Organization of the abstracts and reviews section

Abstracts

Organization of the Abstracts and Reviews section Each abstract published section is characterized

in the Abstracts and Reviews by the following features:

169

and Reviews

If a paper does not deal with any branch of insurance in particular, the branch code is omitted but it always has at least one subject code. Thus, an abstract with codes (E22, M42, B77) deals with inflation and loss reserves in legal expenses insurance.

Serial number By means of the serial number a reader will be able to locate an abstract in the ‘Abstracts and Reviews’ section of this journal. The first two figures of the serial number indicate the volume number and the third figure is the issue number. Thus, serial number 012054 refers to the 54th abstract of the 2nd issue of volume 1.

Subject and insurance branch codes These codes provide a first impression

of the conteut of the paper which is abstracted and the specific branch of insurance it deals with. The key to the codes can be found below. The subject codes themselves are subdivided into two major categories: insurance mathematics (codes starting with M) and insurance economics (codes starting with E). The B-codes are insurance branch codes. For a given abstract, the codes are listed in order of decreasing importance, subject code(s) first, followed by branch code(s).

Subject categories

Keywordr To further identify the content of a paper, one or several keywords are given to its abstract, in order of decreasing importance. The keywords are used for indexing purposes in the keyword index. The section Abstracts and Reviews is organized into five parts. These are ‘Abstracts and Reviews’, the Subject Index, the Insurance Branch Index, the Keyword Index and the Author Index. In the ‘Abstract and Reviews’ portion, the abstracts and reviews themselves are placed in order of their serial number. All information on a given paper such as title, English translation of title, author’s name and address, subject and insurance branch codes and keywords can be found in this section. In the Indexes, reference to an abstract is made by means of its serial number. In some indexes additional information, such as title or other codes, is given.

M

Insurance Mathematics

M22 computer oriented simulation M23 computer games

MOO MO1 MO2 MO3

general and miscellaneous modelling general descriptive statistics and tables data banks

M30 premium, premium principles, M31 experience rating, credibility malus systems M32 deductibles

Ml0 probability theory and mathematical statistics in insurance, general and miscellaneous Ml 1 stochastic models for claim frequency, claim size and aggregate claims Ml2 modelling of portfolios and collectives Ml3 ruin and other stability criteria M20 numerical analysis miscellaneous M21 graduation

in insurance,

general

and

M40 M41 M42 M43 M50 M51 M52 M53 M54

approaches

to risk

and

ordering of risks theory, bonus-

reserves, general and miscellaneous premium reserves loss reserves (incl. IBNR) fluctuation reserves, solvency margins game theory and decision theory in insurance, general and miscellaneous risk sharing arrangements reinsurance, retentions other risk exchanges catastrophic risks

Abstracts and Reviews

170

E

~nsurtinm economics

El0

insurance related mathematical general and miscellaneous El 1 equilibrium theory El2 utility theory El3 portfolio theory E20 macro-economic miscellaneous E21 business cycles E22 inflation E23 taxation E24 employment E25 social security E26 public health

influences,

E31 firm related micro-economics E32 consumer related micro-economics economics,

general

E30 insurance related micro-economic general and miscellaneous

Insurance branch categories BlO B 11 B12 B13

life life individual life group life pension

B20 B21 B22 B23

health permanent health (disability) accident sickness (medical expenses)

B30 B31 B32 B33 B34 B35 B36 B37

fire and related fire industrial fire non-industrial loss of profits (fire consequential loss) burglary flood storm and tempest earthquake

B40 B41 B42 B43

motor third party liability casco passenger liability

and

theory,

E40 E41 E42 E43 E44 E45 E46

business economics, general and miscellaneous products (incl. premiums and deductibles) marketing, publicity risk management prevention technology supervision

E50 E51 ES2 E53 E54

finance, general and miscellaneous rates of interest accountancy investment profit-sharing arrangements

E60 surveys, general and miscellaneous E61 national surveys E62 international surveys

