for MetLife, suggesting that MetLife would be 3.4% more profitable as a non-SIFI. These gains fall short of the $8 billion stipulated by MetLife in its complaint. We also find significant abnormal returns to SIFI institutions on the day following the US Presidential election. [ABSTRACT FROM AUTHOR]

The market for long-term care (LTC) insurance is much smaller than economic theory predicts. One reason is that premium markups are prohibitively high. We aim at quantifying markups for LTC insurance due to mortality and morbidity risk. To this end, we model a shareholder value maximising insurance company that is subject to solvency regulation. Because liabilities from LTC insurance (which depend on future morbidity and mortality) are more volatile than liabilities from annuities (which only depend on future mortality), capital provisions to ensure compliance with regulatory solvency requirements are higher if an insurance company offers LTC insurance instead of annuities. At the same time, a higher volatility in the LTC insurance segment also implies a higher expected payoff to the insurance company's shareholders. To quantify which effect prevails and which product policy is optimal, we conduct an empirically calibrated simulation study with stochastic mortality and LTC needs. Our results show that offering LTC insurance increases the upside potential to shareholders, but that effect is more than offset by a higher need for external capital. Consequently, if shareholders are to accept an LTC insurance segment, holders of an LTC insurance policy need to pay considerable markups. The more LTC insurance contracts the insurer has sold, the higher the markups. [ABSTRACT FROM AUTHOR]