MRIC Working Paper Series

The MRIC Working Paper Series covers topics on insurance economics, insurance law, and insurance mathematics. The working papers are uploaded to the Social Science Research Network (SSRN).


Authors: Gunther Kraut & Raymond de Kuiper

Published in: SSRN

Abstract: The current COVID-19 pandemic caused a significant shock to the world economy which led to large-scale government support measures and thus proved the non-resilience of the current financial ecosystem, with devastating effects on the human global population. As research indicates, pandemic disease outbreaks will increase in frequency and impact in the future. This paper addresses the question how to possibly create a prudent and resilient financial ecosystem resistant to future disease outbreaks and minimalizing the individual financial and economic impact. While insurance risk transfer solutions have been available for epidemic risk, fundamental hurdles of insurability prevent the supply of sufficient capacity to address the magnitude of potential economic losses. A risk transformation market platform is described which enables a wider participation of capacity providers. While initially focusing on a specialty market segment, it is analysed how governments can contribute, alongside private sector investors, to an accelerated industrialization of this market segment. It is shown how the challenge of affordability for insureds can be addressed without requiring premium subsidies, thus maintaining risk-adequate incentives which are relevant for preparedness.

Authors: Johannes Gerd Jaspersen, Andreas Richter & Sandra Zoller

Published in: SSRN

Abstract: While analysts, customers, and lenders rely on financial disclosures to make decisions regarding a company, executives often manage the disclosed earnings. Detecting such practices is thus a concern for company stakeholders and regulators. Qualitative disclosures are an additional source of information about a company's financial situation, but executives likely attempt to hide their earnings management activity in these disclosures, as well. We use supervised machine learning models to predict earnings management by property and casualty insurers from the Management’s Discussion and Analysis filings. For this, we utilize a new algorithm that interprets textual data conditional on the reported financial situation of the company. We show that the qualitative disclosures can predict earnings management, revealing that executives are unable to remove all subliminal messages from them. The results demonstrate that qualitative disclosures can be useful for learning about the accounting choices of companies.


Authors: Andreas Richter & Thomas C. Wilson

Published in: The Geneva Risk and Insurance Review

Abstract: This paper analyzes the insurability of pandemic risk and outlines how underwriting policies and scenario analysis are used to build resilience upfront and plan contingency actions for crisis scenarios. It then summarizes the unique “lessons learned” from the Covid-19 crisis by baselining actual developments against a reasonable, pre-Covid-19 pandemic scenario based on the 2002 SARS epidemic and 1918 Spanish influenza pandemic. Actual developments support the pre-Covid-19 hypothesis that financial market developments dominate claims losses due to the demographics of pandemics and other factors. However, Covid-19 “surprised” relative to the pre-Covid-19 scenario in terms of its impact on the real economy as well as on the property and casualty segment as business interruption property triggers and exclusions are challenged, something that may adversely impact the insurability of pandemics as well as the perception of the industry for some time to come. The unique lessons of Covid-19 reinforce the need for resilience upfront in solvency and liquidity, the need to improve business interruption wordings and re-underwrite the book, and the recognition that business interruption caused by pandemics may not be an insurable risk due to its large accumulation potential and the threat of external moral hazard. These insurability limitations lead to a discussion about the structure and financing of protection against the impact of future pandemics.

Authors: Annette Hofmann, Johannes Jaspersen & Sophie-Madeleine Roth

Published in: SSRN

Abstract: In view of the increasing intensity of terrorism worldwide, behavioral changes of households become visible. People tend to overvalue terror-related risks such that the subjective probability of terrorism events. Using microeconomic panel data of the elderly population from 13 European countries, this study analyzes the impact of terrorism risk on household savings patterns. Terrorism increases household savings to a significant and economically meaningful degree. Two terror variables – the number of attacks and the number of fatalities – analyze this effect in detail. While the impact of the number of attacks is negative, savings increase with the number of fatalities. We give a potential explanation for this difference. While the results for European countries are consistent, Israel is markedly different from the rest of the sample – an effect likely due to the different political situations in both regions. The reported findings have implications for both fiscal and monetary policy.