B50 liability B5 1 personal liability B52 business liability B60 B61 B62 B63

transport marine aviation other

B70 B71 B72 B73 B74 B75 B76 B77

miscellaneous hail live stock (cattle) plate glass yacht technical legal expenses travel

B80 B81 B82 B83 B84 B85

social insurance pension daily compensation permanent health (disability) sickness (medical expenses) unemployment

B90 reinsurance B9 1 proportional reinsurance B92 non-proportional reinsurance

171

Abstracts and Reviews

MIO: PROBABILITY THEORY AND MATHEMATICAL STATISTICS IN INSURANCE, GENERAL AND MISCELLANEOUS

MOO: GENERAL AND MISCELLANEOUS 052001 (MOO,E30, E41, B20) Predictability of individual health expenditures. van VIiet C.J.A., University of Rotterdam,

care 052003 (MlO)

The Vol. 59,

Netherlands, Journal of Risk & Insurance, nr. 3, 1992, pp. 443-460. It is widely believed in both academic and political circles that direct, uniform capitation payments to health insurers may induce them to contain costs. The premium-replacing cap&ion payments should account for predictable variations in individual health care expenditures. This article describes a model that encompasses and rejects several previous models that have been proposed for analyzing these variations. The results indicate that, at most 20 percent of the variance among individuals in annual, short-term health care expenditures is predictable. (R.C. Witt) Keywotds: Health Insurance, Capitation Payments, Cost Containment.

DESCRIPTIVE MO2: TABLES

STATISTICS

On a class of asymptotically sequential procedures. Chaturvedi A., Pandey S.K.,

risk&bent Gupta

M.,

Scandinavian Actuarial Journal, 1991, nr. 1, pp. 8796. A class of sequential procedures is developed for the point estimation of the parameter(s) of a population under a family of loss functions plus cost function of the general form. Condition on the initial sample size is determined which ensures the asymptotic risk-efficiency of the proposed class. By means of various examples, it is shown that many sequential point estimation problems can be handled with the help of the proposed class. (Author) Keywora!s: Point Estimation, Loss, Risk, Stopping lime, Risk-eficiency.

AND

052002 (M02, MlO, E30, B30, B40, BSO, B60) An empirical approach to estimating loss Ratios. Lanun-Tennant J., Starks L., Stokes L., University of Texas Austin, U.S.A., Journal of Risk & Insurance, Vol. 59, nr. 3, 1992, pp. 426-442. The empirical Bayes model is explored as a technique for estimating key financial variables that are meaningful to regulators, policyholders, and security analysts of property-liability insurers. The time series mean and two empirical Bayes models of the loss ratio are evaluated for four lines of business, auto-liability, auto physical damage, medical malpractice and fire. Tests were conducted of the forecasting ability of the three estimators. The empirical Bayes process performed well in the forecasting experiments for all four lines of business, especially medical malpractice. Empirical Bayes methods perform better for small firms, which have higher loss ratio variances than large firms. Forecasting tests using incurred losses suggest that the results might be improved by using a longer time series and recognizing the autoregression of the loss process. (R.C. Witt) Keywords: Lass Ratio, Bayes Estimation, Financial Forecasting.

052004 (MlO, Mll) Nonparametric estimation of actuarial values. Praestgaard J., Scandinavian Actuarial Journal, 1991, nr. 2, pp. 129-143. Recently, the so-called &method has been given renewed attention in survival analysis, mostly due to an article by Gill (1989). In this paper, the author applies the b-method to functionals that arise when one uses nonparametric estimators to estimate actuarial values from life history data. The author obtains general formulas for the asymptotic distribution of nonparametric actuarial value estimators. To illustrate these calculations, he compares the large sample properties of traditional and nonparametric estimators of actuarial values. This is done for two insurance contracts, a term insurance contract and a disability annuity, under the model assumptions specified in the Danish technical basis G-82. (Author) Keywords: Nonparametric Survival Analysis, Markav Chains in Life Insurance, Delta Method, Haabmard Dtj?erentiability. 052005 (MlO) Rates of risk convergence

Bayes estimators.

