Insuring against Country Risks: Descriptive and Prescriptive Aspects

Today multinational firms face grave uncertainties with respect to their investment strategies in other countries. This paper stresses the importance of integrating the descriptive aspects of this problem with prescriptive recommendations. It does so by raising two interrelated questions: (1) How do multinational firms and insurers deal with the problems of international risk in making their decisions on what investments to undertake? (2) What role can analytic approaches, including insurance mechanisms, play in better managing risk and uncertainty in international transactions? These questions are addressed by developing a conceptual framework which emphasizes the importance of problem formulation, institutional arrangements and decision processes as a basis for prescriptive recommendations. The problem is characterized by lack of a detailed statistical data base to estimate probabilities and consequences of different types of political, economic, and social risks. Corporate planners and risk managers who have responsibility for these investment decisions would Like concreteness. Hence, their actions appear to be greatly influenced by past experience and personal contacts. Our prescriptive recommendations are designed to widen the statistical data base by the use of experts and Bayesian analysis as well as to broaden the responsibility for investment decisions within the organization. We also propose a jointly operated US private-federal insurance program which maintains features of current government operated systems but has private firms marketing policies and settling claims. The above theoretical concepts are illustrated with a case study of Indonesia's investment evaluation problem pursuant to their decision to provide the United States with liquefied natural gas in the early 1970's. This case study illustrates the political risks of firms investing even in highly developed economies such as the United States

Misinformation and Equilibrium in Insurance Markets

This paper focuses on the role of misinformation by firms and consumers with respect to the selling and buying of insurance. For example, the reader may wish to think of automobile insurance when the firms do not know the accident probabilities for each of their customers and insured individuals in turn, may misperceive the probabilities of being involved in an accident. Our point of departure is the model developed by Rothschild-Stiglitz which demonstrated that firms could distinguish between different types of risks by offering a set of policies consisting of a premium per dollar and a stated amount of coverage. We will investigate two types of equilibrium concepts in the spirit of this model: a traditional Nash equilibrium where each firm determines the set of policies it will offer under the assumption that all other firms make no changes in their offerings and a Wilson equilibrium here firms look far enough ahead in the future to evaluate the consequences of a new policy offering on the profitability of current policies. The paper contrasts the Nash and Wilson equilibria for cases where consumers correctly perceive the probability of a loss as well as when they misperceive this probability. We focus attention on the case where there are two risk groups in order to highlight significant differences between Nash and Wilson equilibria through graphical procedures. The final portion of the paper generalizes the results to n risk groups and discusses the welfare implications of consumer misperceptions

Insuring Against International Hazards: Descriptive and Prescriptive Aspects

Today multinational firms face grave uncertainties with respect to their investment strategies in other countries. This paper stresses the importance of integrating the descriptive aspects of this problem with prescriptive recommendations. It does so by raising two broad interrelated questions: (1) How do multinational firms and insurers deal with the problems of international risk in making their decisions on what investments to undertake? (2) What role can analytic approaches, including insurance mechanisms, play in better managing risk and uncertainty in international transactions? These questions are addressed by developing a conceptual framework which emphasizes the importance of problem formulation, institutional arrangements and decision processes as a basis for prescriptive recommendations. The problem is characterized by lack of a detailed statistical data base to estimate probabilities and consequences of different types of political, economic, and social risks. Corporate planners and risk managers who have responsibility for these investment decisions are anxious to avoid uncertainty. Hence, their actions appear to be greatly influenced by past experience and personal contacts. Our prescriptive recommendations are designed to widen the statistical data base by the use of experts and Bayesian analysis as well as to broaden the responsibility for investment decisions within the organization. We also propose a jointly operated private-federal insurance program which maintains features of current government operated systems but has private firms marketing policies and settling claims. The above theoretical concepts are illustrated with a case study of Indonesia's investment evaluation problem pursuant to their decision to provide the United States with liquefied natural gas in the early 1970's. This case study illustrates the political risks of firms investing even in highly developed economies such as the United States

Insuring and Managing Hazardous Risks: From Seveso to Bhopal and Beyond

This executive review describes in brief the International Conference on Transportation, Storage, and Disposal of Hazardous Materials, held at IIASA, and the ensuing Proceedings "Insuring and Managing Hazardous Risks." The Conference brought together representatives of academia, business and government from East and West to discuss the nature of current problems in the area of hazardous materials. An important objective of the Conference was to suggest steps that could be undertaken by industrial firms, the insurance industry, and government agencies to improve the safety and efficiency with which hazardous materials are produced and controlled in industrialized societies

The Role of Compensation for Siting Noxious Facilities

The research reported herein was performed under the auspices of the Interactive Decision Analysis (IDA) Project in the Systems and Decision Sciences Program. This paper reports on a class of group choice problems under uncertainty, with applications to the problem of locating public facilities such as power plants or prisons, which have potentially noxious side effects. This research complements the overall thrust of the IDA Project to study the theoretical foundations of interventions directed at improving individual and group decision processes. In this regard, the collective choice mechanisms analyzed in this paper for group bargaining problems under uncertainty should be of interest both for their theoretical properties as well as for their implications for the important practical problem of siting public facilities

Conceptual Trends and Implications for Risk Research. Report of the Task Force Meeting: Risk and Policy Analysis Under Conditions of Uncertainty, November 25-27,1985

The Task Force focused on the uncertainties in decision systems for choosing or modifying technologies intended to improve human well-being. The challenge was to delineate an international research agenda to assist communities to venture into the future with greater confidence in technological innovation. The Task Force recommended research in three interrelated areas: (1) Protocols -- Development of procedural advice for the integrated assessment of the contribution of technologies to environmental and economic achievements, and the associated uncertainties. (2) Case Studies -- Integrated assessments involving local or regional clusters of technologies and decision-making bodies, and investigation of ecosystem effects, economic effects, and effects on human well-being, as well as the structure and performance of institutions. (3) Educational Materials -- Development of educational materials to support integrated assessments

