nep-ias New Economics Papers
on Insurance Economics
Issue of 2010‒10‒30
seven papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Theoretical and Microeconometric Perspectives on Insurance and International Economics By Kesternich, Iris
  2. Using Gambling to Teach Insurance Principles By Mark Pingle
  3. Modelling dependence in a ratemaking procedure with multivariate Poisson regression models By Lluís Bermúdez; Dimitris Karlis
  4. Impact of Insurance for Operational Risk: Is it worthwhile to insure or be insured for severe losses? By Gareth W. Peters; Aaron D. Byrnes; Pavel V. Shevchenko
  5. The Private Credit Insurance Effect on Trade By Koen van der Veer
  6. An introduction to parametric and non-parametric models for bivariate positive insurance claim severity distributions By David Pitt; Montserrat Guillén
  7. The challenges of bankruptcy reform By Cirmizi, Elena; Klapper, Leora; Uttamchandani, Mahesh

  1. By: Kesternich, Iris
    Date: 2010–05–03
  2. By: Mark Pingle (Department of Economics, University of Nevada, Reno)
    Abstract: A basic understanding of insurance principles is useful for making personal finance decisions and for considering public policy issues. Yet, insurance concepts tend to be less intuitive, more difficult for students to grasp, than other concepts. This paper shows how fundamental insurance principles can be taught by relating them to the principles underlying gambling, the game of roulette in particular. This approach has been used successfully with college freshmen taking macroeconomics at the University of Nevada, Reno. After hearing a lecture given using this approach, students tend to come alive with questions, can understand why they might not want to buy an extended warrantee the next time it is offered, can understand why investing in the stock market is usually different than gambling, and can even start to see the subtleties in public policy issues involving insurance.
    Keywords: Agnosticism; Gambling; Insurance; Teaching; Expected value; Risk averse; Risk seeking; Moral hazard; Adverse selection; Extended warrantee
    JEL: C44 D81
    Date: 2010–10
  3. By: Lluís Bermúdez (Departament de Matemµatica Econµomica, Financera i Actuarial, Universitat de Barcelona); Dimitris Karlis (Athens University of Economics and Business)
    Abstract: When actuaries face with the problem of pricing an insurance contract that contains different types of coverage, such as a motor insurance or homeowner's insurance policy, they usually assume that types of claim are independent. However, this assumption may not be realistic: several studies have shown that there is a positive correlation between types of claim. Here we introduce di®erent multivariate Poisson regression models in order to relax the independence assumption, including zero-in°ated models to account for excess of zeros and overdispersion. These models have been largely ignored to date, mainly because of their computational di±culties. Bayesian inference based on MCMC helps to solve this problem (and also lets us derive, for several quantities of interest, posterior summaries to account for uncertainty). Finally, these models are applied to an automobile insurance claims database with three different types of claims. We analyse the consequences for pure and loaded premiums when the independence assumption is relaxed by using different multivariate Poisson regression models and their zero-inflated versions.
    Keywords: Multivariate Poisson regression models, Zero-inflated models, Automobile insurance, MCMC inference, Gibbs sampling
    JEL: C51
    Date: 2010–04
  4. By: Gareth W. Peters; Aaron D. Byrnes; Pavel V. Shevchenko
    Abstract: Under the Basel II standards, the Operational Risk (OpRisk) advanced measurement approach allows a provision for reduction of capital as a result of insurance mitigation of up to 20%. This paper studies the behaviour of different insurance policies in the context of capital reduction for a range of possible extreme loss models and insurance policy scenarios in a multi-period, multiple risk settings. A Loss Distributional Approach (LDA) for modelling of the annual loss process, involving homogeneous compound Poisson processes for the annual losses, with heavy tailed severity models comprised of alpha-stable severities is considered. There has been little analysis of such models to date and it is believed, insurance models will play more of a role in OpRisk mitigation and capital reduction in future. The first question of interest is when would it be equitable for a bank or financial institution to purchase insurance for heavy tailed OpRisk losses under different insurance policy scenarios? The second question then pertains to Solvency II and addresses what the insurers capital would be for such operational risk scenarios under different policy offerings. In addition we consider the insurers perspective with respect to fair premium as a percentage above the expected annual claim for each insurance policy. The intention being to address questions related to VaR reduction under Basel II, SCR under Solvency II and fair insurance premiums in OpRisk for different extreme loss scenarios. In the process we provide closed form solutions for the distribution of loss process and claims process in an LDA structure as well as closed form analytic solutions for the Expected Shortfall, SCR and MCR under Basel II and Solvency II. We also provide closed form analytic solutions for the annual loss distribution of multiple risks including insurance mitigation.
    Date: 2010–10
  5. By: Koen van der Veer
    Abstract: International trade relies on trade finance (credit or insurance) by financial institutions. Data limitations, however, have made it difficult to quantify the impact of changes in the supply of trade finance on trade. This paper is the first to establish a causal link between the supply of private credit insurance and exports. I overcome endogeneity issues by using a unique bilateral data set which covers the activities from 1992 to 2006 of one of the world’s leading private credit insurers. This database enables me to use the insurer’s claim ratio - a primary determinant of the supply of credit insurance - as an instrument for insured exports. Subsequently, applying the method of instrumental variables and a variety of trade models, I consistently find a positive and statistically significant effect of private credit insurance on exports. The estimates are economically relevant and suggest that, depending on the decline in the supply of private credit insurance during the 2008-09 international trade collapse, the reduction in private insurance exposure explains about 5 to 9 percent of the drop in world exports and 10 to 20 percent of the drop in European exports.
    Keywords: trade finance; private credit insurance; international trade; trade credit
    JEL: F10 F14 G20 G22
    Date: 2010–10
  6. By: David Pitt (Dept. Economics, University of Melbourne); Montserrat Guillén (Dept. Econometrics, University of Barcelona)
    Abstract: We present a real data set of claims amounts where costs related to damage are recorded separately from those related to medical expenses. Only claims with positive costs are considered here. Two approaches to density estimation are presented: a classical parametric and a semi-parametric method, based on transformation kernel density estimation. We explore the data set with standard univariate methods. We also propose ways to select the bandwidth and transformation parameters in the univariate case based on Bayesian methods. We indicate how to compare the results of alternative methods both looking at the shape of the overall density domain and exploring the density estimates in the right tail.
    Date: 2010–03
  7. By: Cirmizi, Elena; Klapper, Leora; Uttamchandani, Mahesh
    Abstract: The 2008 financial crisis was followed by a global economic downturn, credit crunch, and reduction in cross-border lending, trade finance, remittances, and foreign direct investment, which adversely affected businesses around the world. The consequent increase in the number of firm insolvencies in the financial and corporate sectors highlights the importance of efficient bankruptcy laws. This paper summarizes the theoretical and empirical literature on bankruptcy design, discusses the challenges of introducing and implementing bankruptcy reforms, and presents examples of how policymakers are trying to use the current economic downturn as an opportunity to engage in meaningful reform of the bankruptcy process.
    Keywords: Bankruptcy and Resolution of Financial Distress,Debt Markets,Access to Finance,Deposit Insurance,Banks&Banking Reform
    Date: 2010–10–01

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