Topics in Risk and Insurance
Sunday, Jan. 5, 2020 8:00 AM - 10:00 AM (PDT)
- Chair: Sharon Tennyson, Cornell University
Regulatory Capital and Asset Risk Transfer
AbstractWe investigate whether and how life insurers use risk-transfer contracts to manage the regulatory capital requirements associated with their investment risk. We theoretically document how a specific type of reinsurance contract, a form of modified coinsurance, enables life insurers to reduce the regulatory capital requirements associated with their investments. We then empirically investigate how life insurers respond to exogenous increases in their regulatory capital costs -- corporate bond downgrades. We find that relative to life insurers without them, life insurers with modified coinsurance reinsurance contracts are less likely to sell downgraded bonds if the sale would result in large realized capital losses.
How do households respond to social program reforms? Evidence from the U.S. National Flood Insurance Program
AbstractHow households will respond to reforms of public insurance programs is unclear given recent behavioral findings on consumers' insurance choices. We examine the insurance decisions of an extremely vulnerable group in the U.S. National Flood Insurance Program. Severe repetitive loss (SRL) properties account for only 1% of policies but 25-30% of flood claims. Congress passed a reform that phases out the premium subsidies offered to this group over several years such that their premiums will eventually equal their contract's actuarially fair rate. We measure the effect of the reform using difference-in-differences estimation on a panel of over two million policy-year observations. We find that about one fourth of SRL property owners decided to stop insuring in response to the reform. The reform did not meaningfully affect the coverage limit choices of households that continued to insure. Curiously, the observed effect on non-renewal begins after the law was publicized but before it was enacted. Our findings thus seem in contrast to canonical and most common behavioral theories of insurance demand. We discuss potential alternative decision-making explanations of our results and are able to rule out some of them. Our findings add to research on public policy design and behavioral insights into insurance demand.
Calibrating Gompertz in Reverse: Mortality-adjusted Biological Ages around the World
AbstractThis paper develops a statistical and methodological framework for inverting the Gompertz-Makeham (GM) law of mortality for heterogenous populations in a manner consistent with a compensation law of mortality (CLaM), to formally define a global mortality-adjusted (biological) age. It implements and calibrates this framework using rates from the Human Mortality Database (HMD) to illustrate its salience and applicability. Among other things, this paper demonstrates that when properly benchmarked, the global mortality-adjusted (biological) age of a 55-year-old Swedish male is 48, whereas a 55-year-old Russian male is closer in age to 67.
The motivation for this (new) framework for presenting age and relative aging is that this metric could be used for pension and retirement policy. In a world of growing mortality heterogeneity and the need for salient longevity metrics beyond simple life expectancy, "biological age" might help capture the public's attention and induce them to take action, for example to work longer and retire later. Perhaps a mortality-adjusted (biological) age could even be used to determine pension eligibility.
- D8 - Information, Knowledge, and Uncertainty
- G2 - Financial Institutions and Services