Authors: Mark J. Browne, Annette Hofmann, Andreas Richter, Sophie-Madeleine Roth & Petra Steinorth

Published in: Annals of Operations Research

Abstract: This study uses data from the German Socio-Economic Panel to analyze peer effects in risk preferences. Empirical evidence on the impact of peer groups on individual willingness to take risks (‘peer effects’) is very limited so far as causality is hard to establish. To establish a causal relationship between individual and community risk preferences, we use an instrumental variables approach where we track the impact of the East–West migration after the German reunification. We find strong support for peer effects in risk preferences. Peer effects seem particularly relevant for women, less educated individuals, the young population, parents, and married individuals. Individuals with higher social interaction tend to have stronger peer effects. Our findings shed light on the origin and stability of risk tolerance and, more generally, on the determinants of economic preferences.

Authors: Nikolaos Argyris, Johannes Jaspersen & Andreas Richter

Published in: Personal website of Johannes Jaspersen

Abstract: Additive multivariate utility functions are common in applications of economicdecision-making. They exist in many areas of multi-attribute decisions and feature prominently in several behavioral economic decision models. For predictions or welfare analyses using such models, it is often necessary to calibrate both ordinal and cardinal preferences in them. One aspect of cardinal preferences is risk aversion. However, the concept of risk aversion in additive multivariate utility functions is poorly understood. In fact, it is impossible to compare two additive multivariate utility functions solely with respect to their risk aversion regarding one or more attributes -changing their risk aversion changes ordinal preferences. We introduce the class of contextual additive multivariate utility functions and consider a subclass of increases in Arrow-Pratt risk aversion, namely those that increase risk aversion in the sense of Ross. In this setting we show that risk premiums change monotonically in risk aversion regarding a single attribute which eases the process of calibrating preference functionals. Additionally, ordinal preferences change in a sensible manner when Ross risk aversion is increased. We apply our procedure to calibration and risk premiums in the Kőszegi-Rabin decision model.


Authors: Tobias Huber

Published in: Journal of Risk and Insurance

Abstract: Risk management decisions provide a means to elicit individuals' risk preferences empirically. In such a context, the literature often presumes that the decision to invest in risk management and the benefit of this investment occur contemporaneously. There is, however, no consensus in the theoretical literature that one-period results can be transferred to intertemporal settings. To address this gap, we study the effect of an increase in risk aversion on the demand for risk management in a two-period context. Our findings reproduce the one-period results and, thus, support the focus of previous empirical literature on the structure of the risk rather than on the timing of investments and benefits. We also contrast our results with those obtained by employing widely used but limited preferences to examine risk aversion in intertemporal settings (standard additive expected utility setting, Selden, Epstein and Zin).

Authors: Francesca Biagini, Tobias Huber, Johannes Jaspersen & Andrea Mazzon

Published in: Journal of Risk and Insurance

Abstract: This paper assesses the risk of a mass lapse event in life insurance. The rarity of the event and the complexity of policyholder behavior make the risk assessment of such a scenario difficult. Using a simulation study, we evaluate how different estimation methods can assess the risk of this scenario, using panel data at the company level. We then use the best‐performing method to estimate the probability distribution function of a mass cancellation event in the United States and Germany. We identify dependencies of the event on company andcountry characteristics, which have not been taken into account by regulating agencies. We also find that the current mass lapse scenario in Solvency II has noempirical foundation for the German market. We show that an empirically valid scenario leads to a significantly lower solvency capital requirement for the average German life insurer.


Authors: Mark J. Browne, Verena Jäger, Andreas Richter & Petra Steinorth

Published in: SSRN

Abstract: We use the German Socio Economic Panel to analyze the impact of life changing events on individuals’ risk tolerance levels over time, which is reported in response to a question on individuals’ willingness to take risks. The dataset follows a representative sample of the German population. We find substantial changes in risk attitudes over time with respect to getting married or separating from a partner, giving birth to a child for the first time, and providing care to a family member. Furthermore, we find that these effects are associated with household structure. In particular, we observe that the risk tolerance of individuals that are referred as the head of household demonstrates more extreme changes associated with life events while having children moderates the changes associated with the dissolution of households.


