This article examines the potential for the U.S. insurance industry to cause systemic risk events that spill over to other segments of the economy. We examine primary indicators of systemic risk as ...well as contributing factors that exacerbate vulnerability to systemic events. Evaluation of systemic risk is based on a detailed financial analysis of the insurance industry, its role in the economy, and the interconnectedness of insurers. The primary conclusion is that the core activities of U.S. insurers do not pose systemic risk. However, life insurers are vulnerable to intrasector crises, and both life and property–casualty insurers are vulnerable to reinsurance crises. Noncore activities such as financial guarantees and derivatives trading may cause systemic risk, and interconnectedness among financial institutions has grown significantly in recent years. To reduce systemic risk from noncore activities, regulators need to continue efforts to strengthen mechanisms for insurance group supervision.
During the financial crisis, life insurers sold long-term policies at deep discounts relative to actuarial value. The average markup was as low as—19 percent for annuities and — 57 percent for life ...insurance. This extraordinary pricing behavior was due to financial and product market frictions, interacting with statutory reserve regulation that allowed life insurers to record far less than a dollar of reserve per dollar of future insurance liability. We identify the shadow cost of capital through exogenous variation in required reserves across different types of policies. The shadow cost was $0.96 per dollar of statutory capital for the average company in November 2008.
This book examines the behavior of individuals at risk and insurance industry decision makers involved in selling, buying and regulation. It compares their actions to those predicted by benchmark ...models of choice derived from classical economic theory. Where actual choices stray from predictions, the behavior is considered to be anomalous. Howard C. Kunreuther, Mark Pauly and Stacey McMorrow attempt to understand why these anomalies occur, in many cases using insights from behavioral economics. The authors then consider if and how such behavioral anomalies could be modified to improve individual and social welfare. This book describes situations in which both public policy and the insurance industry's collective posture need to change. This may require incentives, rules and institutions to help reduce both inefficient and anomalous behavior, thereby encouraging behavior that will improve individual and social welfare.
We conduct a series of field experiments to evaluate the quality of advice provided by life insurance agents in India. Agents overwhelmingly recommend unsuitable, strictly dominated products that ...provide high commissions to the agent. Agents cater to the beliefs of uninformed consumers, even when those beliefs are wrong. We also find that agents appear to focus on maximizing the amount of premiums (and therefore their commissions) that customers pay, as opposed to focusing on how much insurance coverage customers need. A natural experiment requiring disclosure of commissions for a specific product results in agents recommending alternative products with high commissions but no disclosure requirement. A follow-up agent survey sheds light on the extent to which poor advice reflects both the commission incentives and agents’ limited product knowledge.
Long-term care expenditures constitute one of the largest uninsured financial risks facing the elderly in the United States and thus play a central role in determining the retirement security of ...elderly Americans. In this essay, we begin by providing some background on the nature and extent of long-term care expenditures and insurance against those expenditures, emphasizing in particular the large and variable nature of the expenditures and the extreme paucity of private insurance coverage. We then provide some detail on the nature of the private long-term care insurance market and the available evidence on the reasons for its small size, including private market imperfections and factors that limit the demand for such insurance. We highlight how the availability of public long-term care insurance through Medicaid is an important factor suppressing the market for private long-term care insurance. In the final section, we describe and discuss recent long-term care insurance public policy initiatives at both the state and federal level.
Ensuring America's Health explains why the US health care system offers world-class medical services to some patients but is also exceedingly costly with fragmented care, poor distribution, and ...increasingly bureaucratized processes. Based on exhaustive historical research, this work traces how public and private power merged to favor a distinctive economic model that places insurance companies at the center of the system, where they both finance and oversee medical care. Although the insurance company model was created during the 1930s, it continues to drive health care cost and quality problems today. This wide-ranging work not only evaluates the overarching political and economic framework of the medical system but also provides rich narrative detail, examining the political dramas, corporate maneuverings, and forceful personalities that created American health care as we know it. This book breaks new ground in the fields of health care history, organizational studies, and American political economy.
We develop a pair of risk measures, health and mortality delta, for the universe of life and health insurance products. A life-cycle model of insurance choice simplifies to replicating the optimal ...health and mortality delta through a portfolio of insurance products. We estimate the model to explain the observed variation in health and mortality delta implied by the ownership of life insurance, annuities including private pensions, and long-term care insurance in the Health and Retirement Study. For the median household aged 51 to 57, the lifetime welfare cost of market incompleteness and suboptimal choice is 3.2% of total wealth.
In this paper, the impact of both gender and age on the claim rates of dread disease and cancer insurance policies were examined using unique data taken from Taiwan's private health insurance ...policies issued by non-life insurers during the 2012 to 2015 policy years. Those aged 30-39 served as the reference group. For the total number of dread disease policies, male insureds had a higher non-cancer claim probability than female insureds, while an age under 20 was associated with much lower claim rates for dread disease policies than for ages over 50. The claim rate for dread disease policies increased rapidly beginning at age 40 for both cancerous and non-cancerous diseases amongst male insureds. Amongst female insureds, those under 20 had much lower claim rates for dread disease policies. Only those aged 50-59 had a higher claim rate for non-cancerous diseases. For the total number of cancer insurance policies, male insureds had lower claim rates than female insureds, with an upward trend being associated with age. For male (female) insureds aged over 40 (20), the claim rates of cancer increased with age.
Financial illiteracy and underinsurance have been revealed to be critical issues in the financial sustainability and well-being of families. However, studies show that financial literacy does not ...necessarily translate to insurance literacy, and more specialized education can improve insurance literacy. Little is known about the impact of insurance illiteracy on the inclination to seek and retain insurance. Considering this gap, our study aimed to investigate the direct and indirect effect of consumers’ insurance literacy on purchasing decisions of personal insurance. The study sample consists of middle-class consumers in Sri Lanka. A total of 300 valid questionnaires were collected and analyzed using a variance-based structural equation modeling. The results revealed that insurance literacy directly, and through its mediators of trust, perceived benefits, and favorable attitudes towards insurance, impacts the behavioral intention, significantly and positively. The cognition-based trust affected the purchase intention only through its mediators. Additionally, there is a significant difference between those who are having and not having insurance in terms of insurance literacy, trustfulness, and perceived value of insurance. This study is relatively a pioneer study, and findings will be of great interest to academicians and policymakers to encourage personal insurance as a tool in achieving financial security and well-being.
This paper studies regulated health insurance markets known as exchanges, motivated by the increasingly important role they play in both public and private insurance provision. We develop a framework ...that combines data on health outcomes and insurance plan choices for a population of insured individuals with a model of a competitive insurance exchange to predict outcomes under different exchange designs. We apply this framework to examine the effects of regulations that govern insurers' ability to use health status information in pricing. We investigate the welfare implications of these regulations with an emphasis on two potential sources of inefficiency: (i) adverse selection and (ii) premium reclassification risk. We find substantial adverse selection leading to full unraveling of our simulated exchange, even when age can be priced. While the welfare cost of adverse selection is substantial when health status cannot be priced, that of reclassification risk is five times larger when insurers can price based on some health status information. We investigate several extensions including (i) contract design regulation, (ii) self-insurance through saving and borrowing, and (iii) insurer risk adjustment transfers.
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