Guidelines for Coping with Natural Disasters and Climatic Change

This paper presents a conceptual framework for evaluating alternative programs which deal with natural hazards and weather-related risks. The framework stresses the importance of integrating descriptive or behavioral analysis with prescriptive measures. In particular, there is a need to understand the institutional arrangements and decision processes of the interested parties as a prelude to formulating and evaluating alternative plans. Empirical evidence on the decision processes associated with the purchase of disaster insurance suggests ways of linking descriptive and prescriptive analysis for dealing with natural hazards. A parallel type of analysis is undertaken for evaluating what action, if any, should be taken with respect to the manufacturing of aerosol spray cans which use chlorofluorocarbons, given that this substance destroys ozone in the atmosphere

Densely Entangled Financial Systems

In [1] Zawadoski introduces a banking network model in which the asset and counter-party risks are treated separately and the banks hedge their assets risks by appropriate OTC contracts. In his model, each bank has only two counter-party neighbors, a bank fails due to the counter-party risk only if at least one of its two neighbors default, and such a counter-party risk is a low probability event. Informally, the author shows that the banks will hedge their asset risks by appropriate OTC contracts, and, though it may be socially optimal to insure against counter-party risk, in equilibrium banks will {\em not} choose to insure this low probability event. In this paper, we consider the above model for more general network topologies, namely when each node has exactly 2r counter-party neighbors for some integer r>0. We extend the analysis of [1] to show that as the number of counter-party neighbors increase the probability of counter-party risk also increases, and in particular the socially optimal solution becomes privately sustainable when each bank hedges its risk to at least n/2 banks, where n is the number of banks in the network, i.e., when 2r is at least n/2, banks not only hedge their asset risk but also hedge its counter-party risk.Comment: to appear in Network Models in Economics and Finance, V. Kalyagin, P. M. Pardalos and T. M. Rassias (editors), Springer Optimization and Its Applications series, Springer, 201

Relationship of national institutes of health stroke scale to 30-day mortality in medicare beneficiaries with acute ischemic stroke.

BackgroundThe National Institutes of Health Stroke Scale (NIHSS), a well-validated tool for assessing initial stroke severity, has previously been shown to be associated with mortality in acute ischemic stroke. However, the relationship, optimal categorization, and risk discrimination with the NIHSS for predicting 30-day mortality among Medicare beneficiaries with acute ischemic stroke has not been well studied.Methods and resultsWe analyzed data from 33102 fee-for-service Medicare beneficiaries treated at 404 Get With The Guidelines-Stroke hospitals between April 2003 and December 2006 with NIHSS documented. The 30-day mortality rate by NIHSS as a continuous variable and by risk-tree determined or prespecified categories were analyzed, with discrimination of risk quantified by the c-statistic. In this cohort, mean age was 79.0 years and 58% were female. The median NIHSS score was 5 (25th to 75th percentile 2 to 12). There were 4496 deaths in the first 30 days (13.6%). There was a strong graded relation between increasing NIHSS score and higher 30-day mortality. The 30-day mortality rates for acute ischemic stroke by NIHSS categories were as follows: 0 to 7, 4.2%; 8 to 13, 13.9%; 14 to 21, 31.6%; 22 to 42, 53.5%. A model with NIHSS alone provided excellent discrimination whether included as a continuous variable (c-statistic 0.82 [0.81 to 0.83]), 4 categories (c-statistic 0.80 [0.79 to 0.80]), or 3 categories (c-statistic 0.79 [0.78 to 0.79]).ConclusionsThe NIHSS provides substantial prognostic information regarding 30-day mortality risk in Medicare beneficiaries with acute ischemic stroke. This index of stroke severity is a very strong discriminator of mortality risk, even in the absence of other clinical information, whether used as a continuous or categorical risk determinant. (J Am Heart Assoc. 2012;1:42-50.)

Practice patterns for acute ischemic stroke workup: A longitudinal population‐based study

Background We examined practice patterns of inpatient testing to identify stroke etiologies and treatable risk factors for acute ischemic stroke recurrence. Methods and Results We identified stroke cases and related diagnostic testing from four 1‐year study periods (July 1993 to June 1994, 1999, 2005, and 2010) of the Greater Cincinnati/Northern Kentucky Stroke Study. Patients aged ≥18 years were included. We focused on evaluation of extracranial arteries for carotid stenosis and assessment of atrial fibrillation because randomized controlled trials supported treatment of these conditions for stroke prevention across all 4 study periods. In each study period, we also recorded stroke etiology, as determined by diagnostic testing and physician adjudication. An increasing proportion of stroke patients received assessment of both extracranial arteries and the heart over time (50%, 58%, 74%, and 78% in the 1993–1994, 1999, 2005, and 2010 periods, respectively; P &lt;0.0001 for trend), with the most dramatic individual increases in echocardiography (57%, 63%, 77%, and 83%, respectively). Concurrently, we observed a decrease in strokes of unknown etiology (47%, 48%, 41%, and 38%, respectively; P &lt;0.0001 for trend). We also found a significant increase in strokes of other known causes (32%, 25%, 45% and 59%, respectively; P &lt;0.0001 for trend). Conclusions Stroke workup for treatable causes of stroke are being used more frequently over time, and this is associated with a decrease in cryptogenic strokes. Future study of whether better determination of treatable stroke etiologies translates to a decrease in stroke recurrence at the population level will be essential. </jats:sec