Journal of Risk and Insurance on LinkedIn: Enterprise risk management and corporate tax planning (2024)

Centralized insurance markets have long existed in the private and public sectors, whereby an entity pools the risk of its policyholders. Public sector centralization may be found in many countries' social security schemes, with more specific examples in Japan via earthquake reinsurance and in the United States with its National Flood Insurance Program (NFIP), for example. In the NFIP case, questions surrounding the optimal design of such a scheme are key to understanding both policymaking and future catastrophe risk developments. In a new paper, Tim Boonen (The University of Hong Kong), Wing Fung (Alfred) Chong (Heriot-Watt University), and Mario Ghossoub, PhD, FSA, FCIA, CERA, FRM (University of Waterloo) characterize Pareto optimality in risk-sharing arrangements with a centralized, monopolistic insurer. Their approach balances policyholder evaluation of their risk levels with the risk aggregation motives of the insurer. The authors apply their results to flood insurance in the United States, using a modified version of the NFIP. The application suggests potential gains from allowing the NFIP to leverage risk aggregation itself rather than having individuals share their risk directly with the federal government. These results have important policy ramifications for the NFIP specifically, but also flood and monopolized insurance schemes broadly.#floodinsurance #nfip #paretooptimal

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Previously popular in the 1700s and 1800s, tontines—“annuities with benefit of survivorship”—are receiving renewed attention as potential additions to the modern longevity insurance landscape. Relative to life annuities, they can provide lifetime income while limiting the provider’s exposure to the risk of society-wide mortality improvements.Yikang Li and Casey Rothschild - both of Wellesley College - study participants in a set of tontines issued by the Irish government in the 1770s, some of whom were selected and supported by a Genevan banking syndicate. They quantify how much longer-lived and profitable the syndicate-selected participants were.Theirresults shed light on modern proposals to introduce tontine-like elements into modern retirement pensions, particularly on the distributional implications of differential mortality improvement trends among identifiable sub-groups of tontine participants.#retirement #pensions #tontines

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Since the beginning of the 19thcentury, mortality rates have been on a downward trend in Europe, though there have been (temporary) jumps that have disrupted the trend. Modeling future mortality rates is critical to evaluating life-contingent risks, and (re)insurers need to be able to generate scenarios for future mortality experience that can allow for age-specific shocks in mortality rates that may last several years.In a new paper, Jens Robben and Katrien Antonio - both of KU Leuven - develop a toolbox that addresses this need, allowing for the presence of catastrophic shocks. The importance of this toolbox is heightened after recent experiences, like the COVID-19 pandemic, may suggest that (re)insurers are concerned about other potential catastrophes.Given the toolbox can enable actuaries and risk managers to personalize the occurrence and impact of shocks to meet their needs, appetite, or regulatory requirements, the authors' work has important implications for the industry. This work also allows stakeholders - including policymakers - to evaluate how a given catastrophe may impact solvency.#mortality #modeling #catastrophes

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Insurers diversify idiosyncratic longevity risk by selling a large number of annuities but have difficulty addressing the aggregate shifts in longevity patterns that occur over time despite improved forecasting methods.Torben M. Andersen (Aarhus University) and Marias Gestsson (University of Iceland (Háskóli Íslands))theoretically show that annuitization is still possible with aggregate longevity risk, albeit only partially, in which a fraction of pension savings is invested in annuities. Consequently, where aggregate longevity risk exists, savings increase, the return on capital falls, and the survival premium on annuities declines.Their findings offer an explanation for the empirically observed lower returns on savings, as well as the lower pension savings in annuities despite their theoretical appeal (the annuitization paradox). These results have important ramifications for insurers.#pension #riskmanagement #annuities

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With accelerating climate change, insurance coverage of natural hazards becomes increasingly important. Yet, insurance demand remains low in many natural hazard insurance markets. Policymakers, especially within crop insurance markets, sometimes turn to premium subsidies to increase insurance demand. They use premium subsidies to lower prices and, more importantly, to signal a reduced willingness to provide future disaster relief.Tim Philippi and Jörg Schiller, both of the University of Hohenheim, find a recently introduced premium subsidy on the German frost insurance market for winegrowers to have significantly increased insurance demand. The premium subsidy seems to have been effective at lowering farmers’ anticipation of disaster aid. Farmers who recently received disaster aid were especially responsive to the subsidy.Other climate-related risks that have become more salient recently but are not covered by established insurance markets may run into similar dynamics of governmental disaster relief payments and subsequent need for policy changes. These results have important ramifications for understanding optimal government intervention and insured behavior.#cropinsurance #disasterrelief #frost

