Search

JEL Classification G30 According to the World Economic Forum (2016), by 2025, 10% of global gross domestic product (GDP) will be stored on blockchains, a type of decentralized database and [...]

The effects of access to formal credit on financial efficiency of farms in northern Peru are assessed. A two-stage analysis of panel data set shows that 28 percent of farmers are financially inefficient and credit constraints reduce profits of these farmers by at least 17 percent. The impact of uninsured risk and agricultural insurance market-boosting policies are also described.

Recent studies find that a long position in at-the-money straddles consistently yields losses. This is interpreted as evidence for the non-redundancy of options and as a risk premium for volatility [...]

The examination of the markets for life insurance, acute health insurance, annuities, long-term care insurance, and Medicare supplemental insurance are examined and it is found that individuals who engage in 'risky' behaviors are systematically less likely to hold each of these products. These individuals have higher expected claims for life insurance and long-term care insurance.

This paper examines the implications of human capital risk for the relationship between inequality and economic development, It argues that due to missing insurance markets for human capital risk, the initial distribution of family wealth may play an important role for an economy's process of development fueled by human capital accumulation. The analysis suggests that, in the absence of credit constraints, higher inequality tends to increase the aggregate human capital stock and per capita income, under conditions which are supported empirically for advanced countries. Taking additionally into account that, due to borrowing constraints, higher inequality impedes human capital investment in poorer economies, this suggests a non-linear relationship between inequality and economic development. JEL classification: O11; O40; I20 Keywords: Economic development; Human capital risk; Inequality; Intergenerational transfers; Missing insurance markets

This paper presents a field study into the effects of statistical information concerning risks on willingness to take insurance, with special attention being paid to the usefulness of these effects for the clients (the insured). Unlike many academic studies, we were able to use in-depth individual interviews of a large representative sample from the general public (N = 476). The statistical information that had the most interesting effects, 'individual own past-cost information,' unfortunately enhanced adverse selection, which we could directly verify because the real health costs of the clients were known. For a prescriptive evaluation this drawback must be weighted against some advantages: a desirable interaction with risk attitude, increased customer satisfaction, and increased cost awareness. Descriptively, ambiguity seeking was found rather than ambiguity aversion, and no risk aversion was found for loss outcomes. Both findings, obtained in a natural decision context, deviate from traditional views in risk theory but are in line with prospect theory. We confirmed prospect theory's reflection at the level of group averages but falsified it at the individual level. Key words: risk attitude; ambiguity; health insurance; adverse selection, 1. Introduction In many countries, health insurance is only partly government-funded, and clients have to decide on how much extra coverage they want to obtain by purchasing supplemental private insurance [...]

The private market for long-term care insurance in the U.S. is examined and evidence is found which suggests that this does not provide full insurance against becoming a bad risk and being reclassified into a higher-risk group with a higher premium cost.

INTRODUCTION The phrase "adverse selection" was originally coined by insurers to describe the process by which insureds utilize private knowledge of their own riskiness when deciding to buy or forgo [...]

Byline: Thomas Eichner (1), Andreas Wagener (2) Keywords: mean-variance preferences; background risk; variance vulnerability Abstract: An agent with two-parameter, mean-variance preferences is called variance vulnerable if an increase in the variance of an exogenous, independent background risk induces the agent to choose a lower level of risky activities. Variance vulnerability resembles the notion of risk vulnerability in the expected utility (EU) framework. First, we characterize variance vulnerability in terms of two-parameter utility functions. Second, we identify the multivariate normal as the only distribution such that EU- and two-parameter approach are compatible when independent background risks prevail. Third, presupposing normality, we show that--analogously to risk vulnerability--temperance is a necessary, and standardness and convex risk aversion are sufficient conditions for variance vulnerability. Author Affiliation: (1) VWL IV, University of Siegen, FB 5, Holderlinstr. 3, 57068, Siegen, Germany (2) Department of Economics, University of Vienna, Hohenstaufengasse 9, 1010, Vienna, Austria Article History: Registration Date: 05/10/2004

Byline: Hans-Werner Sinn (1) Keywords: risk; evolution Abstract: The paper offers a proof that expected utility maximisation with logarithmic utility is a dominant preference in the biological selection process in the sense that a population following any other preference for decision-making under risk will, with a probability that approaches certainty, disappear relative to the population following this preference as time goes to infinity. The result is contrasted with Weber's and Fechner's Psychophysical Law which implies logarithmic sensation functions for objective physical stimuli. Author Affiliation: (1) CESifo (Ifo Institute for Economic Research and Center for Economic Studies, University of Munich), Poschingerstrasse 5, 81679, Munich, Germany Article History: Registration Date: 05/10/2004

