Shinichi Kamiya

A Theory of the Demand for Underwriting

We examine the demand for underwriting and its effect on equilibrium in an insurance market in which insureds know their risk type, but insurers do not. Our analysis indicates that a set of policies including one that requires buyers to take an underwriting test can constitute a full coverage Nash equilibrium when perfect classification is possible. We also find that underwriting equilibria, in which low risks obtain greater coverage than they would without underwriting, widely exist in a Wilsonian market with nonmyopic insurers. Our findings provide a potential explanation for why empirical evidence on adverse selection is mixed.

A Bayesian Multivariate Risk-Neutral Method for Pricing Reverse Mortgages

In this article, we propose a Bayesian multivariate framework to price reverse mortgages that involve several risks in both insurance and financial sectors (e.g., mortality rates, interest rates, and house prices). Our method is a multivariate extension of the Bayesian risk-neutral method developed by Kogure and Kurachi. We apply the proposed method to Japanese data to examine the possibility for a successful introduction of reverse mortgages into Japan. The results suggest a promising future for this new market.

Determinants of Insurers' Reputational Risk

Reputational risk has become a critical concern for most organizations. Insurers, who rely on trust to generate business, are particularly vulnerable. Maintaining a positive reputation, however, is costly, leading to the potential for moral hazard in the form of choosing a lowercost strategy that ultimately will underperform relative to consumer expectations. The insurer’s optimal strategy depends on factors affecting the relative costs and benefits of fulfilling consumer expectations, which we test using a rich data set on operational loss risk events. Results indicate that passage of the Sarbanes-Oxley act had a significant effect on firm behavior. We also observe that leverage, firm age, and executive shareholdings are significantly related to reputational risk. In some samples, Tobin’s Q, the level of competition, and the discount rate also were related to instances of reputational loss.

A Model of Underwriting and Post-Loss Test Without Commitment in Competitive Insurance Market

In this article, we establish a model of competitive insurance markets based on Rothschild and Stiglitz (1976) where insurers can perform risk classification tests either before insurance contracts are issued (underwriting) or when coverage claims are filed (post-loss test). However, insurers cannot pre-commit to performing either test in the insurance application period since the tests are costly type-verifications. We derive the perfect Bayesian equilibrium of four cases: no test is used; only one kind of the two types of test is performed; and both tests are performed. The space of parameters where the equilibrium exists in Rothschild and Stiglitz (1976) and Picard (2009) models is extended in our model. The key tradeoff determining which test is utilized lies in the relative magnitude of testing costs. Furthermore, we characterize the contracts provided in the market. Different from the overinsurance counterpart in Picard (2009), the contract for low-risk type with only underwriting test may be either overinsurance, full insurance, or underinsurance in our model.

Market Discipline and Guaranty Funds in Life Insurance

This paper studies the effects of company risk and guaranty funds on life insurance in force using company-by-state level data during the 1985-2010 period. Our primary objective is to use the variation in the timing of guaranty fund adoptions across states to identify the impact of public guarantees on market discipline. We first confirm the existence of evidence consistent with market discipline by documenting a negative relation between company risk (measured by changes in financial strength ratings) and changes in life insurance in force and annuity considerations. Effects are especially large for annuity considerations. We find some evidence of a decline in market discipline following the creation of government-backed guaranty funds in 16 states during the sample period, with the most significant effects being observed for firms with low financial ratings.

CREDIT CRUNCH AND INSURANCE CONSUMPTION: THE AFTERMATH OF THE SUBPRIME MORTGAGE CRISIS : Credit Crunch and Insurance Consumption

Using cross‐state panel data of the U.S. personal auto insurance premiums from 2007 to 2012, this study provides evidence that consumer purchases of insurance were reduced by more than expected from losses of risk exposure during and after the subprime mortgage crisis. Analyses show that the credit crunch of auto loans and a deterioration of net worth in housing resulting from the bursting housing bubble contributed to the reduced consumption of auto insurance. This result is robust even after controlling for associated factors, such as the insurance price, personal spending on vehicles, and general consumption. These findings provide evidence for a real effect of the financial crisis.

