Martin Nell

The Design of Liability Rules for Highly Risky Activities - Is Strict Liability Superior When Risk Allocation Matters?

Strict liability is widely seen as the most suitable way to govern highly risky activities, such as environmentally dangerous production or genetic engineering. The reason which is usually given for applying strict liability to these areas, is that not only efficient care is supposed to be induced but also an efficient level of the risky activity itself. It is argued that, in case of no market relationship between injurers and victims, this could only be achieved through strict liability but not via the negligence rule. In this paper, we show that the superiority of strict liability does no longer persist in a world of risk averse parties. Our results suggest that in terms of risk allocation the negligence rule should be preferred for abnormally risky activities, if insurance markets are imperfect. The reason is that highly risky activities typically affect a large number of individuals, such that strict liability implies a quite unfavorable allocation of risk. Therefore, the negligence rule turns out to be superior, if a market relationship between the parties exists, since it incurs less cost of risk. If there is no market relationship between injurer and victims, no clear result can be derived. The paper concludes with some remarks on the usefulness of upper bounds to an injurer’s liability as well as regulations that exclude liability for “unforeseeable” losses. We argue that this kind of supplement to a strict liability rule can improve efficiency.

Auditor liability rules under imperfect information and costly litigation: the welfare-increasing effect of liability insurance

This paper examines auditor liability rules under imperfect information, costly litigation and risk-averse auditors. A negligence rule fails in such a setting, because in equilibrium auditors will deviate with positive probability from any given standard. It is shown that strict liability outperforms negligence with respect to risk allocation and the probability that a desired level of care is met by the auditor if competitive liability insurance markets exist. Furthermore, our model explains the existence of insurance contracts containing obligations a type of contract often observed in liability insurance markets.

Erklärungsansätze für vertragswidriges Verhalten von Versicherungsnehmern aus Sicht der ökonomischen Theorie

ZusammenfassungZiel dieser Arbeit ist es, in die ökonomische Analyse des Versicherungsbetrugs einzuführen und einige grundlegende Determinanten für vertragswidriges Verhalten von Versicherungsnehmern aufzuzeigen. Dazu werden zunächst die strategischen Entscheidungsprobleme von Versicherungsnehmern und Versicherern eingehend analysiert und optimales Verhalten unter realitätsnahen Annahmen hergeleitet, sowie Ansatzpunkte für die Betrugsbekämpfung aufgezeigt. Beispielhaft werden dazu die Auswirkungen von Betrugserkennungssystemen oder die konsequente Anzeige entdeckter Betrüger auf die Bekämpfung von Versicherungsbetrug näher untersucht. Es zeigt sich, dass beide Ansatzpunkte erheblichen Einfluss auf die Kosten des Versicherungsbetrugs haben können. Ein häufig geäußerter Kritikpunkt an solchen Analysen ist, dass ethische Bedenken der Versicherungsnehmer meist unberücksichtigt bleiben. Die Einbeziehung von ethischen Bedenken führt aber nicht zwangsläufig zu einer niedrigeren Betrugshäufigkeit. Abschließend wird der Frage nachgegangen, inwieweit Versicherungsbetrug auf versicherungsspezifische Faktoren zurückzuführen ist und wie bzw. in welchem Umfang Versicherer Einfluss auf die ethische Bewertung des Versicherungsbetrugs durch Versicherungsnehmer nehmen können.AbstractThe two main purposes of this paper are an introduction to the economic analysis of insurance fraud and furthermore a derivation of factors that determine fraudulent behavior of policyholders on insurance markets. Consequently, we analyze the strategic decision problems of insurance companies and the policyholders and identify some factors that can help to reduce fraudulent behavior. In this context we evaluate two derived starting points for the combat against insurance fraud: fraud detection systems and a consequent charge policy of detected defrauders. We illustrate that both points can help to reduce the cost of fraud. Furthermore, we enhance our earlier analysis with respect to the empirical fact that some individuals care about fairness or — in the insurance fraud context — the legitimacy of their actions. Surprisingly, in some market situations these concerns of some policyholders do not lead to a lower fraud probability. Finally, we discuss how and to what extent insurance companies can influence such ethical concerns of policyholders. On that score, we distinguish insurance specific and insurance unspecific factors and their impact on the consumers attitudes towards insurance fraud.

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.

