Nanyang Business School Forum on Risk Management and Insurance
Insuring Longevity Risk and Long-Term Care: Bequest, Housing and Liquidity
Tags: Longevity, Long-Term Care, Liquidity, Housing, IRFRC
More from: Mengyi Xu, Michael Sherris , Jennifer Alonso-Garcia , Adam Shao
Demographic changes have exposed individuals to greater challenges in financing their retirement. Longer life expectancy at 60s means retirees face a harder time allocating their financial resources across time to avoid outliving their wealth. As life expectancy at older ages increases, individuals are also likely to spend more time in disability that requires expensive healthcare costs. Given the challenges in financing retirement, there has been growing interest in retirement products such as annuities, long-term care insurance (LTCI) to address those challenges. Life annuities are an effective instrument to hedge against the risk of outliving one’s financial resources, and LTCI can alleviate the burden of healthcare costs.
Adverse Selection: Evidence form Commercial Surgery and Hospitalization Health Insurance
Tags: Asymmetric Information, Adverse Selection, Health Insurance, Physical Examination, IRFRC
More from: Chia-Ling Ho, Gene Lai
Asymmetric information has been a very crucial issue in the insurance literature in the last two decades. Many studies examine the problem of asymmetric information in various insurance markets such as automobile insurance (e.g., Puelz and Snow, 1994; Richaudeau, 1999; Chiappori and Salanie, 2000; Dionne et al., 2001; Cohen, 2005; Saito, 2006; Cohen and Einav, 2007; Kim et al., 2009; Gao and Wang, 2011; Zavadil, 2015 and Gao et al., 2016), medigap insurance (Fang and Keane, 2008), annuities insurance (Fong, 2002; Finkelstein and Poterba, 2004), life insurance (Cawley and Philipson, 1999; He, 2009; McCarthy and Mitchell 2010), long-term care insurance (Finkelstein and McGarry, 2006), and cancer insurance (Wang et al., 2011).
This paper examines adverse selection using a sample of commercial surgery and hospitalization health insurance policies from a Taiwan insurance company. Hofmann and Browne (2013) suggest that the topic of health insurance is more important than life insurance to examine asymmetric information because insureds accumulate funding capital to compensate for higher expected health expenditures to purchase health insurance rather than life insurance. Whether adverse selection exists has been a major research question for decades and there are no conclusive answers yet.
Marginal Cost of Risk-Based Capital and Risk Taking
Tags: Risk-Based Capital, Regulation, Risk Taking, Insurance, IRFRC
More from: Tao Chen, Jing Rong Goh, Shinichi Kamiya, Pingyi Lou
Capital regulations serve to discourage financial institutions from excessive risk-taking and to prevent their insolvency by ensuring that these institutions hold adequate capital. However, their effectiveness in discouraging risk-taking behavior is debatable.
In this study, we show that particular interactions between the risk categories assumed in required capital calculations may encourage risk taking by lowering the marginal cost of undertaking additional risks. To illustrate this relationship analytically, we utilize the structure of the risk-based capital (RBC) calculation for U.S. insurance companies and show that the predetermined interactions underlying the square root rule of the RBC formula (i.e., the square root of the sum of the squared risk charges) explicitly assigns the marginal cost of each risk category.
Regularized Regression for Reserving and Mortality Models
Tags: Regularized Regression, Mortality
More from: Gary Venter
Maximum likelihood estimation (MLE), once the prime method of statistical estimation, was shown in Stein’s 1956 paper to produce higher error variances than does shrinking fitted values towards the overall mean. His method is very similar to actuarial credibility theory. In 1970, Hoerl and Kennard proved that for models with explanatory variables, like regression models, shrinking the coefficients towards zero will similarly reduce the error variance. This was developed from a mathematical approach to difficult models called regularization.
The problem was that how much to shrink is complicated, with no applicable goodness-of-fit measure to adjust the negative log likelihood (NLL) for shrunk parameters. This has now been solved, using Bayesian shrinkage. The paper lays out the methodology for frequentist and Bayesian shrinkage, and shows how to apply them to the loss reserving and mortality models that fit row and column factors to data in rectangular arrays, including triangles.
Risk aggregation in non-life insurance: Standard models vs. internal models
Tags: Regulation, Risk-based Capital, Standard Model, Internal Model
More from: Martin Eling, Kwangmin Jung
The regulatory standard models require aggregating all possible risks from the assets and liabilities to protect the insurer against simultaneous losses in a stressed situation. The distributions of such possible risks vary, especially between different risk factors in the underwriting portfolio as well as the asset portfolio, including significant tail risks. However, the regulatory standard models (e.g. SII and the Korean Risk-based Capital) require insurers to aggregate them under the linear dependence assumption with predefined correlation parameters and do not allow undertakings to replace the correlation parameters by undertaking-specific parameters. In addition, the standard models either calibrate the parameters from different undertakings (SII and the K-RBC) or require a certain distributional assumption on asset and underwriting risks (Swiss Solvency Test). However, the parameters predefined by the regulations do not fully reflect the empirical data for an individual undertaking and distributional properties vary between different assets and underwriting risks in different datasets. It might be inappropriate to apply homogeneous parameters into datasets with heterogeneous properties and to aggregate different risks with the same statistical tools. All these limitations motivate us to study alternatives to the regulatory standard models.
Saving Face: A Solution to the Hidden Crisis for Life Insurance Policyholders
Tags: Life Insurance, Pricing
More from: Alexander Braun, Lauren H. Cohen, Christopher J. Malloy, Jiahua Xu
Life insurance serves one fundamental end: to provide financial support at insureds’ death to their loved ones. Yet the industry is currently not living up to its full potential. A total face amount of $2 trillion in life insurance policies is terminated each year in the U.S. Ultimately, less than 20% of life insurance ever results in a death claim (Gottlieb and Smetters, 2016), leaving a significant portion of overall life insurance utility unrealized.
Investigating the mechanics of the current U.S. life insurance market reveals an “unhealthy” pricing dynamic. The current market equilibrium, predicated on “lapse-supported pricing”, is delicate, and carriers employing excessive lapse-supported assumptions at pricing are vulnerable to profit decline caused by unanticipated policy persistency.
Peer-subsidizing is a fundamental concept in insurance, which through pooling enables the unfortunate to be subsidized by the fortunate. However, in a lapse-based insurance context, insureds with a short life expectancy, who for whatever reason waive the death benefit through policy termination, become the subsidizer of other insureds. Termination by these insureds is essentially utilized by carriers to (i) set competitively low premiums to gain market share; and (ii) counterbalance the loss of good risks from their books, due to early termination on the part of healthy insureds.