Authors: Patricia Born, Stephanie Meyr & Sharon Tennyson

Abstract: Product market transparency suffered from relaxed regulation following deregulation of the European insurance market in 1994. Instruments such as insurance product ratings can contribute to foster consumers’ orientation in such market environments. However, the capacity of these ratings to promote market transparency and consumer awareness depends critically on whether they are credible. This article provides the first empirical investigation of insurance product ratings, with an emphasis on the potential sources of bias that could undermine rating credibility. The analysis employs a panel data set containing ratings for German disability insurance products from two rating agencies over a fifteen year period. Using the existing literature on other rating types as a guide, we test a series of hypotheses regarding factors that may explain the variation in rating outcomes over time and across rating agencies. Even if conspicuous differences between rating agencies can be revealed, our results suggest no major concerns regarding the credibility of insurance product ratings.

Authors: Verena Jäger

Abstract: Previous research has shown that an individual’s risk attitude has a significant impact on his or her decision making under risk. As attitudes towards risk are not constant, but vary over time, it is crucial to understand if and to what extent individuals incorporate shifts in risk attitude into their behavior and decision making. We use a representative panel dataset and find that individuals who increased their aversion towards risk are more likely to buy insurance and save more money towards their emergency funds. With respect to health-related behavior, we find that increases in risk aversion are associated with reduced smoking consumption and a greater propensity to desist from drinking alcohol and pursuing (extreme) sport activities.

Authors: Mark J. Browne, Verena Jäger & Petra Steinorth

Published in: SSRN

Abstract: The current study uses the German Socio Economic Panel to examine how the financial crisis of 2008-2010 impacted individuals’ risk attitude. We find substantial changes in risk attitudes associated with the financial crisis which supports countercyclical risk aversion. We find that managers who continued to work in a leadership position were more risk taking in the beginning and reacted quicker compared both to the general population and to individuals who entered the crisis but did not exit the crisis with managerial positions. Changes in risk tolerance levels differ across socio-demographic groups, including gender and income levels. Finally, we observe variations across generations, which we attribute to generation-specific macro-economic experiences.

Authors: Sebastian Soika

Published in: Geneva Papers on Risk and Insurance

Abstract: We analyse asymmetric information in private long-term disability insurance. Using the elimination period as a measure of coverage, we examine the correlation between risk and coverage. Our unique data set includes both group and individual insurance. We are thus able to disentangle moral hazard and selection in individual insurance by controlling for moral hazard using group insurance. Our results provide evidence of moral hazard and advantageous selection in the individual private long-term disability insurance market. Thus, we provide guidelines for policymakers and insurers on the presence of asymmetric information in disability insurance and on future attempts to reduce it.

Authors: Tobias Gerstner, Dominik Lohmaier & Andreas Richter

Published in: SSRN

Abstract: Many insurers disclose Embedded Value reports, a 'capital market-consistent' valuation framework for their life insurance business, to provide investors with additional information. We examine the incremental and relative information content of Embedded Value components in comparison to the existing mandatory accounting standards. Our findings can help to predict the capital market effects of the new insurance accounting standard IFRS 4 Phase II, which will be introduced in 2018 and is based on similar principles as the EV framework. Our results show that the incremental information content of the EV framework is limited and even decreasing since 2009. The current IFRS framework seem to have more explanatory power for insurers' stock prices and returns in the current economic environment which casts doubt about benefits of IFRS 4 Phase II. Our comprehensive analysis of the incremental value relevance of EV and EV earnings subcomponents shows that investors would profit from an explicit valuation of options and guarantees and a presentation scheme of earnings which differentiates between inforce and new business.

Authors: Dominik Lohmaier

Published in: SSRN

Abstract: Due to the lack of descriptive information about the effectiveness of risk management activities, decision-makers often have to rely on (their own) prior experience with these investments. Thus, we propose a novel, feedback-based approach to examine risk management decisions. We simulate individuals’ decisions over 50 time periods and analyze how distributional properties of different risk management instruments influence subjects’ propensity to invest in self-insurance or self-protection. Our results show that subjects act more risk averse over time because self-insurance take-up rates increase when learners gain more experience. Individuals’ risk management decisions are price-sensitive but we find only limited evidence for a complementary relationship between both risk management options. Our findings provide an alternative explanation for the low demand for risk management investments against low probability risks and can be used to predict developments in new insurance markets with inexperienced policyholders.

