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Topics in Risk and Insurance

Paper Session

Saturday, Jan. 5, 2019 2:30 PM - 4:30 PM

Hilton Atlanta, 302
Hosted By: American Risk and Insurance Association & American Economic Association
  • Chair: Sharon Tennyson, Cornell University

Should We Do More When We Know Less? Optimal Risk Reduction under Technological Uncertainty

Lu Li
Ludwig-Maximilians-Universitaet Munich
Richard Peter
University of Iowa


Technological uncertainty (TU) arises whenever the effects of risk mitigation depend on exogenous factors or are subjectively perceived to be uncertain. It is a widespread condition in decision-making under risk and uncertainty. We study the effects of TU on self-insurance and self-protection. TU reduces the willingness to pay for self-insurance and has no effect on that for self-protection. Its impact on the optimal demand for both activities is jointly determined by the decision-maker's preferences and risk reduction effectiveness. We identify conditions for TU, FSD improvements and increases of TU to have unambiguous comparative statics. These conditions involve prudence, relative risk aversion, and relative prudence. We highlight cases where TU raises the optimal investment consistent with the precautionary principle. Our theory is rich in empirical predictions and our results have implications in the areas of safety, loss control, insurance demand under nonperformance risk, and climate change.

Awakening of the Rational Man? Non-Cognitive Skills After the Storm

Christian Biener
University of St. Gallen
Andreas Landmann
Paris School of Economics and Abdul Latif Jameel Poverty Action Lab


A common assumption in economics is that non-cognitive skills such as personality
traits and preferences are fixed within an adult population. The extent to which this
assumption holds true is being contested in the more recent empirical literature. We
analyze the very short-term causal impact of exposure to one of the most powerful
storms ever recorded to strike land on locus of control, reciprocity, and risk preferences
for a sample of 2,352 individuals in the Philippines. While we find that post disaster
people exhibit significantly higher internal locus of control, lower reciprocity, and lower
risk-aversion, effect sizes at the extensive margin are modest. This type of short-term
shift towards “rationality” has not been observed before, filling a gap in the emerging
literature on the stability of non-cognitive skills and has potential implications for
post-disaster response policies.

Negative Marginal Option Values: The Interaction of Frictions and Option Exercise in Variable Annuities

Daniel Bauer
University of Alabama
Thorsten Moenig
Temple University


Market frictions can affect option exercise, which in turn affects the value of a marginal
option to the writer—and may even yield negative marginal option values. We demonstrate
the relevance of this mechanism in the context of variable annuities with popular withdrawal
guarantees, both theoretically and empirically. More precisely, we show that in the presence
of income and capital gains taxation for the policyholder, adding on a common death benefit
option—allowing to continue the withdrawal guarantee in case of death—changes the policyholder’s
optimal withdrawal behavior. As a consequence, the total value of the contract from
the perspective of the insurer may decrease, i.e. the marginal option value is negative. This may
explain the common practice of including death benefit options without additional charges in
these products.

Effects of Background Risk on Household Financial Portfolios: Evidence from the Affordable Care Act

Dae Yong Lee
Iowa State University


This article examines the effects of the health insurance coverage mandate for dependents on household financial portfolio decisions by focusing on the Affordable Care Act of 2010. Using the Survey of Income and Program Participation data, the author finds that the dependent coverage mandate significantly increased (decreased) the share of stocks (bonds and other interest-accruing assets) by 2.5 (1.3 and 1.1) percentage points for households having both parental employer-sponsored health insurance and dependent children aged 19 to 25 years. The mediation analysis suggests that the mandate had a positive effect on shares of stocks through increase in health insurance coverage.
M. Martin Boyer
HEC Montreal
Anita Mukherjee
University of Wisconsin
Richard D. Phillips
Georgia State University
Justin Sydnor
University of Wisconsin
JEL Classifications
  • D8 - Information, Knowledge, and Uncertainty