Price Regulation in Secondary Insurance Markets

Secondary life insurance markets are growing rapidly. From nearly no transactions in 1980, a wide variety of similar products in this market has developed, including viatical settlements, accelerated death benefits, and life settlements and as the population ages, these markets will become increasingly popular. Eight state governments, in a bid to guarantee sellers a "fair" price, have passed regulations setting a price floor on secondary life insurance market transactions, and more are considering doing the same. Using data from a unique random sample of HIV+ patients, we estimate welfare losses from transactions prevented by binding price floors in the viatical settlements market (an important segment of the secondary life insurance market). We find that price floors bind on HIV patients with greater than 4 years of life expectancy. Furthermore, HIV patients from states with price floors are significantly less likely to viaticate than similarly healthy HIV patients from other states. If price floors were adopted nationwide, they would rule out transactions worth $119 million per year. We find that the magnitude of welfare loss from these blocked transactions would be highest for consumers who are relatively poor, have weak bequest motives, and have a high rate of time preference. Copyright The Journal of Risk and Insurance, 2004.

Knowledge Spillovers and High-technology Clustering: Evidence from Taiwan's Hsinchu Science-Based Industrial Park

Knowledge spillovers of high-technology industries are alleged to be important determinants of industrial clustering. Dynamic production modeling is applied to measure the sectoral and spatial spillover effects to study the implications of various types of knowledge spillovers on high-technology industry clustering in Taiwan's Hsinchu Science-based Industrial Park (HSIP). The analysis is performed using the Taiwanese government's industrial census of technological activities at the micro level with 2340 plants for the period 1986-1995. We find substantive sectoral and spatial knowledge spillover effects, which are considered to be major motivating forces for regional concentration patterns of Taiwan's high-technology industries. (JEL "L10", "O30") Copyright 2005 Western Economic Association International.

The Use of Dynamic Financial Analysis to Determine Whether an Optimal Growth Rate Exists for a Property-Liability Insurer

Prior research on the aging phenomenon has demonstrated that new business for property-liability (P-L) insurers generates high loss ratios that gradually decline as a book of business goes through successive renewal cycles. Although the experience on new business is initially unprofitable, the renewal book of business eventually becomes profitable over time. Within this context, insurers need to manage their exposure growth in order to maximize long run profitability. Dynamic financial analysis (DFA), a relatively new tool for P-L insurers, utilizes Monte Carlo simulation to generate the overall financial results for an insurer under a large number of scenarios. This article uses a publicly available DFA model-along with the estimated market value of an insurer, based on 1990-2001 data for stock P-L insurers and underlying financial variables-to determine optimal growth rates of a P-L insurer based on mean-variance analysis, stochastic dominance, and constraints on leverage. Copyright The Journal of Risk and Insurance, 2004.

Social Security Benefit Uncertainty under Individual Accounts

Social Security reforms that include individual accounts change both the expected benefit and the benefit risk. This article uses a long-term stochastic forecasting model to estimate the distribution of expected benefits under a simple individual account, recognizing uncertainties in the current system. Introducing individual accounts increases the overall variability of benefit levels relative to current law; indeed the standard deviations of expected benefit gains exceed the level of those gains. The increase in uncertainty about benefit replacement rates is even larger, however, because individual accounts partially sever the link between earnings and benefits in the existing system. (JEL H55) Copyright 2005 Western Economic Association International.