of empirical linear

172

Abstracts and Reviews

Hesselager O., Scandinavian Actuarial Journal, tar. 1, 1992, pp. 88-94. An empirical linear Bayes estimator is

Wilkie A.D., R. Watson & Sons, London, UK, Mitteilungen der S. V. V.M., He3 2, 1992, pp. 123142.

asymptotically optimal in the usual sense if its average risk converges to the risk of the corresponding linear Bayes estimator. The present paper demonstrates that the following result holds for the most commonly used models: if the unknown (structural) parameters are estimated in such a way that their mean square error converges at a certain rate, then the corresponding empirical linear Bayes

Several stochastic models are presented and their actuarial applications are discussed. (Author)

estimator is asymptotically optimal with the same rate of risk wnvergence. In particular, this is the case for the random coefficient regression model, and for bier-arc&al models in the univariate case. (Author) Keywords: Empirical Linear Bayes, Asymptotic Optimal@, Risk Convergence, Regression Models, Hierarchical Moa’els. 052006 (MlO) Noch einige Ungleichungen filr charakteristische Funktionen. Rawitx II., Scandinavian Actuarial Journal, nr. 1, 1991, pp. 4973. The paper can be seen as the third part of a work

that also comprises articles published in 1973 and 1975. It wncems inequalities and bounds for the characteristic function of a random variable X. The first result consists of two inequalities for Ifjuj12. The second result is a bound for If@] 12 when the underlying probability distribution of X is restricted to a class with certain fixed moments. The third result is a remainder term estimate for the Taylor expansion off(u) for an odd number of terms. The fourth and fifth results are inequalities for p(u) 12 when the underlying probability distribution has an absolutely continuous component satisfying two different kinds of regularity conditions. Finally, some errors in Prawitz (1975) are wrrected. (Author) Keywords:

Characteristic

Functions, Bounds.

Ml: STQCXIASTIC MODELS CLAIM FREQUENCY, AGGREGATE CLAIMS

FOR CLAIMS SIZE AND

052007 (Mll) Stochastic investment models and their actuarial

applications.

Keywords:

Stochastic model, Investment.

052008 (Mll) Saddlepoint approximations to the distribution of the total claim amount in some recent risk models. Jensen J.L., Scandinavian Actuarial Journal, nr. 2, 1991, pp. X54-168. The saddlepoint approximation or Esscher

approximation for the total claim distribution is extended from the classical risk model to a number of models considered recently in the literature. Theorems are derived for the validity of the (Author) approximation. Keywords: Compound Sum, Conjugate Distribution, Tail Probability, Log-concave Density. 052009 (Ml 1) Asymptotic results for the risk process based on marked point processes. Moller C.M., Scandinavian Actuarial Journal, nr. 2, 1991, pp. 169-184. In this paper, asymptotic properties for the risk process will be studied when the number of risk units tends to infinity. The paper extends asymptotic properties for the classical risk process to more

general processes. In the classical risk process the claim amounts are assumed independent and identically distributed, and the claim number process is a homogeneous Poisson process. The key tool is point process theory with associated martingale theory. The results are illustrated by (Author) examples. Keywords:

Risk Process,

Martingale

Theory.

052010 (Mll, B13) The dynamics of pension funds in a stochastic environment. de Dominicis R., Mance R., Granata L, Scandinavian Actuarial Journal, nr. 2, 1991, pp. 118-128. The problem of studying the dynamic management

of a pension fund for a sufficiently long time interval can be, in our opinion, faced, mainly with models which use either stochastic processes or simulations.

