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Topics in Risk and Economics

Paper Session

Saturday, Jan. 7, 2017 7:30 PM – 9:30 PM

Hyatt Regency Chicago, Michigan 3
Hosted By: American Risk and Insurance Association & American Economic Association
  • Chair: J. David Cummins, Temple University

Adverse Selection in the Irish Tontines of 1773, 1775, and 1777

Yikang Li
,
Brattle Group
Casey Rothschild
,
Wellesley College

Abstract

We construct and analyze a new data set on the mortality experience of the nominees
of the 1773, 1775, and 1777 Irish Tontines. The active participation of Genevan
speculators in these Irish Tontines has been well documented. We use our new data
to ascertain both the extent of their presence and the fact that the Genevan nominees
were indeed significantly longer-lived than non-Genevan nominees—particularly so
for the 50 nominees selected by a Genevan investment syndicate. We show that this
enhanced longevity had only trivial consequences for the Irish government issuer
but led to a investment return gap of approximately 7% between Genevan and non-
Genevan nominees in tontine issue which had the largest Genevan presence. These
findings have implications for recent proposals to introduce tontine-like features into
contemporary retirement plans.

CEO Overconfidence or Private Information? Evidence From United States Property-Liability Insurance Companies

Sangyong Han
,
Washington State University
Gene C. Lai
,
Washington State University
Chia-Ling Ho
,
Tamkang University

Abstract

This study uses conventional measures of CEO overconfidence, such as option holdings based and net stock purchase-based measures to investigate the impact of CEOs who maintain high personal exposure to firm-specific risk on insurer’s risk-taking behavior and firm performance in U.S. publicly traded property-liability insurance companies. We focus on observable risk-taking behavior by using the insurer’s reinsurance demand as a proxy for risk-taking because CEOs have total control over reinsurance decisions. Our evidence shows that conventional CEO overconfidence measures are negatively associated with insurer’s risk-taking and positively related to firm performance. Overall, the evidence suggests that it is not CEO overconfidence, but private information or the intention to control the company’s destiny that drives these results.

Foreclosure and Catastrophe Insurance

Christian Laux
,
Vienna University of Economics and Business
Giedre Lenciauskaite
,
Vienna Graduate School of Finance
Alexander Muermann
,
Vienna University of Economics and Business

Abstract

The foreclosure law in California protects homeowners against losses caused by devastating earthquakes. Banks do not require homeowners to purchase earthquake insurance to protect their mortgages. While banks may have a comparative advantage over insurance companies in dealing with earthquake risk (through securitization and avoiding insurers' risk of default), banks might also find it less costly to bear catastrophic risk because of bailouts and deposit insurance. We find that this type of implicit insurance is negatively related to explicit earthquake insurance coverage and positively to the sale of mortgages to government-sponsored enterprises (GSEs). Moreover, banks price implicit earthquake insurance coverage, which is cheaper than explicit insurance for some risk factors.

Mortality Risk, Insurance, and the Value of Life

Darius Lakdawalla
,
University of Southern California
Julian Reif
,
University of Illinois-Urbana-Champaign
Daniel Bauer
,
Georgia State University

Abstract

Economic models of risks to life and health are widely employed to assess the costs and benefits of public policies. Yet, these models fail to explain a number of common phenomena, such as the large fraction of spending that occurs near the end of life and a positive correlation between fatality risk and the willingness to pay for life‐extension. Although these anomalies have led some authors to abandon the standard framework, we show that the standard framework accounts naturally for these phenomena, as soon as one relaxes its restrictive and unrealistic assumption of complete annuity markets. This generalized life‐cycle model predicts that a fixed survival gain is worth more to individuals facing bleaker survival prospects, and vice‐versa and yields novel policy implications. First, the commonly observed practice of spending disproportionately more resources on individuals facing limited life expectancies may be efficient, not problematic. Second, conventional methods currently used by health insurers undervalue life‐extension for severely ill patients. Third, public annuity programs like Social Security are strong complements for investments in retiree healthcare, because they increase the value of remaining life for the elderly. Finally, holding life‐extension benefits constant, treatments are more valuable than preventive technology, because they extend life for people that value it the most.
Discussant(s)
Martin Boyer
,
HEC Montreal
Xin Huang
,
Federal Reserve Board
Casey Rothschild
,
Wellesley College
Alexander Muermann
,
Vienna University of Economics and Business
JEL Classifications
  • D8 - Information, Knowledge, and Uncertainty
  • G2 - Financial Institutions and Services