Insurance Economics

Foreword
Preface to the Second Edition
Preface to the First Edition
Contents
1 Introduction: Insurance and Its Economic Role
	1.1 Basics and Definitions
	1.2 Risks and Their Development Over Time
	1.3 Macroeconomic Importance of Insurance
	1.4 Functions of Insurance
	1.5 Major Determinants of the Demand for Insurance
		1.5.1 The Effects of Wealth and Income
		1.5.2 The Effect of Price
	1.6 System Analysis and Organization of the Book
2 Risk: Measurement, Perception, and Management
	2.1 Definition and Measurement of Risk
		2.1.1 Definition of Risk
		2.1.2 Measurement of Risk
	2.2 Subjective Perception of Risk, Risk Aversion, and the Risk Utility Function
		2.2.1 Risk Perception as a Subjective and Cultural Phenomenon
		2.2.2 Risk Aversion and the Risk Utility Function
	2.3 Willingness to Pay for Certainty, Risk Aversion, and Prudence
		2.3.1 Willingness to Pay for Certainty, Certainty Equivalent, and Risk Premium
		2.3.2 Risk Premium and Coefficients of Risk Aversion
		2.3.3 Prudence and Higher Order Derivatives of the Risk Utility Function
	2.4 Estimates of Risk Aversion
		2.4.1 Microeconomic Evidence
		2.4.2 Macroeconomic Evidence
	2.5 Instruments of Risk Management
	2.6 Effectiveness of Risk Management and Risk Policy Measures
	2.A Appendix: Stochastic Dominance
		2.A.1 First-Degree Stochastic Dominance
		2.A.2 Second-Degree Stochastic Dominance
3 Insurance Demand I: Decisions Under Risk Without Diversification Possibilities
	3.1 The Expected Utility Maximization Hypothesis
	3.2 Theory of Insurance Demand
		3.2.1 The Basic Model
		3.2.2 Insurance Demand in the Presence of Irreplaceable Assets
	3.3 Demand for Insurance Without Fair Premiums
		3.3.1 Optimal Degree of Coverage Without Fair Premiums
		3.3.2 Risk Aversion as a Determinant of Insurance Demand
		3.3.3 Premium Rate and Wealth as Determinants of Insurance Demand
		3.3.4 Pareto-Optimal Insurance Contracts
	3.4 Demand for Insurance with Multiple Risks
	3.5 Relation Between Insurance Demand and Prevention
4 Insurance Demand II: Nontraditional Approaches to Decisions Under Risk
	4.1 Expected Utility Theory Revisited
		4.1.1 The Axiomatic Basis of Expected Utility Theory
		4.1.2 Other Weaknesses of Expected Utility Theory
	4.2 Prospect Theory
		4.2.1 The Editing Phase
		4.2.2 The Evaluation Phase
	4.3 Other Non-Traditional Approaches
		4.3.1 Rank Dependent Expected Utility
		4.3.2 Ambiguity Aversion
		4.3.3 Linear Partial Information
		4.3.4 Regret Theory
		4.3.5 Representative and Availability Heuristics
		4.3.6 Other Biases
	4.4 Empirical Evidence
		4.4.1 Prospect Theory and Rank Dependent Expected Utility
		4.4.2 Ambiguity Aversion and Regret
		4.4.3 Representative Heuristic
5 Insurance Demand III: Decisions Under Risk with Diversification Possibilities
	5.1 Risk Management and Diversification
		5.1.1 Risk Management and Internal Diversification
		5.1.2 Risk Diversification Through the Capital Market
		5.1.3 The Capital Asset Pricing Model (CAPM)
		5.1.4 Empirical Asset Pricing Model (EAPM) and Arbitrage Pricing Theory (APT)
	5.2 Risk Management, Forward Contracts, Futures, and Options
		5.2.1 Hedging Through Forward Contracts and Options
		5.2.2 Hedging Through Stock Options
	5.3 Corporate Demand for Insurance
		5.3.1 Demand for Insurance in the Light of Capital Market Theory
		5.3.2 Reasons for Corporate Demand for Insurance Not Related to the Capital Market
		5.3.3 Empirical Studies of Corporate Demand for Insurance
6 The Insurance Company and Its Insurance Technology
	6.1 Financial Statements of an Insurance Company
		6.1.1 The Balance Sheet
		6.1.2 The Income Statement
	6.2 Objectives of the IC
		6.2.1 Theoretical Considerations
		6.2.2 A Descriptive Study Concerning the Importance of IC Objectives
	6.3 Survey of Insurance Technology of an IC
		6.3.1 What Is the Output of an IC?
		6.3.2 Instruments of Insurance Technology
	6.4 Choice of Distribution Channel
		6.4.1 Main Distribution Channels for Insurance Products
		6.4.2 The Principal-Agent Relationship as the Underlying Problem
		6.4.3 A Comparison of the Cost of Distribution Channels Using U.S. Data
		6.4.4 A Study Relating Performance to Incentives
	6.5 Underwriting Policy
		6.5.1 Instruments of Underwriting Policy
		6.5.2 A Simple Model of Risk Selection