Abstracts and Reviews

The second approach was developed through Monte Carlo methods (Tomassetti, 1979) or with actuarial mean values (Manta, 1988; Manta & Volpe, 1988). The stochastic models to describe the phenomenon was developed in other papers (see Balcer & Sahin,

1983; De Dominicis & Manta, 1985). But up to now, while the simulation models can consider all the aspects of the complex phenomenon in study, the stochastic approach, in our opinion, was not sufficient to describe completely the dynamic management of a pension fund. This paper contains the final results of a joint research started in 1981 with a paper by Carravetta et.al., in particular it is a generalization of a study presented by De Dominicis & Manta (1985). For this purpose of the application, they introduce another stochastic process, such that it is possible to consider the worker seniority in the model. The new process is a generalization of the Discrete-Time NonHomogeneous Semi-Markov Reward Process (DTNHSMRP), already introduced by the same authors in 1985. It is evident that all the rewards depend on seniority and by introducing it in the study, pension fund management can be analyzed in a more suitable way. Furthermore, it should be pointed out that the process that they present in the paper, is general and can be usefully in other problems as well (e.g. the reliability of repairable complex systems). (Author) Keywords: Process, Chain, Ma&v, Semi-Ma&v, Sojourn, Seniority, Kernel, Pension, Fund,Reward, Renewal.

052011 (Mll) HattendorWs theorem and Thiele’s differential equation generalized. Norberg R., Scandinavian Actuarial Journal, nr. 1, 1992, pp. 2-14. Hattendorffs classical result on zero means an uncorrelatedness of the losses created in disjoint time intervals by a life insurance policy is an immediate consequence of the very definition of the concept of loss. Thus, the result is formulated and proved here in a setting with quite general payments, discount function, and time intervals, all stochastic. A general representation is given for the variances of losses. They are easy to compute when sufficient structure is added to the model. The traditional continuous time Markov chain model is given special consideration. A stochastic Thiele’s differential

173

equation is obtained in a fairly general counting process framework. (Author) Keyworak Hattenabfls theorem, Payment Streams, Martingales, Optional Sampling, lhiele ‘s Dt@rential Equation.

052012 (Mll) Numerical evaluation of Markov transition probabilities based on tbe discmtized product integral. Moller C.M., Scandinavian Actuarial Journal, nr. I, 1992, pp. 76-W. The present paper proposes and investigates a procedure for numerical evaluation of the transition probabilities for a time-inhomogeneous Markov process when the intensities are known (estimated). The procedure is based on Taylor-expansion of the transition probabilities linked with the ChapmanKolmogorov equation. (Author) Keywords: Markov Process, Product Integral, Taylor Expansion, Matrix Norm.

052013 (Mll, B24) Some remarks concerning stochastic interest rates in relation to long term insurance policies. Papachristou D. J., Waters H.R., Scandinavian Actuarial Journal, nr. 2, 1991, pp. 103-117. This paper starts by considering the calculation of the moments of the present values of the profit on a long term sickness insurance policy using a relatively simple stochastic model for interest rates. It then considers the covariance between the present value of the profit on two policies for more general long term insurance policies using more general stochastic interest rate models. (Authors) Keyworak Stochastic Interest Rates, Long Term Insurance, Sickness Insurance. 052014 (Mll, M41) Eine allgemeine Versicberung auf mehrere L&en und ihre Deckungskapitalen. Beinhauer R., Mitteilungen der S. V. V.M., Heft I, 1992, pp. 47-40. The author considers an insurance contract that is based on a collective M of insured lives. Let X, be the subset of M consisting of the survivors at time t. The resulting process is a Markov process. The collective “dies” at a stopping time. The contract provides premiums and benefits that depend on t and X,. Double-entry bookkeeping makes that mechanism

Abstracts and Reviews

174

of the contract transparent. The author derives an expression for the mathematical reserves in terms of the transition probabilities of the underlying process. (Author) Keywords: Markov Process, Mathematical Reserves. MZ2: MODELLING COLLECTIVES

OF PORTFOLIOS

AND

052015 (M12, B24)

Die

M21:

Kostenentwickhmg

Gesundheitswesen

schweixerischen und die Erhtihtmgen der Ant-

1992, pp. 181-194. This study shows the relationship between the increases of the costs paid by the sickness funds on the one hand and the higher hospital costs and medical practitioners’ fees on the other hand. Using the modem index method the observed growth rates can be separated into each factor responsible for the development of costs. Contrary to other assertions it can be shown that the increase of costs in hospitals is basically caused by the cost of living (higher tariffs), however, for medical practitioners the increase is traceable above all to growth in numbers. From this, the authors can make deductions about the possible saving potential of different health serviCeS. (Author) Keywords: Sickness, Hospital Costs.