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Cyber risk events can cause considerable consequences for affected enterprises. In fact, cyber risk, including business interruption due to such an event, is often thought of as the most important global business risk. To manage any risk effectively, we first must be aware of its causes and potential effects.Nadine Gatzert and Madeline Schubert, both of FAU Erlangen-Nürnberg, construct a cyber risk consciousness score based on a text mining algorithm that is applied to the annual reports of US banks and insurers from 2011 to 2018. The authors further identify whether, and to what extent, cyber risk management is implemented among these banks and insurers to understand cyber risk management's determinants and value.Unsurprisingly, their results show an increasing cyber risk consciousness over time. In addition, a significant positive relationship between cyber risk management and firm value is found for the entire sample, and in each subsample of banks and insurers. Banks are found to implement cyber risk management more than insurers, which the authors attribute to the greater exposure of banks due to spillover and systemic risk. Interestingly, the authors find a negative relationship between cyber risk management and profitability, an area deserving of future study.As regulators increasingly require banks and insurers to take action regarding cyber risk, the authors anticipate continued increases in awareness of the risk and in the development of strategies to manage it effectively. One area deserving of future consideration is the effect of cyber risks on smaller firms.#cyberrisk #cybersecurity #textmining #cyber

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Weather-related extreme events are becoming more frequent and intense as the planet warms. These disasters impose large costs on households and communities. Despite the risk, however, motivating the purchase of insurance in these areas has remained a challenge, particularly among low-income households. Evidence of household impacts from these disasters have been clear, though it has more difficult to parse out the recovery efforts and how they may or may not be driven by access to insurance ex-ante.In a new paper, Xuesong (Song) You (Freddie Mac) and Carolyn Kousky (Environmental Defense Fund) harness unique survey data from four land-falling U.S. hurricanes to examine both household and community recovery from these storms, and to isolate the role of insurance. They document a wide range of financial costs that households face post-disaster, including both property and non-property costs, as well as a decline in income from business interruption. These households sort into two groups when it comes to financing recovery: those primarily using property insurance and those largely uninsured, relying instead on friends and family.Using foot-traffic data collected from cell phones coupled with historical flood measures, You and Kousky find that insurance improves households’ ability to participate in the local economy. As the uptake of flood insurance increases in a community, visitations to local businesses increase, creating positive economic spillovers. These findings are consistent with insurance reducing post-disaster financial constraints, and they have important ramifications for policymakers and policyholders.#floodinsurance #hurricanes #spillovers

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Increasing climate volatility and technological innovations are changing the structure of insurance losses across time and space for a variety of lines, including property, catastrophe, health, and life. Depending on the significance of these changes, naïve premium rate estimation using past losses may be highly unreliable.Yong Liu and Alan Ker, both from the University of Guelph, provide three flexible, data-driven methods to simultaneously capture trends in space and time. The methods are computationally easy and can be applied in a variety of settings, industries, and business lines as it does not require knowledge of the structural changes in losses.Applying their methods on U.S. crop insurance premium rates, the authors find significant borrowing of information across both time and space. All three methodologies improve both the stability and accuracy of crop insurance premium rates. Their methods may be of relevance for other lines of insurance characterized by spatially and/or temporally changing loss structures.#insurance #pricing #cropinsurance

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Even though demand for long-term care is growing due to a rapidly aging population, the uptake of private long-term care insurance is low. One of the reasons for this is the complexity of long-term care planning decisions. Policies aimed at enhancing decision-making abilities of individuals are oftenrecommended as a solution.Timo Lambregts and Erik Schut – both from Erasmus University Rotterdam – posit that improving individual decision-making would not unambiguously improve the functioning of the private long-term care insurance market. To test this hypothesis, the authors examine the impact of two distinct decision-making abilities – education and numeracy – on long-term care insurance holding in the years 2002-2010 and subsequent nursing home use. They find that people with greater decision-making abilities make better use of their private information, which implies that improving these abilities will intensify adverse selection. These findings highlight atrade-offbetween supporting better decision-making and selection in insurance markets. As for the long-term care insurance market, these findings suggests that other steps are needed to improve its performance.#longtermcare #insurance #decisionmaking

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