Nanyang Business School Forum on Risk Management and Insurance

Ordinary and Markov-Switching Autoregressive Models for Firm-Level Underwriting Data

Tags: Underwriting-profitability, Regimes, Cycles, Autoregressive Process, Markov-Switching
More from: Frank Y. Feng, Michael R. Powers

Editor’s Note: Posted by Michael R. Powers, Zurich Group Chair Professor of Risk Mathematics, SEM Professor of Economics and Business, Schwarzman College, Tsinghua University; Frank Y. Feng, School of Finance and Shanghai Institute of International Finance Center, Shanghai University of Finance and Economics. This paper received the 2018 APRIA Harold D. Skipper Best Paper Award.

The analysis of underwriting-profitability regimes has formed an important topic in property-liability (P-L) insurance research since the mid-1980s (see Stewart, 1984; and Venezian, 1985). The conventional wisdom among both practitioners and researchers is that P-L markets are characterized by patterns of alternation between two distinct regimes: “hard” markets, in which insurance prices rise and coverage becomes more restricted; and “soft” markets, in which prices decrease and capacity increases. Most of the scholarly literature infers, either explicitly or implicitly, that these alternating regimes follow a regular, sinusoidal pattern that can be described as an “underwriting cycle” (see Weiss, 2007, for a survey of relevant articles).

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Index Insurance Design

Tags: index insurance, agricultural insurance, mortality securities, catastrophe insurance
More from: Jinggong Zhang, Ken Seng Tan, Chengguo Weng

Editor’s Note: Posted by Jinggong Zhang, Assistant Professor, Nanyang Business School, Nanyang Technological University; Professor, Department of Statistics and Actuarial Science, University of Waterloo; Chengguo Weng, Associate Professor, Department of Statistics and Actuarial Science, University of Waterloo

The purpose of this paper is to provide an in-depth analysis on a class of insurance known as the index-indemnifying insurance, or simply the index insurance. As opposed to the traditional -indemnifying insurance for which its payout (indemnity) is a function of the actual incurred by the policyholder, the payout of an index insurance depends exclusively on a pre-determined index or some appropriately chosen indicators. Prominent applications of index insurance can be found in insurance coverage provided to agricultural producers.

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Agricultural Insurance Ratemaking: Development of a New Premium Principle

Tags: premium principles, agricultural insurance ratemaking, systemic risk, reweighting, weighted distribution
More from: Wenjun Zhu, Ken Seng Tan, Lysa Porth

Editor’s Note: Posted by Wenjun Zhu, Assistant Professor, Nanyang Business School, Nanyang Technological University; Ken Seng Tan, University Research Chair Professor, Department of Statistics and Actuarial Science, University of Waterloo; Lysa Porth, Associate Dean Strategic Partnerships and Administration, Associate Professor and Guy Carpenter Research Chair in Agricultural Risk Management and Insurance, Warren Centre for Actuarial Studies and Research, University of Manitoba

Agricultural insurance is recognized as one of the most rapidly growing insurance markets (Swiss Re, 2013a). Over the past several decades, it has played an increasingly important role in helping to improve food productivity, achieve food security and protect economic growth (Porth and Tan, 2015; Swiss Re, 2013b). For example, the exposure of the U.S. crop insurance program was approximately USD 117 billion in 2012, with program of USD 14.1 billion (Shields, 2013). The respective figures for Canada are CAD 17.3 billion and CAD 1 billion (Agriculture and Agri-Food Canada (AAFC), 2012). The crop insurance sector has experienced rapid growth since 2005, largely due to emerging markets driven by major growth in Brazil, China and India (Swiss Re, 2013a). As agricultural insurance programs continue to grow in terms of scale and scope, actuarial foundations have become more important in order to ensure that programs are efficient and actuarially sound. Therefore, central to crop insurance programs worldwide is the ability to determine actuarially fair and sustainable premium rates (Babcock et al., 2004; Woodard, 2014).

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Risk Transfer and Moral Hazard: An Examination on the Market for Insurance-Linked Securities

Tags: CAT Bonds, indemnity trigger, insurance-linked securities, moral hazard, EGRIE
More from: Tobias Götze, Marc Gürtler

Editor’s Note: Posted by Tobias Götze from Technische Universität Braunschweig – Institute of Finance; Marc Gürtler, Professor, University of Braunschweig – Institute of Technology, Department of Finance. This paper was presented at the 45th Annual Seminar of EGRIE, Nuremberg, Germany on September 17-19, 2018.

Moral hazard is one of the biggest challenges faced by insurance market participants, and therefore also receives a lot of attention in academic literature. Typically, two types of moral hazard are distinguished from each other: ex ante moral hazard, which occurs when an insured has incentives to conduct activities that affect the probability of loss before an insurance event and ex post moral hazard, which occurs when an insured has incentives to conduct activities that affect the magnitude of losses after an insurance event. In the present article, we provide a direct test on the presence of ex ante and ex post moral hazard on the market for insurance-linked securities (ILS).

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Higher-order Omega: A Performance Index with a Decision-Theoretic Foundation

Tags: almost stochastic dominance, acceptance dominance, performance index, optimal hedge ratio, EGRIE
More from: Hongwei Bi, Rachel J Huang, Larry Y Tzeng, Wei Zhu

Editor’s Note: Posted by Rachel J Huang, Professor at Department of Finance, National Central University, Taiwan; Hongwei Bi, Professor at School of Insurance and Economics, University of International Business and Economics, China; Larry Y Tzeng, Professor at Department of Finance, National Taiwan University, Taiwan; Wei Zhu, Professor at School of Insurance and Economics, University of International Business and Economics, China. This paper was presented at the 45th Annual Seminar of EGRIE, Nuremberg, Germany on September 17-19, 2018.