Byline: Donald C. Keenan (1), Arthur Snow (1) Keywords: local vulnerability; risk aversion; portfolio choice; insurance Abstract: Willingness to take on risk is influenced by the presence of fair and unfair background risks for decision makers who are risk vulnerable as defined by Gollier and Pratt [1996], for these decision makers are more risk averse when they possess such an uninsurable background risk. We present an alternative derivation of the index of local vulnerability based on Diamond and Stiglitz [1974] compensated increases in risk, such that risk aversion increases with the introduction of any small fair background risk if and only if the index of local vulnerability is positive. We establish that the increase in risk aversion is greater for those who are more vulnerable as measured by the index of local vulnerability. Author Affiliation: (1) Department of Economics, University of Georgia, Athens, Georgia, 30602, USA Article History: Registration Date: 05/10/2004

Byline: Harris Schlesinger (1) Author Affiliation: (1) University of Alabama and CESifo, Tuscaloosa, AL, 35487-0224, USA Article History: Registration Date: 05/10/2004

Byline: Kenneth A. Froot (1), Steven E. Posner (2) Keywords: parameter uncertainty; event risk; catastrophe risk; asset pricing Abstract: Financial instruments whose payoffs are linked to exogenous events, such as the occurrence of a natural catastrophe or an unusual weather pattern depend crucially on actuarial models for determining event (e.g., default) probabilities. In many instances, investors appear to receive premiums far in excess of these modeled actuarial probabilities, even for event risks that are uncorrelated with returns on other financial assets. Some have attributed these larger spreads to uncertainty in the probabilities generated by the models. We provide a simple model of such 'parameter uncertainty' and demonstrate how it affects rational investors' demand for event risk exposures. We show that while parameter uncertainty does indeed affect bond spreads, it does not tend to increase spreads by much. Indeed, the spread increases due to parameter uncertainty in our numerical examples are on the order of only 1--2 basis points. Moreover, in many instances, including those that have the most sensible correlation settings, parameter uncertainty tends to decrease the size of bond spreads. We therefore argue that parameter uncertainty does not appear to be a satisfactory explanation for high event-risk returns. Author Affiliation: (1) Soldiers Field, Harvard Business School, Morgan Hall 391, Boston, MA, 02163, USA (2) Goldman Sachs &amp Co., 85 Broad Street, New York, NY, 10004, USA Article History: Registration Date: 12/10/2004

Byline: Richard MacMinn (1) Keywords: strict liability; negligence; limited liability; judgment proof Abstract: A party who causes harm to others and is found legally liable but cannot fully pay is said to be judgment proof. When the party who causes the harm is judgment proof, the incentives provided by the negligence and strict liability rules diverge. The payment probabilities implied by the two rules also differ. If the cost of care is non-monetary, as in Shavell's analysis, then the different probabilities generated by the two rules and the injurer's risk aversion combine to show that greater care is optimal under the negligence rule than the strict liability rule. If, however, the cost of care is monetary then the difference in probabilities generated by the two rules suffices to show greater care under the strict liability rule than under the negligence rule. The latter case holds for either a risk averse injurer or a corporate injurer. Author Affiliation: (1) College of Business, Illinois State University, Normal, IL, 61790, USA Article History: Registration Date: 12/10/2004

The competitive health insurance market with two risk types and two health benefits is examined. In a community rated health insurance system, the regulation of benefit packages is of crucial importance.

Byline: Anders Borglin (1), Hans Keiding (2) Keywords: stochastic dominance; conditional expectation; Lorenz domination; reversed martingale Abstract: We show that the relation of second order stochastic dominance, which has found widespread use in models of economic behavior under uncertainty, may be described in terms of conditional expectation. If a distribution G second order stochastically dominates another distribution F, then there are random variables g and f with distributions G and F, respectively, such that g can be obtained from f by iterated conditional expectation. In terms of insurance, this shows that the less risky distribution can be obtained by a sequence of insurance contracts each one insuring against the residual risk left over from the previous contracts. Author Affiliation: (1) Economics Department, University of Lund, Ekonomicentrum, Tycho Brakes vag 1, S-22007, Lund, Sweden (2) Institute of Economics, University of Copenhagen, Studie Straede 6, DK-1456, Copenhagen K, Denmark Article History: Registration Date: 12/10/2004

