Annette Hofmann

Information Cost, Broker Compensation, and Collusion in Insurance Markets

We examine the impact of intermediation on insurance market transparency and performance. in a differentiated insurance market under imperfect information, consumers can gain information about product suitability by consulting an intermediary. We analyze current broker compensation methods: commissions and fees. although insurers’ equilibrium profits are equivalent under both systems, social welfare is always higher under a fee-for-advice system than under a commission system. Both systems offer the opportunity to increase profits via collusion. under a commission system, collusion enables insurers to separate consumers into groups purchasing different contracts. insurers may then extract additional rents from some consumers. this advantage can explain why brokers tend to be compensated by insurers.

Self-Insurance, Self-Protection, and Saving: On Consumption Smoothing and Risk Management

This article studies the effect of risk preferences on self-insurance and self-protection in a two-period expected utility framework. Here the investment to reduce risk precedes its effect. In contrast to single-period models, self-insurance and self-protection react similarly when the agents utility function becomes more concave. Effort is increased if and only if current consumption is sufficiently large. However, if we introduce endogenous saving, an agent with more concave utility always selects more self-insurance, but will select more self-protection if and only if the probability of loss is small enough. These latter results concur with those in standard monoperiodic models with no saving.

Interdependent risk networks: the threat of cyber attack

This article presents an economic model that explicitly reflects the interdependent risk structure of a cyber network. We find that due to this interdependent risk structure, the level of cyber risk protection in the community is inefficient from the communitys overall viewpoint. The analysis further suggests that decision processes should take into account the interdependent risk structure of the underlying internet-based network. Therefore, an organisation that invests in comprehensive cyber risk protection should be rewarded by other organisations for the benefits (in the form of lower exposure risk) that it has brought to the network. Another promising way to improve protection is to subsidise high-exposure organisations. It is also important that states implement laws to prevent cyber attacks and to protect organisations. Formal contractual agreements between different organisations specifying their data and information exchange and other interactions may also prove a promising strategy. A successful agreement may involve using rewards as coordinative mechanisms; for instance, in using non-monetary web certificates. Finally, the development of international standards for tracking and tracing technologies is essential in order to improve cyber safety.

Insurance-Linked Securities: Structured and Market Solutions

The traditional reinsurance markets face capacity limits. Global financial markets provide a much larger pool to diversify large (re)insurer risk. Insurance-Linked Securities (ILS) are a group of financial instruments, which are sold to institutional investors and whose value is affected by an insured loss event. ILS encompass multiple forms of risk-linked securitization such as CAT bonds, weather derivatives (WDs), contingent capital (CC), and Finite Re products. Their purpose is to provide more efficient ways to transfer large-scale risk by combining insurance and reinsurance techniques with capital market techniques.

Vertically Linked Industries, Product Quality and Minimum Quality Standards

Abstract This paper extends the seminal model of vertical product differentiation by Ronnen (1991) to a two-tier supply chain. While Ronnen considers the duopoly case, we add a vertical structure such that each downstream firm procures an input from a monopolistic upstream supplier. While simultaneous up- and downstream regulation in the form of a minimum quality standard restores Ronnen’s findings, if only one firm is regulated in the vertical chain, a free-rider effect results: all the bargaining power is given to the non-regulated member of the chain, which uses it to free-ride on the pressure exerted by the regulator onto the other member.

Self-Insurance, Self-Protection and Increased Risk Aversion: An Intertemporal Reinvestigation

This paper studies the effect of increased risk aversion on self-insurance and self-protection in a two-period framework. Here risk management incentives and consumption smoothing incentives are traded off, and the monotonic relationship between self-insurance and risk aversion may no longer hold as more risk-averse agents cannot always afford spending more on self-insurance. A very similar relationship holds for self-protection making self-insurance and self-protection much more alike in a two-period model. We also extend the model to a joint analysis of self-insurance/self-protection and saving decisions.

Smoking bans and the secondhand smoking problem: an economic analysis

Smoking bans are gaining widespread support in the European Union and other countries. The vast majority of these bans are partial bans given that smoking is still permitted in certain places. This article investigates the role of partial smoking bans in coping with externalities caused by the secondhand smoking problem. Although it is widely known that Pigouvian taxation is superior to a perfect ban, this result does not necessarily carry over to a partial ban because taxes cannot (easily) be differentiated according to location. We show that under an easy and intuitive condition, (1) enacting a partial smoking ban alone always improves social welfare (a) in an unregulated society and (b) even in a regulated society if externalities can be eliminated, and (2) it is ensured that a combination of Pigouvian tax and a partial smoking ban leads to a higher social optimum than implementing corrective Pigouvian taxation alone.

A Practical Perspective on Corporate Risk Management

The essay draws on ideas from across knowledge silos in order to provide a pragmatic examination of the risk management concept in a corporate setting. The essay explores: the need to allow into our thinking the notion that risk and uncertainty are distinct; the practical challenges of implementing the idea that the price of any single risk facing the corporate risk manager also depends on how it associates with all the other risks facing the firm; a tractable strategy for the risk manager given that there is not a consensus on why corporations manage risk. A possible way forward is a management strategy that conceptualizes risk as tactical and as strategic.

Managing supply chain disruption risks through insurance solutions: current practices and challenges

Supply chain risk management is receiving increasing attention by both academics and practitioners. This paper challenges the management of supply chain disruption risks, which may arise from economic frictions or natural catastrophes and puts a specific focus on insurance solutions. Major insurability issues regarding supply chain disruption risks are discussed, and insurance is integrated into a holistic catastrophic risk planning approach. The approach adds value to the whole supply chain risk management process.