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Banks as Insurance Referral Agents? The Convergence of Financial Services: Evidence from the Title Insurance Industry

Banks as Insurance Referral Agents? The Convergence of Financial Services: Evidence from the Title Insurance Industry

In the event that P&C insurers start behaving as title insurers in using banks as their main referral service and consumers do not shop for better prices more than they are now (or if consumers are willing to pay more for one stop shopping for all financial services), one should expect insurers to compete for the referrals even it that competition increases the cost of insurance policies for end users. In other words, if insurers compete for bank referrals by investing a sizeable amount of money on those strategic partnerships, insurers will need to charge greater premiums to policyholders to finance such investments. This means that total premiums collected by insurers will be driven up at the same time as their loss ratio (Loss incurred divided by premiums earned) is driven down. It would then appear to insurance regulators that insurance companies have increased their profit margin after the integration of financial services since they are collecting more premiums for the same loss. Such an analysis may be erroneous, however, since the insurers’ expense ratio (total expenses divided by premiums written) may be driven up. Regulators would then be faced with an interesting situation where insurers are collecting more in premiums, incurring the same losses, but paying more in expenses. Although outside of the scope of the present paper, a potential test of such an hypothesis would be to compare the expense and loss ratio of insurance companies that have invested in controlled business arrangments with the expense and loss ratio of insurance companies that have not.
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Adverse Selection in Insurance Contracting

Adverse Selection in Insurance Contracting

we can rank the a priori loss probabilities as p H > p U > p L . If insurers know the information and risk status of any individual (i.e. they know whether she is U , H or L) the equilibrium competitive contracts are the …rst best contracts C U , C H and C L depicted in Figure 6. This conclusion seems pretty obvious but there is a potential problem to be cleared before we can be comfortable with this equilibrium contract set. If all the uninformed chose to become informed, then the equilibrium contract set would contain only C H and C L . Thus, we must check when uninformed would choose to become informed and face a lottery 5 0 For an overview of regulations and policy statements, see Hoel and Iversen (2002) and Viswanathan et al (2007). The latter describe four major regulatory schemes for genetic information in many states, from no regulation to the most strict regulatory structure: in the Laissez-Faire approach, insurers have full freedom to request new tests, disclosure of existing tests and to use tests results in underwriting and rating; under the Disclosure Duty approach, individuals have to disclose to insurers the result of existing tests but cannot be required to undergo additional tests, while under the Consent Law approach, consumers are not required to divulge genetic tests results but if they do, insurers may use this information. Finally, in the Strict Prohibition approach (there is a tendency in most countries to adopt this regulation of information in health insurance policies), insurers cannot request genetic tests and cannot use any genetic information in underwriting and rating.
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Insurance Contracts with deductibles and upper limits

Insurance Contracts with deductibles and upper limits

1 Introduction In his 1963 seminal insurance paper, Arrow showed that risk-averse agents with von-Neumann Mor- genstern utility demand full insurance coverage if insurance is available at actuarially fair price. Yet insurance policies seldom provide policy holders with a complete coverage against losses. Most insur- ance policies limit coverage of losses with deductibles and include an upper limit on coverage. Many explanations have already been given: transaction costs, economies of scale in administrative expenses, limited liability of policy holders, informationnal asymetries between the insurer and the insured...(see for example Huberman et al (1983) and Winter (1992) and the references included in those papers).
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Measuring Unemployment Insurance Generosity

Measuring Unemployment Insurance Generosity

Abstract: Unemployment insurance policies are multidimensional objects. They are typically defined by waiting periods, eligibility duration, benefit levels and asset tests when eligible, which make intertemporal or international comparisons difficult. To make things worse, labor market conditions, such as the likelihood and duration of unemployment matter when assessing the generosity of different policies. In this paper, we develop a methodology to measure the generosity of unemployment insurance programs with a single metric. We build a first model with such complex characteristics. Our model features heterogeneous agents that are liquidity constrained but can self-insure. We then build a second model that is similar, except that the unemployment insurance is simpler: it is deprived of waiting periods and agents are eligible forever with constant benefits. We then determine which level of benefits in this second model makes agents indifferent between both unemployment insurance policies. We apply this strategy to the unemployment insurance program of the United Kingdom and study how its generosity evolved over time.
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Directors' and Officers' Insurance and Shareholders' Protection

