Handbook of Insurance PDF
Preview Handbook of Insurance
Georges Dionne Editor Handbook of Insurance Second Edition Handbook of Insurance Georges Dionne Editor Handbook of Insurance Second Edition 123 Editor GeorgesDionne HECMontre´al,Que´bec,Canada ISBN978-1-4614-0154-4 ISBN978-1-4614-0155-1(eBook) DOI10.1007/978-1-4614-0155-1 SpringerNewYorkHeidelbergDordrechtLondon LibraryofCongressControlNumber:2013942303 ©SpringerScience+BusinessMediaNewYork2013 Thisworkissubjecttocopyright.AllrightsarereservedbythePublisher,whetherthewholeorpartofthematerialisconcerned, specificallytherightsoftranslation,reprinting,reuseofillustrations,recitation,broadcasting,reproductiononmicrofilmsorin anyotherphysicalway,andtransmissionorinformationstorageandretrieval,electronicadaptation,computersoftware,orby similarordissimilarmethodologynowknownorhereafterdeveloped.Exemptedfromthislegalreservationarebriefexcerptsin connectionwithreviewsorscholarlyanalysisormaterialsuppliedspecificallyforthepurposeofbeingenteredandexecutedon acomputersystem,forexclusiveusebythepurchaserofthework.Duplicationofthispublicationorpartsthereofispermitted onlyundertheprovisionsoftheCopyrightLawofthePublisher’slocation,initscurrentversion,andpermissionforusemust alwaysbeobtainedfromSpringer.PermissionsforusemaybeobtainedthroughRightsLinkattheCopyrightClearanceCenter. ViolationsareliabletoprosecutionundertherespectiveCopyrightLaw. Theuseofgeneral descriptive names,registered names,trademarks, service marks,etc. inthis publication does notimply, evenintheabsenceofaspecificstatement,thatsuchnamesareexemptfromtherelevantprotectivelawsandregulationsand thereforefreeforgeneraluse. Whiletheadviceandinformationinthisbookarebelievedtobetrueandaccurateatthedateofpublication,neithertheauthors northeeditorsnorthepublishercanacceptanylegalresponsibilityforanyerrorsoromissionsthatmaybemade.Thepublisher makesnowarranty,expressorimplied,withrespecttothematerialcontainedherein. Printedonacid-freepaper SpringerispartofSpringerScience+BusinessMedia(www.springer.com) To: Myfamily, fortheircontinuoussupport ClaireBoisvert forher excellent collaboration Mystudents fortheirhunger forlearning Preface WhatapleasureitistodiscoverthesecondeditionoftheHandbookofInsurance,editedbyGeorges Dionne, 12 years after the first! Almost all original basic texts are there, for the most part updated to incorporate the scientific foundations of insurance, and have been re-explored through 15 new contributionsofgreatrelevance.Thefieldofinsuranceeconomicsisindeedexpandingeveryyear,and itisfascinatingtoseethedepthandbreadthofthisgrowth.Oldproblemsarerevisited,reformulated, andremodeled,bringingnewconclusionsandsolutions.Andthroughaprocessofgermination,these fruitfuldevelopmentsgenerateanewstreamofhighlyinterestingresearch. Many key concepts at the core of risk, uncertainty, and insurance economics have been further refined, reassessed, and reanalyzed over the past 12 years—for example moral hazard, adverse selection,thesymmetryandasymmetryofinformation,andriskaversion.Traditionalissueshavebeen re-explored,suchasunderwritingcycles,theperformanceofinsurancecompanies,riskmanagement, distribution networks, regulation, recourse to reinsurance, coexistence between private and public insurance, health insurance, and fraud. New issues have emerged or have grown in importance, including systemic risk, longevity risk, long-term care, interactions and dependencies between variables, the corporate governance of insurance companies, capital allocation within insurance companies, and alternative risk transfer devices such as industry loss warranty (ILW), sidecars, cat bonds,swaps,andsecuritization. What is striking when reading these various contributions is the recurring issue of optimization. How do youdesign an optimalinsurancecontractto minimizemoralhazard,whether exante orex post, and reduce or eliminate adverse selection? What is the optimal demand for insurance from a