Robert Puelz

Evidence on Adverse Selection: Equilibrium Signaling and Cross-Subsidization in the Insurance Market

The configuration of equilibrium in the market for automobile collision insurance is examined empirically by representing the premium-deductible menu and the demand function as a standard hedonic system. Using contractual data from a representative insurer, we estimate a reduced-form hedonic premium equation and the inverse of the marginal bid equation for insurance coverage. The data reveal an equilibrium with adverse selection and market signaling but lead us to reject the hypothesis that high risks receive contracts subsidized by low risks.

The Effect of Legal Rules on the Value of Economic and Non-Economic Damages and the Decision to File

This study focuses on the economic consequences of tort reform. In particular, we address two issues. First, we test the relationship between tort reforms and claim severity for an automobile liability incident while controlling for a variety of cost drivers including the presence of no-fault rules, and the impact of a plaintiffs attorney. In addition to examining the effect of tort reforms on total claim severity, we also test their effect on economic and non-economic damages separately. Second, we test the proposition that tort reforms, by reducing the damages available at trial, have reduced the likelihood that an injured party will seek legal remedy. Both aspects of this study are examined with individual data from a large sample of insurance claims from 61 insurers. Our results suggest that many of the reforms have had a statistically significantly effect on total damages, non-economic damages and economic damages. Caps on non-economic damages, collateral source rule reforms, and minor reforms impacting prejudgment interest, frivolous suits, and provisions for periodic payments are negatively related to the value of non-economic claims, while joint and several reform is positively related to the value of non-economic claims. We find collateral source rule reforms and minor reforms are negatively related to the value of economic claims. We find that caps on non-economic damages and minor reforms are associated with a decreased probability to file. We do not find any evidence that joint and several or collateral source rule reform is associated with the decision to file.

Statutory Rules, Attorney Involvement, and Automobile Liability Claims

The cost associated with an automobile liability incident in the United States has been hypothesized to be related to different tort reform statutes, the presence of no-fault rules, and the impact of a plaintiff s attorney. This article tests these relationships and reports the marginal impact of variables related to liability claims with individual loss data from a representative insurer. Among major tort reforms, our analysis reveals that punitive damage limits, caps on noneconomic damages, and minor reforms (sanctions on frivolous suits or defenses, prejudgment interest, and provisions for structured settlements) are associated with a reduced individual claim severity. Reform of the joint and several liability rule is associated with an increased individual claim severity in this insurance market. Low dollar thresholds and add-on no-fault rules increase liability claim severity, while no statistically significant difference in claim severity is found when the claim is subject to verbal threshold rules relative to tort law. Finally, attorney involvement is associated with a 64 percent increase in the average claim size.

A Process for Selecting a Life Insurance Contract

A Process for Selecting a Life Insurance Contract Abstract In the market for life insurance, individuals face many product alternatives, however, little guidance is provided in product selection other than basic descriptions of plan benefits and costs. While objective criteria are important to the purchase decision, an individuals subjective valuation of all criteria, objective and subjective, play the pivotal role. A multi-attribute life insurance contract choice model is presented to assist an individual in the problem of choosing the optimal life insurance contract conditional upon the preference set of the individual. The analytic hierarchy process is employed to structure the decision and determine the optimal life insurance contract. Introduction The selection of the best life insurance contract has been a problem confronted by researchers who have offered consumers numerical recipes to solve for the contract of best value or lowest cost. Kensicki (1974), Babbel (1978), and Babbel and Staking (1983) have used net present value analysis to measure the cost of a life insurance contract, while the interest-adjusted net payment and surrender cost indices are well known methods to evaluate a life insurance contracts projected cost.(1) There also exist a text of positive, theoretical literature that describe optimal life insurance purchasing behavior when a consumer is faced with an uncertain lifetime.(2) However, there is no decision model that integrates an individuals objectives and constraints with respect to the choice of the best life insurance product. This article posits such a decision model. The determination of an individuals optimal life insurance contract among competing contracts is resolved through the analytic hierarchy process (AHP). It is shown that the AHP, as a decision-making methodology, unifies the characteristics of life insurance contracts with an individuals preference set to create a determinate model which assists an individual in selecting a life insurance contract while considering simultaneously the ordering of all characteristics important to the individual. AHP Methodology and the Life Insurance Contract Choice Model The AHP assists an individual in a decision-making process by decomposing a problem into a hierarchic structure of objectives, criteria, and alternatives. Recently, the AHP was employed by Khaksari, Kamath, and Grieves (1989) to the asset allocation problem faced by a portfolio manager. In this article the problem introduced is the selection of the appropriate life insurance contract given a set of competing contracts from which to choose. Associated with this problem are many subjective and objective criteria important to a decision-maker. For example, the value placed on the contractual provisions within the insurance contract is subjective, while the projected interest-adjusted net payment index and cash value accumulation after n years are objective. However, comparisons among subjective and objective criteria by an individual are inherently judgmental reflecting a preference ordering after all comparisons among the criteria have been held. Thus, an individuals subjective valuation of both objective and subjective criteria is captured in the life insurance contract choice model. Multiple criteria weights are derived through the AHP by incorporating the decision-makers judgments into an objective ratio scale through pairwise comparisons of preference orderings.(3) Structure is given to this process by the problem objective (the top level of the hierarchy), and the underlying criteria. The hierarchical structure of the multi-attribute life insurance contract choice decision is illustrated in Figure 1. In the context of life insurance contract choice, the objective is the individuals expected satisfaction with the life insurance contract which is dependent on the first level of the hierarchy: the net payment index, financial strength of the insurer, contractual features, and cash value accumulation. …