Das Inflationsproblem bei der Übertragung von individuellen Alterungsrückstellungen in der privaten Krankenversicherung

ZusammenfassungDas Kapitaldeckungsverfahren der substitutiven Privaten Krankenversicherung (PKV) in Deutschland besitzt in alternden Gesellschaften im Vergleich zum Umlageverfahren der Gesetzlichen Krankenversicherung (GKV) den Vorzug der Generationengerechtigkeit, führt allerdings zu einem stark eingeschränkten Wettbewerb im Segment der Bestandskunden. Diesem ordnungspolitischen Mangel kann theoretisch mit der Übertragung individueller Alterungsrückstellungen begegnet werden. Bei einer Implementierung dieses Konzepts sind allerdings drei gravierende Probleme zu lösen. Diese Arbeit ist dem Inflationsproblem gewidmet. Es führt dazu, dass es bei einer Übertragung korrekt ermittelter individueller Alterungsrückstellungen zu Selektionseffekten kommt, wenn in der Zukunft Preissteigerungen zu erwarten sind. Es wird gezeigt, dass das Inflationsproblem gelöst werden kann, indem zukünftige Preissteigerungen erwartungstreu geschätzt und in der Berechnung der individuellen Alterungsrückstellungen berücksichtigt werden. Daher können sich weitere Forschungsbemühungen auf Bestimmbarkeits- und Verifizierbarkeitsschwierigkeiten im Zusammenhang mit individuellen Alterungsrückstellungen konzentrieren, die im Rahmen dieser Arbeit nicht thematisiert werden.AbstractIn an ageing population, as e.g. in Germany, intergenerational justice is much better achieved in a capital funded health insurance system (as the PKV) than in a pay-as-you-go scheme (as the GKV). But the capital funded system leads to a lack of competition because insurants loose their ageing provisions if they switch their insurer. This problem can theoretically be solved by a transfer of „individual ageing provisions“. But the implementation of this concept has three main difficulties: the calculation, the verification and the inflation problem. This article focuses on the inflation problem. It is shown that the inflation problem can be resolved by modifying the individual ageing provisions in a special way. Future research should concentrate on the calculation and verification problems.

Wertorientierte Steuerung von Lebensversicherungsunternehmen mittels stochastischer Prozesse

ZusammenfassungIn dieser Arbeit wird das Konzept einer wertorientierten Steuerung von Lebensversicherungsunternehmen basierend auf stochastischen Prozessen vorgestellt. Dabei werden die stochastischen Prozesse dazu verwendet, die zufälligen wertbestimmenden Parameter der Unternehmensbewertung zu modellieren. Betrachtet werden stochastische Prozesse in diskreter bzw. stetiger Zeit und mit diskretem bzw. stetigem Zustandsraum. Als Ergebnis erhält man für den Unternehmenswert Verteilungsfunktionen, die approximativ bzw. exakt in der Klasse der Normalverteilungen liegen.AbstractIn this paper we present the concept for value based management of life insurance companies using stochastic process methods. The stochastic processes are used for modelling the random parameters determining the value. Stochastic processes in discrete and continuous time as well as with discrete and continuous state space are considered. As shown in the article this results in distribution functions for the corporate value which lie approximately or even exactly in the class of normal distribution functions.

Garantien als Signale für die Produktqualität

SummaryThis paper deals with the question, whether warranties can be used to signal the (unobservable) quality of a product to the consumers. Although this question is usually answered in the positive in the literature, it is shown that the superficial plausibility of the mainstream signalling hypothesis can not be confirmed once we apply a thorough formal analYSis. This result which is derived by game theoretic analysis has practical implications for firms marketing activities as well as for the design of warranties implied by law. Furthermore the results show that signalling arguments should be used with much more caution. This is presumably true not only for warranties but for other areas of research too.

Independent Safety Controls with Moral Hazard

We analyze the role of liability, insurance, and side payments for independent safety controls with unobservable care levels. By independent safety controls we mean that the accident probability depends on the care levels of two parties, and that the effects of the controls on the accident probability are stochastically inde-pendent. We show that efficiency can be reached for these kinds of double moral hazard through side payments if one agent detects that the other agents security control has failed. This requires either an appropriate liability rule, or an arbitrarily chosen liability rule combined with fair insurance coverage.

The Law & Economics of Epidemic Livestock Disease Risk Management

Animal disease risk has gained increasing significance in the recent past. Particularly the emergence of Avian Influenza attracts global attention, as a subtype of the virus can even cause illness in the human population. In a global economic context, animal disease risk is one of the most significant risks, affecting one of the world’s most important industries. Hence livestock disease risk management efficiency, which is the focus of this article, strongly affects global welfare.

Alternative Risk Transfer Mechanisms for Seismic Risks

Damages inflicted by natural catastrophes in recent years have accounted for economic losses of a size heretofore unknown.1 During this period, one could detect an increasing frequency of catastrophic events as well as an increase in the average amount of loss per event; the latter largely stemming from the geographic concentration of values in catastrophe-prone areas. For the case of earthquakes no significant trends in the number of occurrences are observed, but the influence of concentration of values on damages was demonstrated in a dramatic way in 1999: Although the number of severe earthquakes was not unusual, these events, among them the dreadful disaster in Izmit (Turkey), were perceived as a very singular accumulation, since in a short time span several densely populated areas were hit.2