Byline: A. Heras (1), J.L. Vilar (2), J.A. Gil (1) Keywords: bonus-malus system; asymptotic fairness; Goal Programming; simplex method Abstract: In this paper we try to evaluate the asymptotic fairness of bonus-malus systems, assuming the simplest case when there is no hunger for bonus. The asymptotic fairness has to be understood as the bonus-malus system ability in assessing the individual risks in the long run. Firstly we define the asymptotic fairness of a bonus-malus system following an expression that can be found in J. Lemaire [1985]: Automobile Insurance. Actuarial Models. Dordrecht: Kluwer-Nijhoff Publishing, p. 168. Secondly, we define a measure of the global asymptotic fairness considering the structure function of the risk group. Finally we try to calculate, for each set of transition rules and a given structure function, the scale of premiums that brings the global asymptotic fairness closest to the ideal situation where each insured pays in the long run a premium corresponding to its own claim frequency. This is possible thanks to the application of a multiobjective optimization technique named Goal Programming. Author Affiliation: (1) Departamento de Economia Financiera y Actuarial, Universidad Complutense de Madrid, Spain (2) Departamento de Economia Financiera y Contabilidad 1 (Economia Financiera y Actuarial), Facultad de Ciencias Economicas, UCM, Campus de Somosaguas, 28223, Pozuelo de Alarcon, Spain Article History: Registration Date: 12/10/2004

Byline: Fatma Lajeri-Chaherli (1) Keywords: risk aversion; prudence; proper risk aversion; proper prudence Abstract: This paper focuses on the situations where individuals with mean-variance preferences add independent risks to an already risky situation. Pratt and Zeckhauser (Econometrica, 55, 143--154, 1987) define a concept called proper risk aversion in the expected utility framework to describe the situation where an undesirable risk can never be made desirable by the presence of an independent undesirable risk. The assumption of mean-variance preferences allows us to study proper risk aversion in an intuitive manner. The paper presents an economic interpretation for the quasi-concavity of a utility function derived over mean and variance. The main result of the paper says that quasi-concavity plus decreasing risk aversion is equivalent to proper risk aversion. Author Affiliation: (1) Koc University, Sariyer, 80910, Istanbul, Turkey Article History: Registration Date: 12/10/2004

Byline: Steven W. Pottier (1), David W. Sommer (1) Keywords: Risk-based capital; insolvencies; insurance regulation. Abstract: This article investigates the abilities of four key summary risk measures to predict property-liability insurer insolvencies. The four summary risk measures studied are the NAIC's risk-based capital ratios, the NAIC's financial analysis solvency tools (FAST) scores, A.M. Best's Capital Adequacy Relativity ratios, and A.M. Best's ratings. The empirical tests find that the risk measures produced by the private sector are superior in predictive ability to the measures produced by regulators, perhaps because of the qualitative adjustments made by private sector analysts. The results also demonstrate that overall measures of risk are substantially better than risk-based capital measures in predicting insolvencies. Another finding is that the predictive ability of the NAIC's RBC ratios can be improved substantially if ranks are used rather than the ratios themselves. Author Affiliation: (1) University of Georgia, Athens, GA Article History: Registration Date: 05/10/2004

Byline: Georges Dionne (1), Marie-Gloriose Ingabire (2) Keywords: state-dependent preferences; reference set; diffidence theorem; prudence; decreasing absolute risk aversion (DARA) Abstract: C. Gollier (The Economics of Risk and Time. Cambridge: MIT Press, 2001) has developed a standard technique based on the diffidence theorem. This theorem provides a very simple instrument to solve relatively sophisticated problems when preferences are state-independent. The object of this article is to show that the theorem is also very useful to derive significant results with state-dependent preferences. Using the reference set notion and an extension of the diffidence theorem, we establish formally necessary and sufficient conditions on the reference set, in order to obtain prudence and decreasing absolute risk aversion. Examples of DARA utility functions compatible with non-linear reference sets are presented in the Appendix. Author Affiliation: (1) Risk Management Chair, HEC--Montreal and CRT, Universite de Montreal, Canada (2) Health Canada, Canada Article History: Registration Date: 12/10/2004

Byline: Elisa Luciano (1), Robert Kast (2,3) Keywords: value at risk; background risk; demand for insurance; non-insurable risk Abstract: This paper studies the effects of an uninsurable background risk (BR) on the demand for insurance (proportional and with deductible). We study both the case of BR uncorrelated with the insurable one and the perfectly correlated one, in a Gaussian world. In order to perform our study, we exploit the new risk measure known as Value at Risk (VaR) and consider insurance contracts which are Mean-VaR efficient. We obtain results which depend on the parameters (moments) of both risks and on the magnitude of loadings charged by the insurance company, instead of depending on the risk attitudes of the insured, such as risk aversion and prudence. We demonstrate that, if loadings are not too high, the demand for insurance increases with positively correlated BR it decreases with BR negatively correlated if the latter is less risky than the insurable one (in this case it can even go to zero, if loadings are too high) it goes to zero with BR which is negatively correlated and more risky than the insurable one. Author Affiliation: (1) Universita di Torino, Piazza Arbarello, I10122, Torino (2) CNRS, GREQAM, 2 rue de la Charite, F13302, Marseille (3) ICER, Villa Gualino, Torino Article History: Registration Date: 12/10/2004