Classification in automobile insurance using a DEA and discriminant analysis hybrid

In this article, we adopt an efficiency approach to the two-group linear programming method of discriminant analysis (DA), using principles taken from data envelopment analysis (DEA), to predict group membership in an insurance underwriting scheme. Using an empirical insurance data base we illustrate the effectiveness of our model as a decision-making tool to distinguish among automobile insurance applicants by contrasting our hybrid model with both statistical and LP methods of discriminant analysis. We find for this insurance application that our hybrid model significantly outperforms the more traditional methods in separation and misclassification outcomes.

Implications for unisex statutes and risk-pooling: The costs of gender and underwriting attributes in the automobile insurance market

In this paper, we explore the effects of gender and other demographic features and benefit provisions on insurance premiums using individual data from a property and liability insurer domiciled in Georgia for three types of automobile insurance coverages: collision insurance, comprehensive insurance, and liability insurance. We report the implicit prices of individual and automobile underwriting attributes and find that the effect of gender on the insurance premium for each of our coverage types is significant but has a lower absolute effect than other underwriting attributes, raising questions about the regulatory impact of unisex statutes. Finally, we examine three alternatives open to the regulator who must mandate and monitor insurance pricing under a unisex statute.

An Empirical Regularity in the Market for Risk and Insurance Research Output

This study provides a means for evaluating the research productivity and output concentration of risk and insurance researchers by identifying an empirical regularity in the frequency distribution of article publications in six major risk and insurance journals. Our results reveal a strong bibliometric regularity, which provides a useful tool for assessing the likelihood of multiple publications in the insurance literature. Assuming that the publishing behavior of risk and insurance researchers is stable over time, we predict that less than four percent of all publishing risk and insurance researchers will publish six or more coauthored articles in the next fifteen years, and less than two percent will publish ten or more articles.

Personal financial planning and the allocation of disposable wealth

Abstract In the process of personal financial planning individuals are confronted with a time dependent wealth allocation problem. Oftentimes the solution involves selecting financial products based on objective criteria, for example, product cost and expected return. While objective criteria are important to the selection process, an individuals subjective valuation of all criteria, objective and subjective, relevant to the decision plays the crucial role. A goal programming model parameterized by the analytical hierarchy process is presented to determine the allocation of an individuals disposable wealth to present and future consumption bundles and investable assets, conditional on the preference ordering of the individual.

Technology's Effect on Property–Casualty Insurance Operations

The post‐Glass–Steagall era has presented insurers with new opportunities and risks during a time when information flows and business processes are being impacted by changing technology. In this article, we explore how insurers use and perceive current technology to carry out their operations by reporting results from a sample of insurers that includes some of the nations largest property and casualty insurers. We find among insurers in our sample that an online channel is having a significant impact on customer retention and revenue enhancement, but a lesser impact on cost reduction. Interestingly, about two‐thirds of our sample has experienced an increase in their overall number of transactions following the adoption on an online channel. Moreover, while the Internet is perceived as giving marketing benefits it is not being used as a substitute for agents. We find that 65 percent of respondents have used technology to integrate customer data across functional areas and another 23 percent plan to do so in the next 3 years. Nearly 71 percent of respondents have or plan to adopt service‐oriented architecture in their technology infrastructure.

Contingent Commissions and the Management of the Independent Agency

Insurance agencies continue to exist as an important distribution mechanism because they give their contracting insurers advantages in risk selection and enable insurance applicants to transfer complex risks. While independent agencies are compensated by upfront commissions, a key component of their profitability is tied to contingent commissions. A contingency arrangement represents ex post compensation normally tied to underwriting profitability, volume, and annual growth. We report two actual contingency contracts in the context of a decision process for choosing among contingency offerings by insurers. We incorporate both uncertainty and correlation among key variables to arrive at values for competing contracts, then use a downside risk approach that helps agency owners select the better contract. The approach offered in this article is scalable to a selection problem for any number of contingency arrangements.