Directors' and Officers' Insurance and Shareholders' Protection

Corporate directors are liable for the corporation's actions as well as their own. Strangely, and by far, the most likely plaintiffs in a lawsuit against corporate directors are the shareholders who appointed them in the first place. As a result, directors often require protection so that their own personal wealth is not expropriated in the event of a good faith error. There are three ways to protect a director's wealth: Corporate indemnification plans, Limited liability provisions and Directors' and Officers (D&O) insurance policies. Of the three types of protection, D&O insurance is arguably the strangest not because shareholders purchase it to protect directors in case of a lawsuit, but because it also protects shareholders. Using an original database, we test a set of hypotheses that should determine the demand for D&O insurance. Our analysis suggests that the D&O insurance demand is best explained as part of the directors' compensation package, managerial signalling and shareholders' wealth protection. D&O insurance also appears to be a substitute for financial institution monitoring. Surprisingly, managerial risk aversion and financial distress do not seem to play important roles. Our results lead us to conclude that D&O insurance is not designed to protect the directors' personal wealth as much as it is designed to protect the shareholders'. In that sense, our paper offers an original approach to one of the many fundamental questions in finance: What determines corporate risk management practices?
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Is the Demand for Corporate Insurance a Habit? Evidence of Organizational Inertia from Directors' and Officers' Insurance

Is the Demand for Corporate Insurance a Habit? Evidence of Organizational Inertia from Directors' and Officers' Insurance

1 Introduction and Motivation 1.1 Introduction Of the many fundamental questions left unanswered in finance, one relates to corporate risk man- agement practices. Put differently, it is still relatively unclear why corporations actively manage their idiosyncratic risk. Purchasing insurance policies and investing in risk management are two common practices that are inherently costly but that do not necessarily increase shareholder wealth. Indeed, because shareholders have access to the financial markets, they are better equipped than corporations to hedge idiosyncratic risk through diversification. A recent article by Guay and Kothari (2003) shows that the value created in non-financial firms through the use of derivatives instruments is quite small. Moreover, if a clear consensus existed on the value to the firm of risk management, we should not see firms in the same industry (for example, the gold mining industry) arguing, often time vehemently, on whether risk management creates or destroys value, not only for each firm, but for the entire industry.
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Citywide urban design policies

Citywide urban design policies

The desirability of formulating and debating citywide urban design policies whenever issues involved can be regarded as citywide in nature and policy matters in substance, [r]

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Simulating Targeted Policies
with Macro Impacts: Poverty Alleviation Policies in Madagascar

Simulating Targeted Policies with Macro Impacts: Poverty Alleviation Policies in Madagascar

When the targeting is imperfect and depends on self-selection of individuals, a micro-structural model may be most useful. For instance, how many people will choose the new wage offer from a workfare program or a from an export processing zone? Another problem is to assess the overall distributional impact of such policies within and outside the target population, when their magnitude is big enough to have a macro-economic impact. Here then, a micro-macro clo- sure may help. For instance, how many people will benefit from an increase in the minimum wage, how will this increase be transmitted to other segments in the labor market through a raise in the informal labor earnings; or what are the respective impacts of a job creation policy and of a wage policy in a developing
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Artificial intelligence in insurance profitability models

Artificial intelligence in insurance profitability models

The paper compares, in specific, two methods of data analysis for this two method classification problem: multiple linear regression, which attempts to discover linear re[r]

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A Recommendation System For Car Insurance

A Recommendation System For Car Insurance

Purpose: up-selling. Our recommendation system is currently in use by Foyer Assurances 1 agents. Our goal is to support the agents that are and will continue to be the best advisers for customers, due to their experience and their knowl- edge of their portfolio. In short, our tool helps them by automatically selecting from their large portfolios the customers most likely to augment their insurance coverage, in order to optimize up-selling campaigns for instance. Thus, an in- surance company using this solution could combine advantages from both data analysis and human expertise. Agents validate if the recommendations from our system are appropriate to customers and make trustworthy commercial opportu- nities for them. The recommendation system is also planned to be integrated in customers’ web-pages, in order to provide them a personalized assistance online.
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Optimal Unemployment Insurance for Older Workers