An important question in modern decision analysis is how to choose a good performance measure to properly evaluate decisions or risky prospects. One of the well-known performance indices is the Sharpe ratio proposed by Sharpe (1966). The ratio works well when the evaluated prospects follow normal distributions or the decision makers have mean-variance preferences. However, normality is difficult to observe in reality. Moreover, the literature indicates that decision makers do exhibit preferences on higher moments of their investments, such as skewness and kurtosis. Thus, to take higher moments of the distribution and decision makers’ preferences into consideration, the blossoming literature has adopted a utility-based approach to provide and support different performance measures.

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Strategic Momentum for Most Investors

Tags: almost stochastic dominance, momentum strategies, asset pricing, EGRIE
More from: Mi-Hsiu Chiang, Hsin-Yu Chiu, Rachel J Huang

Editor’s Note: Posted by Rachel J Huang, Professor at Department of Finance, National Central University, Taiwan; Mi-Hsiu Chiang, Professor at Department of Banking and Finance, National Chengchi University, Taiwan; Hsin-Yu Chiu, Professor at Department of Finance, National Pingtung University, Taiwan. This paper was presented at the 45th Annual Seminar of EGRIE, Nuremberg, Germany on September 17-19, 2018.

In this paper, momentum returns are strategically derived. Using utility-based Almost Stochastic Dominance (ASD) rules — capable of comprising full moment conditions of the cumulative returns, we derive winner-minus-loser return differences that are less volatile and less negatively skewed relative to those of Jegadeesh and Titman (1993). This is a benefit by design to capitalize on momentum, and not by coincidence. These abnormal returns are statistically and economically significant. Most importantly, we see to the strategy’s practical applicability by resolving the computational complexity often involved in the actual implementation of these selection rules in the stochastic dominance family. The computational are being effectively reduced.

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EGRIE 2018 Geneva Risk Economics Lecture “The Behavioral Welfare Economics of Insurance”

Tags: behavioral economics, welfare economics, insurance, expected consumer surplus, EGRIE
More from: Glenn Harrison

Editor’s Note: Professor Glenn Harrison, C.V. Starr Chair of Risk Management & Insurance and Director of Center for the Economic Analysis of Risk (CEAR) at J. Mack Robinson College of Business, Georgia State University

A short summary of the EGRIE 2018 Geneva Risk Economics Lecture “The Behavioral Welfare Economics of Insurance” by Professor Glenn Harrison, Georgia State University

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Willingness to pay for reductions in morbidity risks under anticipated regret

Tags: regret, willingness to , morbidity risk, health policy, EGRIE
More from: Jiakun Zheng

Editor’s Note: Posted by Jiakun Zheng, Toulouse School of Economics, France. This paper was presented at the 45th Annual Seminar of EGRIE, Nuremberg, Germany on September 17-19, 2018

Benefit and analyses of public programs with the objective of reducing morbidity risks require an estimate of the monetary value of health. Most of this literature has made a crucial assumption that people are standard expected utility maximizers. Empirical evidence abounds, however, that people violate standard expected utility in systematic ways. Assuming standard expected utility in the face of such violations may lead to biased risk valuations and, consequently, to biased policy recommendations. One important reason for why people deviate from expected utility is that they not only value the outcome obtained from their decisions, but are also sensitive to whether their decisions were correctly made ex-post. People experience regret when realizing or imagining that their current situation would have been better, if they had decided differently. In particular, when facing decisions about ones’ health or lives such as whether working in a dangerous sector or not, people tend to be more likely to anticipate regret and act upon it. This is because these decisions are important, difficult and generally not easy to undo.

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Insurance and Portfolio Decisions: A Wealth Effect Puzzle

Tags: insurance demand, portfolio decision, risk preference, wealth, EGRIE
More from: Olivier Armantier, Jérôme Foncel, Nicolas Treich

Editor’s Note: Posted by Nicolas Treich, Professor at Toulouse School of Economics (TSE), INRA, University Toulouse Capitole, France; Olivier Armantier, Federal Reserve Bank of New York, USA; Jérôme Foncel, University of Lille 3, France. This paper was presented at the 45th Annual Seminar of EGRIE, Nuremberg, Germany on September 17-19, 2018.

The decision to insure against the risk of monetary and the decision to invest in risky assets reflect the same, albeit opposite, risk retention tradeoff. Namely, an agent reduces his exposure to risk by purchasing insurance, while he increases his risk exposure by investing. Factors that promote risk taking should therefore lower the demand for insurance and increase the demand for risky assets. In particular, because the wealth elasticity of demand for risky assets has been shown to be positive, insurance coverage should decrease with wealth, making insurance an inferior good. The object of this paper is to explore the link between portfolio and insurance decisions, and in particular to test the hypothesis that wealth has an opposite effect on the two decisions.

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IFoA Roundtable on Employment Opportunities for Actuaries, Singapore (12 Sep 2018)

Tags: The Institute and Faculty of Actuaries, Singapore Actuarial Society, actuary, Life Insurance Association, Singapore, Nanyang Technological University

Editor’s Note: Posted by Marie Lee, Regional Coordinator, South-East Asia, IFoA

The Institute and Faculty of Actuaries (IFoA) and Singapore Actuarial Society (SAS) jointly organised a roundtable on employment opportunities with representatives from Nanyang Technological University, the Life Insurance Association and several employers of actuaries in Singapore.

The first session considered the future of insurance in light of these evolving risks:
• Societal
• Technological
• Economic
• Environmental
• Political

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