Authors: Vijay Aseervatham, Patricia Born, Dominik Lohmaier & Andreas Richter

Published in: Geneva Papers on Risk and Insurance

Abstract: Prior studies on the effects of catastrophes on insurance markets have either focused on one specific type of hazard or pooled several natural disasters. We argue that insurers evaluate disaster risk with respect to not only the frequency and severity of disasters but also the disaster type. We analyse U.S. property insurers’ supply decisions between 1992 and 2012 and find that insurers’ responses with respect to the reduction of business volume and exit decisions differ across hazards, even after controlling for damage size. The negative effects of catastrophes on supply decisions are more pronounced after extreme hurricane years compared with tornado years. We argue that supply distortions in the aftermath of unprecedented catastrophes are driven primarily by correlated losses besides the damage size of the event. Our results show that the predictability of catastrophe losses poses less-severe threats to insurers. Thus, we propose that insurers and regulators should focus primarily on measures that encourage diversification.

Authors: Johannes Jaspersen, Andreas Richter & Sebastian Soika

Published in: SSRN

Abstract: We analyze the influence of rate regulation on insurance demand in an annuity setting. With a unique dataset containing a natural experiment due to German federal regulation and the E.U. Gender Directive we study the impact of unisex tariffs on contract choices in variable annuity products. Our data contains two different choice variables with antithetic predictions for men and women, meaning that women should increase their demand in one choice and decrease it in the other, while men should exhibit opposite behavior. We find with regard to both choices that both men and women have lower demand for guarantees within the annuity in unisex contracts than without rate regulation. This behavior contradicts economic intuition. We hypothesize that the effect could instead be explained by the public perception of unisex tariffs.


Authors: Richard Peter, Sebastian Soika & Petra Steinorth

Published in: Health Economics

Abstract: Assuming symmetric information, we show that a high-deductible health plan (HDHP) combined with a tax-favored health savings account (HSA) induces more savings and less treatment compared with a full coverage plan under reasonable risk preferences. Furthermore, a higher tax subsidy increases savings in any case but decreases medical utilization if and only if treatment expenses are above the deductible. A larger deductible increases savings but does not necessarily decrease healthcare utilization. Whether an HDHP/HSA combination is preferred over a full coverage contract depends on absolute risk aversion. A higher tax advantage increases the attractiveness of an HDHP/HSA combination, whereas the effects of changes in the deductible are ambiguous. The paper shows that a potential regulator needs to carefully set the size of the deductible as only in a certain corridor of the probability of sickness, its effect on aggregate healthcare costs are unambiguously favorable.

Authors: Annette Hofmann & Richard Peter

Published in: Journal of Risk and Insurance

Abstract: This article studies the effect of risk preferences on self-insurance and self-protection in a two-period expected utility framework. Here the investment to reduce risk precedes its effect. In contrast to single-period models, self-insurance and self-protection react similarly when the agent's utility function becomes more concave. Effort is increased if and only if current consumption is sufficiently large. However, if we introduce endogenous saving, an agent with more concave utility always selects more self-insurance, but will select more self-protection if and only if the probability of loss is small enough. These latter results concur with those in standard monoperiodic models with no saving.

Authors: Christophe Courbage, Henri Loubergé & Richard Peter

Published in: Journal of Risk and Insurance

Abstract: This article analyzes optimal prevention in a situation of multiple, possibly correlated risks. We focus on probability reduction (self-protection) so that correlation becomes endogenous. If prevention concerns only one risk, introducing a second exogenous risk increases the level of prevention expenditures, even if correlation is negative. If prevention expenditures may be invested for both risks, a substitution effect arises. Under nonincreasing returns on self-protection, we find that increased dependence increases aggregate prevention expenditures, but not necessarily prevention expenditures for each risk due to differences in prevention efficiency. Similar results are found when considering changes in the severity of losses. Consequently, the comparative statics emphasize global effects versus allocation effects. Our results have strong policy implications, considering the numerous mandatory safety measures introduced by governments over the past years.

Authors: Johannes Jaspersen & Richard Peter

Published in: Organization Science

Abstract: It is part of managerial wisdom that managers need to take risks in order to succeed. This is in stark contrast to the prominent agent-based theories of experiential learning and competitive selection that are known to be biased against risky alternatives in the long run. How can the positive managerial view on risk taking prevail given these results? Qualitative surveys of managers suggest risks to be acceptable if their outcome distribution meets certain criteria. We argue in this paper that these criteria are widely congruent with low downside risk. Using a novel simulation design, we analyze the effects of experiential learning and competitive selection on downside risk preferences in an ecology of agents. In the long run, experiential learning implies weak downside risk seeking, whereas competitive selection leads to strong downside risk aversion. Furthermore, competitive selection leads to the prevalence of outcome distributions with low downside risk in an ecology, even if they have a significantly higher level of total risk than comparable distributions with more downside risk. We draw implications for empirical studies on managerial behavior.