052016 (M12) Recherche de I’dtat stationnaire d’une population. Hart M., Universit6 de Lausanne, Switzerland, Mitteilungen &r S. V. V M., Heft 2, 1992. The author examines various aspects of the convergence of a population to the stationary or stable state. Migration is neglected, and the birth and mortality rates are assumed to be constant. (Author) Keywords: Population, Stationary State.

052017 (M13) The probability

AND

of ultimate

OTHER

ruin

STABILITY

with a variable

premium loading, a special case. Dickson D.C.M., Scandinavian Actuarial Journal. 1991, nr. 1, pp. 75-86.

GRADUATION

im

und SpitaItarife in cinder Gegeniiberstelhmg. Miiller M., Mitteilungen der S. V V.M., Hefr 2,

RUIN M13: CRITERIA

The probability of ultimate ruin in the classical risk model is investigated under the assumption that the premium loading varies according to the insurer’s surplus. The loading is assumed to be constant at 0, when the surplus is below some specified level b; otherwise it is constant at 0i. (Author) Keywords: Variable Loading, Ultimate Ruin, Probability and Severity of Ruin.

052018 (M21) Information theoretic multivariate graduation. Brockett P.L., Huang Z., Li H. Thomas D.A., Scandinavian Actuarial Journal, nr. 2, 1992, pp. 144-153. This paper presents a new multivariate graduation method based upon a constrained information theoretic methodology. The statistical formulation of the graduation problem is shown to result in a convex mathematical programming problem, thus allowing the actuary to include constraints such as monotonicity along the rows, monotonicity down the column, monotonicity along the rows, monotonicity along the upward diagonal, as well as convexity, and any of a variety of other relationships desired for the graduated series. An illustrative application is made to the graduation of select and ultimate mortality tables. (Author) Keywords: Constrained Graduation, Prior Knowledge Incorporation, Mathematical Programming. M30: PREMIUM, PREMIUM ORDERING OF RISKS

PRINCIPLES,

052019 (M.30, Ell, E30, E50, E53, B30, B40, B50, B60) The equilibrium insurance price and underwriting return in a capital market setting. Moridaira S., Urrutia J.L., Witt R.C., Keio University, Japan, Loyola University of Chicago, University of Texas, U.S.A., Journal of Risk & Insurance, Vol. 59, nr. 2, 1992, pp. 291-3&I. This article develops a modified capital asset pricing model, CAPM, which integrates the markets for financial assets, real assets and insurance. It is shown that the purchase of insurance should not be ignored in determining the equilibrium rate of return on assets, and that the equilibrium insurance premium should adjust for the sources of systematic

Abstracts and Reviews

risk associated with financial assets, real assets, and the insurance market. Consistent with some earlier studies, it was found that the insurer’s equilibrium underwriting return could be negative, rather than positive, under certain conditions. (R.C. Witt) Kvordr: Capital Asset Pricing, Insurance, Systematic Risk, Financial Real Assets. 052020 (M30, M12)

The impact of rehabilitation on contingent invalidity annuities. Chuard M., Chuard P., Zurich VersicherungsMitteilungen Der Gesellschaft, Switzerland, S. V. V. M., HeJs 1, 1992, pp. 61-82. This paper gives actuarial methods which respect the impact of rehabilitation on contingent invalidity annuities. By way of an example, one can see the numerical consequences of such a rehabilitation. (Author) Keywords: Rehabilitation, Invalidity.