Optimal Unemployment Insurance for Older Workers

We here extend the dynamic moral hazard model of Hopenhayn and Nicolini (1997) by introducing a definitive exit from the labor market, i.e. retirement. Unemployed workers face a given probability of retiring, which is interpreted as a measure of their distance to retirement. Those with a higher probability of retiring correspond to older workers, while workers with a lower retirement probability are younger. We thus identify the optimal unemployment insurance for workers of different ages by looking at their different proba- bilities of retirement. It should be emphasized that agents do not age in our model, since the probability of exiting the labor market is independent of the time spent there. This allows us to compute easily the optimal contracts for any value of this probability. Taking into account agents’ aging in addition to unemployment duration would add unnecessary complexity. Our simple theoretical framework captures, we believe, the essence of the retirement horizon effect on optimal unemployment benefits.
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Life Insurance

Life Insurance

With similar assumptions on the functioning of markets, Abel (1986) ex- plored the effect of Social security on capital accumulation in an overlapping generations model. Consumers save by purchasing life annuities in a private market: differing by their survival probabilities, they differ by their insur- ance demands. Given that private markets are subject to adverse selection, whereas the public sector can propose a uniform level of pensions (i.e. com- pulsory annuities), the issue is to find the effect of increasing pensions on total wealth. Ambiguity comes from the fact that mandatory pensions force saving on high mortality people (a positive effect on total saving), while it aggravates the adverse selection problem by raising the equilibrium price in the private market (a negative effect on total saving). Overall, the effect of public pensions remains ambiguous, except when they pass from zero to a small positive level (saving decreases). Abel supposed for simplicity that all individuals participated in the annuity markets, and accordingly, he did not model life insurance. Villeneuve (1996) developed Abel’s model in view of ex- amining systematically the effect of public pensions on the functioning of life insurance and life annuity markets at the same time. It is proved that typ- ically, if public pensions were to decrease, one should observe an alleviation of adverse selection in annuity market as well as an increased participation. However, the social welfare generated by the reform would be generically negative. Factors not modelled in the paper (incentives to work, endogenous growth, etc.) could attenuate this strong conclusion.
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Sons as Widowhood Insurance: Evidence from Senegal

Sons as Widowhood Insurance: Evidence from Senegal

more the hazard rate and decrease more the expected birth interval when there are rivals. β 3 can be interpreted as the effect of an insurance strategy through sons as long as both groups of women have the same intrinsic son preference, as spelled out in the model. Of course, as described in Section 2.2, wives with and without rivals are different ; even after controlling for observable differences, some unobservable characteristics may drive both fertility choices and the decision to marry into a union with rivals. 30 However, as clarified in the model, what matters for our interpretation to hold, is that in the absence of rivals, both groups would have reacted similarly to an exogenous shock : having one son vs. one daughter. Under this assumption, if wives with rivals eventually display a stronger son preference than wives without rivals, the difference would be caused by the presence of rivals. In the results presented below, we control for all observational differences between these two groups of women, so that the necessary assumption is that of common son preference conditional on the whole set of observables. In Section 5, we run some placebo tests to ensure that (i) the common intrinsic son preference is plausible, and that (ii) an insurance-based interpretation explains the results better than potential alternative mechanisms. Other differences between
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Optimal Extortion and Political Risk Insurance

Optimal Extortion and Political Risk Insurance

of extortion. The issue of expropriation has been addressed by Thomas and Worrall (1994). They consider a bilateral relationship between a MNC and a host country. The host country can expropriate the MNC by force of its sovereignty. They study, in a multiple periods setting, the properties of a self-enforceable agreement where the firm gives transfer in exchange for being left to operate. A main result is under-investment and delayed payment in an initial period. This pattern obtains because of the MNC’s concern to increase the cost of expropriation to the host country, i.e., the loss of future income. Our approach is very different. We do not model investment decisions; instead we consider several firms that are privately informed about the (exogenous) value of their investments in the host country, and we characterize the extortion power of the bureaucrat when he can expropriate and harass them. Our focus is on the quality of governance in the host country and on the impact of political risk insurance. The bureaucrat’s power is limited by his imperfect of information about firms’ profits in the host country. He may also have a political constraint, meaning that he may be able to expropriate only a limited number of firms. The bureaucrat aims at exploiting his power to extort maximal value. Our approach relies on Myerson (1981) to characterize the optimal extortion mechanism. The idea is that the situation shows strong similarities with an auction. The bureaucrat sells promises to “leave the firm alone” in exchange for a bribe. At first sight, the setting differs from Myerson (1981) in several respects. First, the bureaucrat can sell as many promises as he wants. Second, he may be forced to sell some of them by force of a political constraint (he may not expropriate as many firms as he wants). Third, the bureaucrat’s valuation of the promises depends on the types of the firms that do not receive it, i.e., that are expropriated. Last, the firm’s outside option may be type dependent. Nevertheless, we show that Myerson’s technic is applicable. Our model covers very general situations, in which the value of expropriation and the cost of harassment for the bureaucrat could vary across firms, and firms may be heterogeneous with respect to their profit prospects and insurance coverages.
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Optimal unemployment insurance for older workers