Authors: Gunther Kraut

Published in: SSRN

Abstract: For assuming risk in a multi-party risk pool of several insurance companies, a pool sharing mechanism, i.e., a type of pricing mechanism, is needed to determine each participant’s share of the pool’s losses. Based on axiomatic capital allocation principles, a fair and unique pool sharing mechanism is derived that differs from the current pooling solutions. Insights from game theory show that the mechanism is optimal in the sense of the Aumann-Shapley value. For this new application of these two theories, only small adaptations are necessary which are related to the differentiation between expected and unexpected losses. It is discussed why multi-party risk pools with this type of a pool sharing mechanism are particularly suitable for illiquid catastrophe risk markets. Special attention is given to the market for terrorism risk. A case study for portfolios of concentrated group life exposures shows that this type of a multi-party risk pool is feasible and economically beneficial.

Authors: Kai Purnhagen

Published in: SSRN

Abstract: What is fascinating about causation is that on the one hand it is essential for market players and society to rely on definite rules and principles with regards to causation in order to allow for benefits from investments in trust. On the other, neither the lawmaker nor judges provide a definite answer to when causation in torts and insurance is established. A vast number of juristic literatures has tried to shine some light on the proper meaning of causation but has “left a trail of doubt and uncertainty.” Although lawyers emphasize that causation is a legal notion and hence needs to be determined legally, non-legal experts have always played a crucial role in the assessment of legal causation and thereby liability and amount of harm. Philosophers such as Hegel and Kant, physiologists such as Johann v. Kries and economists from the Chicago school of law and economics have tried to provide some answers for the causation problem in law. It is therefore no wonder that other expert groups such as recently epidemiologists have claimed for ground in the legal debate on causation. I will evaluate whether epidemiological expertise may contribute to solving the problem of legal causation and whether there are limits to this approach. I will test from a legal point of view if and how the involvement of epidemiological expertise can contribute to overcoming the weaknesses of contemporary causation theories and where it intensifies them (II). I will conclude that epidemiological expertise may provide one form of probability that the association under question is causal in the sense of factual causation. However, factual causation forms only one facet on the judicial balancing exercise. Epidemiological research may, if any, hence provide an indication for causation only, which forms one facet of the judicial balancing exercise when assigning costs on the parties (III).

Authors: Johannes Jaspersen & Andreas Richter

Published in: European Economic Review

Abstract: Insurance premium subsidies are present in many insurance markets. The Swiss government, for example, paid out CHF 4.26 billion or 0.72% of the Swiss GDP for health insurance premium subsidies in 2011. Analyses of premium subsidies have often highlighted that the increased insurance demand due to premium subsidies increases the effects of moral hazard in the market. Other consequences of premium subsidies, however, have mostly been neglected by the literature. We show in our theoretical model that the wealth effects of premium subsidies decrease the sensitivity of the insured towards the monetary consequences of losses. This leads to less prevention efforts by the insured and thus increases moral hazard in the market. The effect is preserved if the subsidy is financed through proportional taxation. Using two alternative models, we show that providing state-dependent subsidies can either increase or reverse this effect, depending on which state subsidies are paid. We argue that whether demand effects or wealth effects of premium subsidies will dominate the insured׳s behavior depends on the market structure.


Authors: Vijay Aseervatham, Christoph Lex & Martin Spindler

Published in: Geneva Papers on Risk and Insurance

Abstract: As of 21 December 2012, the use of gender as an insurance rating category is prohibited in the EU. Any remaining pricing disparities between men and women will now be traced back to the reasonable pricing of characteristics that happen to differ between the groups or to the pricing of characteristics that differ between sexes in a way that proxies for gender. Using data from an automobile insurer, we analyse how the standard industry approach of simply omitting gender from the pricing formula, which allows for proxy effects, differs from the benchmark for what prices would look like if direct gender effects were removed and other variables did not adjust as proxies. We find that the standard industry approach will likely be influenced by proxy effects for younger and older drivers. Our method can simply be applied to almost any setting where a regulator is considering a uniform pricing reform.