EXPERIENCE RATING, CREDIBILITY THEORY AND BONUS-MALUS SYSTEMS

M31:

052021 (M31,M40) Prediction of outstanding claims: A hierarchical credibility approach. Hesslager O., Scandinavian Actuarial Journal, nr. 1, 1991, pp. 25-47. We consider the problem of predicting unpaid losses in respect of incurred, but not reported claims in the case where the distribution of delays until notification may depend on the type of claim. A hierarchical credibility model is presented, where the distribution of delays corresponding to different types of claims, as well as other characteristics affecting the claims experience, are viewed as realizations of unobservable random variables. The proposed method is illustrated by a numerical example. (Author) Keywords: Hierarchical Credibility Theory, IBNR.

175

Prospective and retrospective reserves are defined as conditional expected values, given some information available at the time of consideration. Each specification of the information invoked gives rise to a corresponding pair of reserves. Relationships between reserves are established in the general set-up. For the prospective reserve the present definition conforms with, and generalizes, the traditional one. For the retrospective reserve, it appears to be novel. Special attention is given to the continuous time Markov Chain Model frequently used in the context of life and pension insurance. Thiele’s differential equation for the prospective reserve is shown to have a retrospective counterpart. It is pointed out that the prospective and retrospective differential equations have, respectively, the Kolmogorov backward and forward differential equations as special cases. Practical uses of the differential equations are demonstrated by examples. (Author) Keywords: Prospective and Retrospective Reserves, Continuous Time Markov Chains, Conditional Ma&v Chains, Ihiele’s Dtflerential Equation, Retrospective Counterpart. M50: GAME THEORY AND DECISION THEORY IN INSURANCE, GENERAL AND MISCELLANEOUS

052023 (MSO) Three actuarial applications

of decision trees. Lenmire J., University of Pennsylvania, U.S.A., Mitteilungen der VSW, Hefl2, 1992, pp. 157-l 79. Three different actuarial applications of decision analysis are presented, to evaluate the benefits of smoke detectors laws, compare fixed-rate and adjustable-rate mortgage loans, and help a life insurance underwriter select a medical examinations strategy. (Author) Keywork: Decision Analysis. 052024 (IWO, E12)

RESERVES, MISCELLANEOUS

M40:

GENERAL

AND

052022 (M40, BlO) Reserves in life and pension insurance. Norberg R., Scandinavian Actuarial Journal, nr. I, 1991, pp. 3-24.

Recent developments

in modelling Uncertainty and ambiguity. Camerer C., Weber M., University Christian-Albrechts-Universitat, Kiel, Journal of Risk & Uncertainty, Vol. 5, pp. 325-3 70. In subjective expected utility (SEU), weights people attach to events are their

preferences: of Chicago; Germany, nr. 4, 1992, the decision beliefs about

176

Abstracts and Reviews

the likelihood of events. Much empirical evidence, inspired by Ellsberg (1961) and others, shows that people prefer to bet on events they know more about, even when their beliefs are held constant. (They are averse to ambiguity, about or uncertainty probability). The authors review evidence, recent theoretical explanations, and applications of research on ambiguity and SEU. (Authors) Keyworcis: Ambiguity, Uncertainty, Ellsberg Paradox, Nonexpected Utility. 052025 (M50, E12)

Ambiguity and decision modeling: A preferencebased approach. Sarin R., Winkler R.L., University of California, U.S.A.; Duke University, Durham, U.S.A., Journal of Risk & Uncertainty, Vol. 5.4, 1992, pp. 389407. In this article, the authors develop a model that permits a decision maker’s preferences to depend on the decision maker’s ambiguity about the probability of an event that is relevant for decision-making purposes. They deal with ambiguity through preference modeling, with ambiguity leading to modifications in the utilities of outcomes. The behavior of ambiguity premiums and probability premiums as the payoffs are varied depends on the nature of the modifications in utilities. Particular forms of the model that arise under different sets of assumptions about preferences include additive, bilinear and ratio forms. They conclude with a brief example and some thoughts about potential generalizations and implications of the model. (Authors) Keywords: Ambiguity, Decision Modeling, Preference, Utility. 052026 (M50) Preference reversals

