Optimal Loss Mitigation and Contract Design

This work examines the interaction between the premium rates set by an insurer and the incentives of an individual to purchase market insurance and undertake mitigation to reduce the size of a potential loss. A risk-neutral monopolistic insurer prices insurance according to the price-elasticity of demand for coverage. The elasticity of demand is affected by the presence of both mitigation and government intervention. The availability of loss reduction activities increases the consumer's elasticity of demand and lowers the optimal rate charged by the monopolist. Government intervention reduces both expenditures on mitigation and the rate charged by the monopolistic insurer. Copyright 2003 The Journal of Risk and Insurance.

THE EFFECT OF COSTLY RISK BEARING ON INSURERS' SUPPLY DECISIONS

Efficient contracts for sharing risk will allocate risk according to comparative advantage. When risks meet the typical criteria for insurability, in particular independence, the comparative advantage is straightforward and insurers are able to diversify risk by pooling together many policyholders. But this comparative advantage is established only in the event insureds have a low correlation. Earthquakes do not fit this description. The high correlations between the claims on the insurer's policies will (in the limit) equalize the costs of risk bearing for the insurer and insured. But the insurer's comparative advantage is not necessarily entirely removed, since correlations are not perfect, but there is a limit to the insurers' ability to diversify the risk. This paper considers insurance markets for earthquake risk and how comparative advantage in risk bearing can explain the amount of business individual insurers write. The respective abilities of insurers to write this risk depend on the characteristics of their entire portfolio as well as on financial features that influence the costs of risk bearing. Several recent contributions have shown why risk is costly to corporations such as insurers. The costs of risk arise from tax convexity, principal agent relationships within the firm, and the costs of financial distress. We will show how these types of features jointly determine the capacity of insurers to write earthquake insurance. We collect these arguments together in a simple equilibrium model of insurance. From this we derive and estimate a cross sectional model of earthquake insurance which emphasizes the differing capacity of insurers to write this line ofcorporate risk management, earthquake insurance

The Relationship between Automobile Liability Costs and Government Social Spending

Liability insurance is one of the primary mechanisms for compensating individuals who are injured in auto accidents. An injured individual’s propensity to seek compensation through the legal system depends on his or her expected payoff and access to other sources of compensation. A justification for social insurance programs that provide compensation to injured parties is the potential for such compensation to reduce the need for victims to seek compensation through the legal system. If such programs serve as substitutes for the legal system as sources of compensation, then we expect that as spending on these programs decreases, liability costs will increase, and vice-versa. Using State-level data for the U.S., and provincial-level data for Canada, we evaluate the relationship between government health/welfare spending and automobile liability insurance costs. Our results suggest a small but significant substitute relationship in both countries. Information that substantiates a connection between these sources will be useful in public assistance decision-making.L’assurance responsabilité est le plus important mécanisme de compensation pour les victimes d’accidents de la route. La probabilité que ces victimes entament des poursuites judiciaires dépend à la fois des profits espérés par une telle démarche et de leur accès à d’autres sources de compensation. Le bien-fondé des programmes sociaux d’assurance repose sur le principe qu’en compensant les victimes d’accident, on réduit la probabilité qu’elles passent par un système légal pour demander une compensation. Si de tels programmes se substituent au système légal en tant que sources des compensations, on peut supposer que les dépenses dans ces programmes sont inversement corrélées aux coûts de responsabilité (liability cost). En utilisant des données au niveau provincial pour le Canada et au niveau des États pour les États-Unis, nous avons évalué la relation existant entre les dépenses gouvernementales en santé et en aide sociale, et les coûts d’assurance responsabilité automobile. Nos résultats suggèrent la présence, dans les deux pays étudiés, d’une relation mince mais substantielle entre ces variables. L’information qui explique la relation découverte sera particulièrement utile lors de l’élaboration des programmes gouvernementaux d’aide

Managing Curriculum Convergence in Risk Management and Financial Services

Permission granted from publisher November 25, 2010.This article describes how the University of Calgary has increased the flexibility offered to students in a curriculum that directly reflects the convergence occurring in the financial services marketplace. This design uses elements from existing programs in finance, risk management and insurance, as well as a few specific courses from accounting, economics, and other departments. The result is a double concentration that provides students a better understanding of financial services and of the career paths offered in the financial services industry. Students are able to select a career path early, which in turn benefits them and their future employers.Ye