Authors: Kai Purnhagen

Published in: SSRN

Abstract: From the point of internal market regulation, the Artegodan saga is one of the most interesting set of cases to study in recent times. These cases can be looked at – and have been looked at – in many different ways. Given the enormous body of literature that the Artegodan saga has sparked in the recent decades, such as numerous articles on the precautionary principle and the way how to implement science into internal market regulation, it would go far beyond the scope of this paper to provide an exhaustive overview. Departing from the context of these typical topics against which Artegodan is usually and correctly so examined, I attempt a fresh look at these cases: I will focus on the question how these cases shape the normative imperative of internal market regulation. Special emphasis will be given to the question how insights from behavioural economics have been – consciously or unconsciously – considered. In order to set the scene, I will hence first provide a short introduction to the economics of internal market regulation. Deviating from traditional literature, I will then proceed to show that the Artegodan saga indeed lies largely in line with this economic rationale of traditional internal market regulation. In the few areas where it worked for changing the traditional concept of internal market regulation, I will highlight that it nonetheless did not develop a more individualized approach in the sense as it aims at more protection of the individual. Drawing on insights from behavioural economics, I will make clear that in Artegodan the ECJ uses the precautionary principle narrative in order to instrumentalise the individual for the purposes of expanding the regulatory capacity of EU institutions. It thereby takes into account that it may in fact result in a lower level of protection of the individual for the sake of developing a centralized internal market. I will then critically review this development and argue for a more nuanced application of the precautionary principle, which takes the interdependencies between traditional integration based on fundamental freedoms and the provision of fundamental rights more seriously.

Authors: Kai Purnhagen

Published in: Law and Economics in Europe

Abstract: Why could law and economics theory (hereinafter L&E ) develop to become the most prominent theory in US legal scholarship, while still playing only a minor role in Europe? As this article is also meant as a gloss, as “a propagandist tracet”,1 I herein make use of my academic freedom to write freely also on controversial issues. If there is a grain of truth in what I am proposing here, it might help to de-mystify L&E theory and classify it to what it to my mind, really is: one very convincing and influential theory, but only one theory out of many that might explain the law. I will argue that it is not only the persuasiveness of the theory that helped to establish the continental divide in legal thought. But that cultural reasons also contributed to a significant extent. Some of them, such as World War II, are external social factors. Other factors, such as the influence of the Olin foundation, resulted from internal factors. As Grechenig and Gelter convincingly explain, at the beginning of the movement in the nineteenth and the early twentieth century the developments were comparable in Europe and the USA. The Nazi regime and World War II then marked a turning point, which resulted in reservations against L&E thinking. Europe responded with a renaissance of classical legal thought (hereinafter CLT ), while in the USA, the L&E theory developed further unhindered. This development, however, was not autonomous but influenced by man-made culture on both sides. Only recently, arguments from L&E are able to grasp hold in Europe. Interestingly, this development goes hand in hand with the upcoming of a new generation that has not been influenced by World War II. Furthermore, this generation benefited greatly from incentive mechanisms to grapple with American legal thinking through funding and the legal society likewise. The fall of the Berlin wall, I will argue, marks a second point in history, which brings L&E arguments to Europe and classical legal thought to the USA. I will close with a call for a specific EU-based idea of L&E , which starts from the outset as a method freed from the ideological struggles that accompanied the introduction of L&E in the USA. It shall live towards the aim of establishing both, a free and social market economy.

Authors: Vijay Aseervatham, Patricia Born & Andreas Richter

Published in: Semantic Scholar

Abstract: Catastrophic events lead to a temporary increase in insurance demand. Since the informational value of an event usually cannot be observed, inferences about the “rationality” of individuals’ decisions are difficult. The purpose of this research is to investigate whether and to what degree demand reactions of less sophisticated homeowners differ from the reactions of more sophisticated businesses in the aftermath of catastrophes. Identifying differences or similarities in demand reactions might help to clarify whether behavioral approaches are needed to explain the observations in the homeowners insurance market. We use NAIC data from 1984-2007 to analyze the impact of catastrophes on insurance demand. While the commercial market does not seem to react to catastrophic events, premium volume in the homeowners insurance market increases by about 2.9 % after catastrophes. This finding strengthens the need for behavioral approaches to explain the demand reactions in the aftermath of catastrophes.