Optimal unemployment insurance for older workers

For a calibration based on workers aged over 50 in the French labor market, we propose a quantitative evaluation of the pension tax contract, especially relative to the wage tax contract. We show that the former allows unemployed workers to attain a smoother con- sumption profile, but also to search for a new job, whereas the proximity to retirement renders the other policies inefficient. This policy yields savings of about 40% of the exist- ing unemployment insurance cost for unemployed workers 5 years prior to retirement. A tax on re-employment wages reduces the total cost of unemployed older workers by 34%. This contrasts sharply with a decreasing unemployment insurance (UI) policy, which only lowers this cost by 3%. Introducing a tax on pensions is then particularly useful in reconciling incentives and insurance for older workers near retirement when search is dra- matically reduced by the short horizon on the labor market. This considerable reduction in total costs works mainly via search incentives rather than consumption smoothing. In this sense, our proposal is more along the lines of Hopenhayn and Nicolini (1997) than Stiglitz and Yun (2005).
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Do insurance defrauders want to be punished ?

Do insurance defrauders want to be punished ?

We …nd that e¢cient contracts have the same coverage properties than the Stiglitz’s equilibrium. A high risk agent receives a full insurance contract whereas a low risk policyholder is partially insured. Although under the Stiglitz’s framework a separating equilibrium always exists, low risk types can be excluded from the market if their proportion is relatively low. This is not the case in our model. As the insurer has the possibility to audit and punish a defrauder, he is always able to cover both types of agents. Following the well-known Becker’s (1968) argument, the insurer will penalize a defrauder at the maximum legal level. Concerning his audit strategy, our result goes in the same direction than the intuitions that appear in Border and Sobel and in Mookherjee and Png, although their setting is di¤erent to ours. As only the high risk agent has incentives to mimic the low risk policyholder, only a low risk report will be audited. Finally, we show that di¤erent cases of e¢cient contracts arise. They depend crucially on the legal limit to punishments.
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Social insurance competition between Bismarck and Beveridge

Social insurance competition between Bismarck and Beveridge

Besides the benefit rule, another feature of a social protection system is its size and particularly its relative size, compared to GDP. Table 1 shows how a number of EU countries can be characterized along theses two dimensions. Roughly speaking the Anglo- Saxon countries are located in the North-West part of Table 1. Social spending is not very high (26% of GDP for the UK in 1998) and benefits are either uniform or means- tested. At the other extreme in terms of redistribution, one finds continental Europe dominated by the Bismarckian social insurance approach. There is little redistribution: contributory programs provide benefits with constant replacement ratios along the income scale. The overall size of schemes is rather generous. France and Germany are typical of this approach with social spending amounting to about 29% of GDP. Finally, there are the
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Essays on the insurance of aging-related risks

Essays on the insurance of aging-related risks

Ainsi, les chap itres deux et trois démontrent deux circonstances pour qu'il y ait équili- bre séparateur avec un co ntrat non exclusif : sa combinaison dans un contrat multirisqu[r]

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A Lévy insurance risk process with tax

A Lévy insurance risk process with tax

Using u tuation theory, we identify the ruin probability of a general spe trally negative Lévy risk pro ess with tax payments of loss arry forward type.. We study arbitrary moments of [r]

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(DI-02) Agricultural Insurance and Guarantee Funds

(DI-02) Agricultural Insurance and Guarantee Funds

3 $JULFXOWXUDOLQVXUDQFHDQGJXDUDQWHHIXQGV At its Thirteenth Regular Meeting, the Inter-American Board of Agriculture adopted Resolution 411, “Horizontal Cooperation in the Area of Agricultural Insurance and Guarantee Funds,” in which it asked the Director General of IICA “to promote and facilitate horizontal cooperation among the Member States, and the systematization and dissemination of successful experiences in the area of agricultural insurance and guarantee funds.” It also urged the Member States “to contribute to the exchange of information and experts” and instructed the Director General to establish partnerships with financial institutions, with a view to developing and strengthening the agricultural insurance market.
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