corporationandforreinsurancefromaninsurancecompany?Howdoyoudraftanoptimalregulation, allowingmarketforcestooperateandcompetitiontofunction,whileminimizingcostlyfailures?How doyouoptimizecapitalallocationwithinacompanybetweenthevariousbranches,linesofbusiness, and markets? How do you optimize a portfolioof risks by minimizing dependencies?How do you optimize the amountof capitalfora giveninsurancecompany,while maximizingthe rate of return, yetrespectingthesolvencylevelcorrespondingtothechosenriskappetite? These37newcontributionsandupdatesprovideanswers—sometimesstraightforward,sometimes morecomplex—toallofthesequestions,andprovidehighlyusefultoolsforagreaterunderstanding of the markets and institutions transferring and sharing risks. This handbook contains a wealth of ideas, insights, models, data and empirical tests, providing food for thought for academics, policy makers,andlastbutnotleast,managersofinsuranceandreinsurancecompanies.Iamconvincedthat carefulreadingofthishandbookwillhelpresearcherstodetectnewfieldsandhypothesestoexplore, policymakerstodrawupregulationsbasedonsolidgrounds,andmanagersofinsurancecompaniesto innovate,redesigncontractpolicies,improvetheuseofcapital,reorientdistributionnetworks,protect againstfraud,andsoon.Inanever-expandingriskuniverse,increasedsophisticationistheonlywayto vii viii Preface pushbackthefrontiersofinsurabilityandthereforemaintain,orevenimprove,thelevelofprotection offeredtoindividualsandcorporationsthroughouttheworld. May I take the opportunity of this preface to congratulate Georges Dionne for his outstanding contributiontothescienceofriskanduncertainty.Hiscapacitytodeveloptheoriesandmodels,while validating them through empirical work, and to deal with the real issues at the core of insurance industrypractice,isunique.MayIalsothankeachoftheauthorsofthisnewhandbook,forproviding contributionsofsuchhighquality. I have a simple wish that this handbookbe diffused to as wide an audience as possible, both in academicandprofessionalspheres.Itwillhelptoimproveunderstandingintermsofthedemandand supplyofinsuranceandreinsuranceandtopromotemarketsolutionsformoreefficientrisktrading. Thedevelopmentofinsurance—bothforP&CandLifelines—isundoubtedlyofbenefittothewelfare ofsocietyasawhole. ChairmanandCEOofSCOR DenisKessler Contents 1 DevelopmentsinRiskandInsuranceEconomics:ThePast40Years .................. 1 HenriLouberge´ 2 Higher-OrderRiskAttitudes................................................................ 41 LouisEeckhoudtandHarrisSchlesinger 3 Non-ExpectedUtilityandtheRobustnessoftheClassicalInsuranceParadigm...... 59 MarkJ.Machina 4 TheEconomicsofOptimalInsuranceDesign............................................. 107 ChristianGollier 5 TheEffectsofChangesinRiskonRiskTaking:ASurvey .............................. 123 LouisEeckhoudtandChristianGollier 6 RiskMeasuresandDependenceModeling ................................................ 135 PaulEmbrechtsandMariusHofert 7 TheTheoryofInsuranceDemand.......................................................... 167 HarrisSchlesinger 8 PreventionandPrecaution .................................................................. 185 ChristopheCourbage,Be´atriceRey,andNicolasTreich 9 OptimalInsuranceContractsUnderMoralHazard ..................................... 205 RalphA.Winter 10 AdverseSelectioninInsuranceContracting .............................................. 231 GeorgesDionne,NathalieFombaron,andNeilDoherty 11 TheTheoryofRiskClassification .......................................................... 281 KeithJ.CrockerandArthurSnow 12 TheEconomicsofLiabilityInsurance ..................................................... 315 JanM.Ambrose,AnneM.Carroll,andLaureenRegan 13 EconomicAnalysisofInsuranceFraud ................................................... 349 PierrePicard 14 AsymmetricInformationinInsuranceMarkets:PredictionsandTests................ 397 Pierre-Andre´ChiapporiandBernardSalanie´ ix
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