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Insurance Economics

Paper Session

Friday, Jan. 5, 2024 8:00 AM - 10:00 AM (CST)

Marriott Rivercenter, Conference Room 9
Hosted By: American Risk and Insurance Association & American Economic Association
  • Chair: Martin Boyer, HEC Montréal

A Simple Approach for Measuring Higher-Order Risk Attitudes

Cary Deck
,
University of Alabama
Rachel J. Huang
,
National Central University
Larry Y. Tzeng
,
National Taiwan University
Lin Zhao
,
Southwestern University of Finance and Economics

Abstract

While the importance of the Arrow-Pratt coefficients of second order risk aversion is well established in economics, the importance of higher-order risk attitudes has only recently begun to be recognized. In this paper, we provide the first approach to measure the higher-order Arrow-Pratt coefficients with choices between compound lotteries. Specifically, we provide a theoretical basis for using risk apportionment to reveal the intensity of higher-order risk attitudes, and then draw upon our theoretical results to develop a simple, systematic, and generalizable procedure for eliciting Arrow-Pratt coefficients of prudence, temperance, and other higher-order risk attitudes. We demonstrate our approach in a laboratory experiment and find that the modal subject exhibits mild prudence and mild temperance.

Regulatory Capital and Catastrophe Risk

Evan M. Eastman
,
Florida State University
Kyeonghee Kim
,
Florida State University

Abstract

In this study, we examine the effect of capital regulation on insurers’ pricing behavior using homeowners’ insurance price data. We leverage a regulatory reform that imposes greater regulatory capital costs for insurers to provide property coverage in catastrophe-prone areas. We first document that the regulatory capital reform had a meaningful impact on insurers—on average, regulatory capital ratios appear to decline by 50 percentage points. Using a difference-in-differences design and homeowners insurance prices, we find empirical evidence that the reform results in price increases, though the magnitude of the increases is restrained; we attribute the small magnitude to insurance pricing regulation. Taken together with the size of the homeowners’ insurance market, our back-of-the-envelope calculation suggests the increase in insurance price is commensurate to 12-30% of the increase in regulatory capital costs due to catastrophes. We also find that the increase in price is larger for areas with higher hurricane risks, suggesting that consumers in risky areas bear the cost of climate change. Overall, our study provides evidence that climate-related regulation can have unintended consequences for consumers while the effect is attenuated through price regulation.

Transmission Effect from Insurers’ Climate Risk Disclosures on their Corporate Bond Investees’ Environmental Friendliness

Jiang Cheng
,
Lingnan University
Jia Guo
,
Hong Kong Polytechnic University
Xiaohui Li
,
Hong Kong Polytechnic University
Jeffrey Ng
,
University of Hong Kong
Nan Yang
,
Hong Kong Polytechnic University

Abstract

We investigate how insurers’ mandatory climate risk disclosure affects their corporate bond investees’ environmental friendliness. We employ the U.S. insurance industry’s adoption of the Climate Risk Disclosure Survey (CRDS) and a difference-in-differences research design. We find that adoption reduces investees' carbon emission intensity if insurers affected by the CRDS also own a significant amount of the investees’ bonds. This outcome is consistent with investors’ mandated climate risk disclosure having a positive insurer-to-investee transmission effect on investees’ environmental performance. The reduction in carbon emission intensity is more pronounced when the insurers and/or their investees experience more climate-related public pressure to be more climate friendly, when the insurers are likely to more closely monitor their investees, when the investees are more dependent on financing from the insurers, and when the insurers face less underwriting competition.

Optimal Consumption and Investment Decisions with Disastrous Income Risk: Revisiting Rietz’s Rare Disaster Risk Hypothesis

Chusu He
,
Financial Conduct Authority
Alistair Milne
,
Loughborough University
Seyoung Park
,
University of Nottingham

Abstract

In this paper, we develop an analytically tractable dynamic model of optimal consump-tion and savings decisions with disastrous income risk. We first empirically explore the relations among consumption changes, aggregate income, disaster shock severity, and fiscal measures in 55 countries during the Covid-19 period. We then by empirical motivation investigate an important role of insurance with a focus on the recovery of income in a dis-aster. We highlight how extent of the disastrous income risk to which the agent is exposed and her income recovery post disaster jointly affect the agent’s optimal decisions. Overall, availability of insurance can be particularly important for both the poor and the wealthy in the sense that they could even consume more, save less, and invest more post disaster as long as their future income is (partly) recovered.

Discussant(s)
Martin Boyer
,
HEC Montréal
JEL Classifications
  • G2 - Financial Institutions and Services
  • G5 - Household Finance