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InsurTech: Digital technologies in insurance
Does property insurance promote corporate innovation? Evidence from China
Abstract
This paper investigates the impact of property insurance on corporate innovation. Using data from Chinese listed firms between 2010 and 2021, we find that property insurance can reduce the uncertainty arising from negative cash flows and then promote corporate innovation. This finding holds true when controlling endogeneity and performing robustness checks. The mechanism tests suggest that the positive impact of property insurance use on corporate innovation is primarily attributed to the enhancement of companies’ risk-taking and the alleviation of financing constraints. Additionally, the effects of property insurance use are stronger for non-state-owned companies, high- and new-technology enterprises, and firms led by more innovative managers. Overall, this study highlights the role of property insurance in enhancing corporate incentives for innovation.
Insurance demand: a historical long-run perspective (1850–2020)
Abstract
Existing research on how international insurance demand varies with income is largely driven by cross-sectional variation post-1970. Drawing on newly collected historical long-run data on life insurance premiums starting as early as 1850 to 2020 for 20 OECD countries, we evaluate the ‘S-Curve’ predicting insurance demand as each country transitions through different income levels. In contrast to predictions in the literature, we reject the ‘S-curve’, but identify a two-bump curve with two high-elasticity episodes, one driven by a massive expansion of life insurance contracts at the end of the 19th century to ensure mortality risks and the other in the late 20th century driven by a shift to savings products. This could imply that the longitudinal catching-up process of countries with low insurance density may be steeper than what the cross-sectional ‘S-Curve’ would suggest.
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Market equilibrium with management costs and implications for insurance accounting
Abstract
We examine a general equilibrium investment model in which agents incur management costs for holding assets. We characterize the influence of these costs on equilibrium prices as a weighted average of these costs for market participants. We then propose a correction method for this influence in valuation procedures used under regulatory frameworks, such as Solvency II. For insurers subject to Solvency II, the accounting correction amounts to approximately €130 billion, the equivalent of 1.8% of investments or 14% of own funds. These results not only contribute to the understanding of management costs in market equilibrium, but also highlight a distortion in current practices which discourages the holding of assets that are expensive to manage and typically inaccessible directly by policyholders.
Catastrophe insurance and solvency regulation
Abstract
Solvency regulation can prevent insurers from making decisions that are detrimental to policyholders. However, it can also discourage the purchase of insurance for catastrophic risks by causing prohibitive insurance loading due to high reinsurance coverage constraints. This paper examines this delicate trade-off. We show that a solvency regulation allowing some level of insurer default in catastrophic states can be a first-best policy. The default rate of this first-best policy varies depending on the risk line and market conditions. Our numerical simulations indicate that it is possible to closely approximate the first-best policy by implementing a straightforward solvency regulation, considering insurers’ Expected Shortfall and Value at Risk, the reinsurance loading, and policyholders’ risk aversion. Therefore, reforming current solvency regulations in this direction could improve policyholders’ welfare.
Adverse selection in tontines
Abstract
Several recent studies have cited the theoretical work of Valdez et al. [Insur: Math Econ 39(2):251–266, 2006] as evidence that there is less adverse selection in tontine-style products than in conventional life annuities. We argue that the modeling work and results of Valdez et al. [Insur: Math Econ 39(2):251–266, 2006] do not unconditionally support such a claim. Conducting our own analyses structured in a similar way but focusing on the relative instead of absolute change in annuity vs. tontine investments, we find that an individual with private information about their own survival prospect can potentially adversely select against tontines at the same, or even higher levels than against annuities. Our results suggest that the investor’s relative risk aversion is the driving factor of the relative susceptibility of the two products to adverse selection.