The Face of Risk: CEO Facial Masculinity and Firm Risk

We examine whether a male CEO’s facial masculinity, measured by facial width-to-height ratio (fWHR), predicts the riskiness of his firm. Using the face pictures of 1,162 CEOs in the Execucomp database, we find supporting evidence. Firms with more masculine-faced CEOs have higher stock return volatility and higher financial leverage and are more acquisitive. Their frequency of acquisitions, the dollar amount spent on acquisitions, and the takeover premium are all higher. We find that more masculine-faced CEOs’ compensation is more sensitive to the risk of the firm. The result is robust when we use AI (artificial intelligence)-measured fWHR of the CEOs.Testosterone is a steroid hormone that affects male to aggressively take risks to achieve dominant status. We examine whether CEOs with higher testosterone level make the firms riskier. Since the facial width-to-height ratio (fWHR) of a male adult is determined by his pubertal testosterone exposure, we measure the fWHR male CEOs in both Execucomp and BoardEx that had CNBC interviews during 1997~2009. Controlling for sample selection bias, CEO’s preference for risky hobbies, and overconfidence, we find that high testosterone CEOs (1) increase firm risk; (2) maintain high leverage ratio; (3) are more acquisitive; and (4) receive high VEGA compensation. Key word: testosterone, risk, CEO, leverage, M&A, fWHR, VEGA JEL Classification: G02, G32, G34, M1, Z1 1 Corresponding author. Assistant Professor of Finance, Nanyang Business School, yhkim@ntu.edu.sg , +65-67904639, S3-B1A-16, Nanyang Busness School, Nanyang Business School, Nanyang Avenue, Singapore 639798. We thank Stephen Dimmock, Angie Low, Jun-Koo Kang, Chris Parsons, and Richard Roll for insightful comments. We also thank research assistantship of Gan Zheren, Goh Cai Yun, Grace Wang, Isaiah Ziwei Chia, Jared Wang, Kenn Kee Wen Wong, Li Hui Yi, Loo Pei Yu, Ma Yu Jing, Matthew Lim, Nico Dharmawan, Tan Wei Jie Remus, Yong Mei Ling, Youngjae Jay Choi, Zhang Chuchen, Zou Ziyuan. All errors are our own. 2 Assistant professor of Finance, Nanyang Business School, skamiya@ntu.edu.sg, +65-6790-5718, S3-B1B-64 Nanyang Business School, Nanyang Technological University, Nanyang Avenue, Singapore 639798.

Egalitarian Equivalent Capital Allocation

We apply Moulins notion of egalitarian equivalent cost sharing of a public good to the problem of insurance capitalization and capital allocation where the liability portfolio is fixed. We show that this approach yields overall capitalization and cost allocations that are Pareto efficient, individually rational, and, unlike other mechanisms, stable in the sense of adhering to cost monotonicity.

Learning from Extreme Catastrophes

This article studies the effects of direct and indirect loss experience of extreme catastrophes on expectations concerning the likelihood of future events by investigating the earthquake insurance take-up of Japanese households after the two costliest disasters in history. Direct loss experiences caused the strongest reactions to extreme catastrophes, whereas risk belief updates were a nationwide phenomenon. Sharing personalized information contributed to strong and persistent indirect experience effects. Investigating the effect of past quake experience on reaction to a new major quake, we find that both availability bias and representativeness help explain the effect of past loss experiences. Furthermore, the gambler’s fallacy, as proposed by Tversky and Kahneman (1971), appears to play an important role after an indirect experience with a 1000-year earthquake.

Marginal Cost of Risk-Based Capital and Risk-Taking

This paper explores the impact of capital adequacy requirements on the investment behavior of insurance companies from a new perspective. We specifically investigate one important feature of Risk-Based Capital (RBC) system, the square root rule in aggregating risk categories. We show that the simple square root rule of the RBC calculation formula causes difference in the marginal RBC cost of holding risky fixed-income securities across different insurance companies and across time. We find that insurers facing a lower RBC cost of fixed-income investment purchase more of risky fixed-income securities than those who face a higher RBC cost. Using Hurricane Sandy and Hurricane Katrina as exogenous shocks to RBC cost, we find that insurers suffered more in the two disasters took more risk in their fixed-income investment in the following year and that their overall risk and probability of insolvency also increased. These special cases highlight the side-effect of current US RBC calculation rule implicitly assuming independence between risk categories, and provide an important regulatory implication for minimum capital calculation in capital regulation regimes.