Authors: Covadonga Díaz Llavona

Published in: SSRN

Abstract: Bancassurance has grown to currently become a completely consolidated insurance distribution channel in the global market, even though it shows unequal levels of development depending on the social and economic characteristics of the different countries. Several factors have contributed to give this phenomenon a particularly important role in Spain, which has led to the specific incorporation of this channel in the Insurance and Reinsurance Distribution Act. However, the provisions laid down in the law have proven to be inadequate to cover such a complex phenomenon as bancassurance, with many varied manifestations that are not always in line with the single model provided by the Spanish law. After studying the historical causes of the Spanish development and the existing legislation, I will show the most controversial aspects of the Act 26/2006, and those that do not reflect the current situation of the market. The analysis is complemented by an examination of the treatment given to this distribution channel by the German legal system.

Authors: Kai Purnhagen

Published in: European Review of Private Law

Abstract: The lack of harmonized collective redress mechanisms in EU civil procedural law results in a substantial increase of litigation risks for insurers. The right to a fair trial, as well as the effect utile, enables the EU to introduce collective redress mechanisms under certain conditions. The doctrine of implied powers, Article 114 Treaty on the Functioning of the European Union (TFEU), as well as Article 81 TFEU, can serve as competence norms in this respect. The introduction of harmonized rules on collective redress mechanisms is hence desirable from the perspective of European insurance law. To cope with the newly emerging risks, insurers have amended certain practices: In order to avoid litigation risks, the insurance industry requires establishing a steady communication strategy with private intermediaries, who have a special standing in collective redress mechanisms. Insurers might amend their insurance policies in order to cope with these risks. The development of a new insurance product coping with the special litigation challenges from collective redress procedures is advisable.

Authors: Mark J. Browne, Christian Knoller & Andreas Richter

Published in: Journal of Risk and Uncertainty

Abstract: With data from an insurer that provides coverage for both a low probability, high consequence (LPHC) risk (the flood peril) and a high probability, low consequence (HPLC) risk (bicycle theft), we investigate behavioral bias in the demand for insurance. Our analysis provides evidence which is consistent with a preference for insurance for HPLC risks over LPHC risks: we find that many more policyholders purchase add-on coverage to their homeowner’s insurance to cover the risk of bicycle theft than to cover the risk of loss due to flooding. In addition, we find mixed evidence on whether policyholders’ insurance coverage decisions are responsive to changes in their risk exposure. We find a strong relationship between wealth and the demand for both types of coverage.

Authors: Gunther Kraut & Raymond de Kuiper

Published in: Risk Analysis

Abstract: Probability elicitation protocols are used to assess and incorporate subjective probabilities in risk and decision analysis. While most of these protocols use methods that have focused on the precision of the elicited probabilities, the speed of the elicitation process has often been neglected. However, speed is also important, particularly when experts need to examine a large number of events on a recurrent basis. Furthermore, most existing elicitation methods are numerical in nature, but there are various reasons why an expert would refuse to give such precise ratio-scale estimates, even if highly numerate. This may occur, for instance, when there is lack of sufficient hard evidence, when assessing very uncertain events (such as emergent threats), or when dealing with politicized topics (such as terrorism or disease outbreaks). In this article, we adopt an ordinal ranking approach from multicriteria decision analysis to provide a fast and nonnumerical probability elicitation process. Probabilities are subsequently approximated from the ranking by an algorithm based on the principle of maximum entropy, a rule compatible with the ordinal information provided by the expert. The method can elicit probabilities for a wide range of different event types, including new ways of eliciting probabilities for stochastically independent events and low-probability events. We use a Monte Carlo simulation to test the accuracy of the approximated probabilities and try the method in practice, applying it to a real-world risk analysis recently conducted for DEFRA (the U.K. Department for the Environment, Farming and Rural Affairs): the prioritization of animal health threats.

Authors: Johannes G. Jaspersen & Vijay Aseervatham

Published in: Journal of Risk and Insurance

Abstract: Heuristic thinking can influence human behavior in decisions under risk and uncertainty. In an experimental setting, we study whether emotional activation primes individuals to use the representativeness heuristic and the affect heuristic. We observe the decision behavior of 272 subjects in a computer-based experiment that differentiates between incidental affect and integral affect. Positive incidental affect and integral affect increase the use of the representativeness heuristic, while negative incidental affect has no effect. Our findings have statistical and economic significance and carry implications for insurance companies and regulators.