	6.6 Controlling Moral Hazard Effects
	6.7 Reinsurance
		6.7.1 Functions of Reinsurance
		6.7.2 Types of Reinsurance
		6.7.3 A Model of Demand for Reinsurance Based on Option Pricing Theory
		6.7.4 Empirical Testing of the Model
	6.8 Capital Investment Policy
	6.9 New Elements of Insurance Technology
		6.9.1 The Value at Risk Concept
		6.9.2 Copulas for Dealing with Tail Dependence
		6.9.3 Alternative Risk Transfer (ART) Through Capital Markets
7 The Supply of Insurance
	7.1 Traditional Premium Calculation
		7.1.1 Claims Process and Loss Distribution
		7.1.2 Basics of Probability Theory and Insurer's Risk
		7.1.3 Premium Principles
	7.2 Financial Models of Insurance Pricing
		7.2.1 Portfolio Optimization by the IC
		7.2.2 Pricing According to the Insurance CAPM
		7.2.3 Pricing According to Option Pricing Theory
		7.2.4 Evidence on the Actual Behavior of the IC
	7.3 Economies of Scope
		7.3.1 Economies of Scope and Properties of the Cost Function
		7.3.2 Empirical Relevance of Economies of Scope
		7.3.3 Stochastic Economies of Scope
	7.4 Economies of Scale
		7.4.1 Definitional Issues
		7.4.2 Empirical Relevance of Economies of Scale in Life Insurance
		7.4.3 Empirical Relevance of Economies of Scale in Non-life Insurance
		7.4.4 Alternatives and Extensions
		7.4.5 Scale Economies and Size of Market
8 Insurance Markets and Asymmetric Information
	8.1 Asymmetric Information and Its Consequences
	8.2 Moral Hazard
		8.2.1 Definition and Importance of Moral Hazard
		8.2.2 Ex-Ante Moral Hazard
		8.2.3 Market Equilibrium with Ex-Ante Moral Hazard
		8.2.4 Empirical Evidence on Ex-Ante Moral Hazard
		8.2.5 Ex-Post Moral Hazard in Short-Term Disability Insurance
		8.2.6 Relational Moral Hazard in Long-Term Care Insurance
	8.3 Adverse Selection
		8.3.1 Adverse Selection in a Single-Period Framework
		8.3.2 Empirical Relevance of Adverse Selection
		8.3.3 Adverse Selection in a Multi-period Context
		8.3.4 Empirical Evidence Regarding the Experience-Rating Model
	8.4 Adverse Selection and Moral Hazard in Combination
9 Regulation of Insurance
	9.1 Objectives and Types of Insurance Regulation
		9.1.1 Objectives of Insurance Regulation
		9.1.2 Avoidance of Negative Externalities
		9.1.3 Material Regulation
		9.1.4 Regulation Limited to Formal Requirements
		9.1.5 Historical Differences in Insurance Regulation Between Countries
	9.2 Three Competing Theories of Regulation
		9.2.1 Public Interest Theory
		9.2.2 Capture Theory
		9.2.3 Market for Regulation Theory
		9.2.4 Empirically Testable Implications for Insurance
	9.3 Effects of Insurance Regulation
		9.3.1 Evidence from the United States
		9.3.2 Risk-Based Capital as the U.S. Regulatory Response
		9.3.3 Evidence from Europe
	9.4 Recent Trends in Insurance Regulation
		9.4.1 The Financial Crisis of 2007–2009
		9.4.2 The Convergence of Banking and Insurance and Their Regulation
		9.4.3 Is there Systemic Risk in Insurance Markets?
		9.4.4 Characterization of Recent Regulatory Initiatives
10 Social Insurance
	10.1 Importance of Social Insurance
	10.2 Why Social Insurance?
		10.2.1 Social Insurance as an Efficiency-Enhancing Institution
		10.2.2 Social Insurance as an Instrument Wielded by Political Decision-Makers
	10.3 Overview of the Branches of Social Insurance
	10.4 Requirements for Efficient Social Insurance
		10.4.1 Comparing the Efficiency of Provision for Old Age
		10.4.2 Efficiency Assessment from a Portfolio Theory Perspective
	10.5 Impacts of Social Insurance Beyond Insurance Markets
		10.5.1 Impacts of Provision for Old Age
		10.5.2 Impacts of Social Health Insurance
		10.5.3 Impacts of Unemployment Insurance
		10.5.4 Optimal Amount of Social Insurance
11 Challenges Confronting Insurance
	11.1 Globalization of International Economic Relations
		11.1.1 Globalization and Corporate Insurance
		11.1.2 Globalization and Individual Insurance
	11.2 Changes in Science and Technology
		11.2.1 Genetic Information
		11.2.2 Advances in Information Technology
	11.3 Changes in Legal Norms
		11.3.1 Principal Elements of Insurance Contract Law
		11.3.2 Consequences of Deregulation
	11.4 Demographic Change
		11.4.1 Aging of Population
		11.4.2 Increasing Share of One-Person Households
	11.5 Final Remarks
References
Author Index
Author Index
Subject Index
Index