Byline: Christophe Courbage (1) Keywords: market insurance; self-insurance; self-protection; Dual Theory Abstract: As demonstrated by Ehrlich and Becker [1972], Expected Utility Theory predicts that market insurance and self-insurance are substitutes, whilst surprisingly, market insurance and self-protection could be complements. This article examines the robustness of this conclusion, as well as its extensions under the Dual Theory of Choice [Yaari, 1987]. In particular, the non-reliability of self-insurance activities, background risk and asymmetric information are considered. Author Affiliation: (1) Lombard Odier &amp Cie, Geneva, Switzerland Article History: Registration Date: 11/10/2004

Byline: Gabrielle Demange (1), Guy Laroque (2) Keywords: intergenerational risk sharing; pay-as-you-go redistribution schemes Abstract: In a previous paper, we showed how a pay-as-you-go social security scheme, based on voluntary contributions, can be an appropriate institution to reach an optimal sharing of risks among generations in the presence of demographic uncertainties. We study here the functioning of such schemes when there are different population strata, with different demographic shocks and wages. We show that while a collective voluntary pay-as-you-go scheme can provide efficient intergenerational risk sharing, it is likely to be destabilized by pensions funds specialized by agents' types. This is true both when there is a complete set of contingent markets, where the risk pooling capabilities of a collective fund are potentially of less interest, and when markets are incomplete. In this last circumstance, a collective fund may help the living agents to share their intragenerational risks. However, we show that the resulting allocation does not Pareto dominate the outcome of individual funds by agent types, and that there are incentives for agents to separate from any collective organization. Author Affiliation: (1) DELTA, 48 Boulevard Jourdan, Paris, 75014, France (2) Direction des Etudes et Syntheses Economiques, INSEE, 15 boulevard Gabriel Peri, BP 100, 92244, Malakoff Cedex, France Article History: Registration Date: 11/10/2004

Byline: Arthur Hau (1) Keywords: absolutely riskier than; comparative statics; risk averter; non-monotonic payoff; second-order stochastic dominance Abstract: In this paper, the concept of 'absolutely riskier than' is introduced to generalize Gollier's (Journal of Economic Theory, 66, 522--535) necessary and sufficient conditions for the comparative statics of a change in risk for risk averters. The restrictive assumption that the payoff function is monotonic in the risk is relaxed. The 'policymaker's choice problem,' the 'newsboy problem,' and a farmer's example are used to illustrate how easily the monotonicity assumption is violated. Finally, some important properties of the concept of 'absolutely riskier than,' such as its relation with the concept of 'second-order stochastic dominance,' are illustrated using the farmer's example. Author Affiliation: (1) Department of Economics and Finance, University of Central Arkansas, 201 Donaghey Avenue, Conway, AR, 72035, USA Article History: Registration Date: 11/10/2004

Risk adjustment is essential in minimizing the selection of patients, or enrollees in health plans. Selection has become an important issue in the new world of competing, at-risk health plans and disappearing indemnity plans. Limiting services, to an extent that consumers are not informed, may also be an issue in the new world. Partial capitation may solve these problems, since it decreases financial incentives to select and provides some benefits for offering additional services.

Byline: Mark Pauly (1), Andreas Nickel (2), Howard Kunreuther (3) Keywords: Insurance; health insurance; health care; risk sharing; Medicare Abstract: This paper investigates a multiple-period level premium insurance policy equilibrium in a model in which loss probabilities increase for a fixed time period for a set of persons buying insurance in a group. We show that a level-premium sequence which induces risk averse persons to become and remain members of the group exists. We also show that the availability of the Medicare program can prevent the emergence of optimal level-premium private group insurance, but that a system of bonuses for remaining in the group can permit optimality to be retained. Author Affiliation: (1) The Wharton School, Health Care Systems Department, University of Pennsylvania, 201 Colonial Penn Center, 3641 Locust Walk, Philadelphia, PA, 19104-6218 (2) Seminar fA'r Versicherungswissenschaft, Georg-August-University Gottingen, Germany (3) The Wharton School, Operations and Information Management, University of Pennsylvania, USA Article History: Registration Date: 04/10/2004

Senior HMOs are growing rapidly Good patient relationships can help you capitalize on this trend - if you're ready to take full risk. But don't wait too long. As managed [...]

Alliances for collective defence are likened to mutual insurance arrangements. External attack is seen as a risk in much the same way that illness is a risk to a breadwinner, who will often want to insure against it by combining with other persons in similar circumstances to pool the risks involved (usually mediated by an insurance company). Here, alliance members' defence budgets become insurance premiums entitling them to group protection against attack. In such alliances size is strongly beneficial since there are always economies of scale in risk-sharing. Indefinite geographical expansion of such arrangements is checked by the comparatively slow speed with which alliance forces may be brought to bear on behalf of an endangered member and the difficulties of harmonizing within the same arrangement members who belong to different statistical categories of risk.