Authors: Christian Knoller, Gunther Kraut & Pascal Schoenmaekers

Published in: Journal of Risk and Insurance

Abstract: We empirically analyze surrender behavior for variable annuity contracts using Japanese individual policy data. For traditional life insurance products, surrender behavior is typically explained by the interest rate and the emergency fund hypotheses. For variable annuities, the interest rate hypothesis is not directly applicable. For these products, we expect the value of the financial options and guarantees provided to the policyholder to drive surrender behavior. We define this expectation as the “moneyness hypothesis.” The statistical analysis confirms our moneyness hypothesis: the value of the embedded financial options and guarantees has the largest explanatory power for the surrender rate. The extent to which this finding holds depends on the single premium paid, which we consider a proxy for the policyholder's financial literacy. Moreover, our data set weakly supports the emergency fund hypothesis for the case of variable annuities.

Authors: Gunther Kraut & Andreas Richter

Published in: Geneva Papers on Risk and Insurance

Abstract: The regulatory regime in Europe is undergoing a fundamental change that will serve as a benchmark for the regulators in other countries. This paper analyses the influence of regulation imposed by Solvency II on life catastrophe risk management activities. The interplay of extreme mortality risks and risk management activities is demonstrated, and the special characteristics of different causes of life catastrophe risk are identified. The advice of the Committee of European Insurance and Occupational Pensions Supervisors, now the European Insurance and Occupational Pensions Authority, regarding the life catastrophe risk sub-module of the solvency capital requirement standard formula is to apply a unified single mortality catastrophe shock scenario. We show that this approach does not properly reflect life catastrophe risk and that it potentially prevents the recognition of more sophisticated risk management instruments for the solvency capital requirement calculation. As a result of this analysis, proposals are made for how these shortcomings can be resolved by using a simple generic partial internal model. This model facilitates the recognition of non-proportional risk transfer techniques and thus provides incentives for their use. We show that these proposals are in line with and relevant to the current trend towards the potential development of a more liquid market for extreme mortality risks.

Authors: Christian Knoller

Published in: Journal of Risk and Insurance

Abstract: We conducted an experiment in which participants were confronted with an experimental annuitization decision. Previous research has argued in favor of the hypothesis that a combination of mental accounting and prospect theory can explain why annuities containing a capital guarantee are preferred to standard annuities. However, from this perspective people would not annuitize their assets at all, but rather invest the money in a risk-free alternative. Recent research has also suggested a “cushion effect.” When all possible outcomes of two options are above a certain goal, this goal serves as a cushion in case of unfavorable outcomes. Hence, individuals might have a higher propensity to exhibit risk-seeking behavior. We find that individuals were indeed more willing to choose the annuity option if it contained a capital guarantee and that individuals using this guarantee as a cushion were even more willing to choose the annuity. Thus, the cushion effect can partially explain the high demand for guarantee features in annuity contracts.

Authors: Uwe Focht, Andreas Richter & Jörg Schiller

Published in: Journal of Risk and Insurance

Abstract: This article addresses the role of independent insurance intermediaries in markets where matching is important. We compare fee-based and commission-based compensation systems and show that they are payoff equivalent if the intermediary is completely honest. Allowing for strategic behavior, we discuss the impact of remuneration on the quality of advice. The possibility of mismatching gives the intermediary substantial market power, which will not translate into mismatching if consumers are rational. Furthermore, we offer a rationale for the use of contingent commissions and address whether or not the ban of any commission payments is an appropriate market intervention.

Authors: Richard Peter, Andreas Richter & Petra Steinorth

Published in: Journal of Risk and Insurance

Abstract: The article shows that heterogeneous incomplete private information can explain the limited existence of guaranteed renewable health insurance (GR) contracts in an otherwise frictionless markets. We derive a unique equilibrium that can be of the form that either only a portion of the population or none will cover themselves against premium risk with a GR contract. Increased risk aversion, increased premium risk, and first-order stochastic improvements of the distribution of private information increase the likelihood of positive take-up. In case GR contracts are in demand, increased risk aversion and first-order stochastic improvements of the distribution of private information lead to more individuals purchasing the GR contract.

Former discussion papers

Former discussion papers can be found on Open Access LMU.