and the measurement of environmental values. Irwin J.R., Slavic P., Licbtenstein S., McClelland G.H., Journal of Risk & Uncertainty, Vol. 6, nr. 1, 1993, pp. 5-18. Numerous studies have demonstrated that theoretically equivalent measures of preference, such as choices and prices, can lead to systematically different preference orderings, known as preference reversals. Two major causes of preference reversals are the compatibility, effect and the prominence effect. The present studies demonstrate that the combined effects of prominence and compatibility

lead to predictable preference reversals in settings where improvements in air quality are compared with improvements in consumer commodities by two methods, willingness to pay each improvement and choice (for which of the two improvements would you pay more? Which improvement is more valuable to you?) Willingness to pay leads to relatively greater preference for improved commodities: choice leads to relatively greater preference for improved air quality. These results extend the domain of preference reversals and pose a challenge to traditional theories of preference. At the applied level, these findings indicate the need to develop new methods for valuing environmental resources. (Authors) Keywords: Preference Reversals, Environmental Values, Compatibility Eflect, Prominence Effect, Contingent Valuation, Willingness to pay. 052027 (MSO)

An empirical investigation into the effect of psychological perceptions on the Willingness-topay to reduce risk. Savage I., Northwestern University, U.S.A., Journal of Risk & Uncertainty, Vol. 6, nr. I, 1993, pp. 75-90. A large sample of the residents of metropolitan Chicago were interviewed to investigate whether psychometric attributes by which people view hazards are related to their willingness-to-pay to reduce the hazard. One of the hazards, stomach cancer, is found to engender fear and a high willingness-to-pay. Among the other hazards, willingness-to-pay increases with the dread of the hazard but declines with degree of knowledge people have about the risk they are exposed to. When adjustment is made for perceived probability of occurrence, one can conclude that the implied valuation of life varies across hazards according to psychometric risk perceptions. This result has practical implications for policy makers when making decisions regarding spending to reduce hazards. (Author) Keywords: Risk, Value of Life, Psychometric Characteristics. 052028 (M50, E12)

Counterexamples to &gal’s measure representation theorem.

Abstracts and Reviews

Wakker P., University

of Nijmegen (NICI), The Netherlands, Journal of Risk & Uncertainty, Vol. 6, nr. 1, 1993, pp.91-98. This article discusses relations between several notions of continuity in rank-dependent utility, and in the generalized version of rank-dependent utility as initiated by Segal. Primarily, examples are given to show logical independencies between these notions of continuity. This also leads to counterexamples to Segal’s (1989) characterizing theorem 1. (Author) Keywor&: Rank-dependent Utility, Qualitative Probability. 052029 (M50, E12)

The measure representation: A correction. &gal U., University of Toronto, Ontario MSSlAl, Canada, Journal of Risk & Uncertainty, Vol. 6, nr. I, 1993, pp. 99-107. Wakker (1991) and Puppe (1990) point out a mistake in theorem 1 in Segal (1989). This theorem deals with representing preference relations over lotteries by the measure of their epigraphs. An error in the theorem is that it gives wrong conditions concerning the continuity of the measure. This article corrects the error. Another problem is that the axioms do not imply that the measure is bounded; therefore, the measure representation applies only to subsets of the space of lotteries, although these subsets can become arbitrarily close to the whole space of lotteries. Some additional axioms (Segal 1989, 1990) implying that the measure is a product measure (and hence anticipated utility) also guarantee that the measure is bounded. (Author) Keywords: Anticipated Utility, Rank-dependent Probabilities, Measure Representation. 052030 (M50, E12)

Self-protection in the expected-utility-of-wealth model: an impossibility theorem. Sweeney G., Beard T.R., Vanderbilt University, Nashville; Auburn University, Auburn, U.S.A., Geneva Papers on Risk & Insurance theory, Vol. 17, nr. 2, 1992, pp. 147-158. The authors investigate the possibility of ordering expected utility-of-wealth maximizers according to their propensities to purchase self-protection. They define one agent as “more cautious” than another (toward a loss of specific size given a specific initial wealth) if the first agent would spend more on selfprotection than the other, so long as the technological

177

relationship between spending and loss probability belongs to a broad class of functions. They show that the expected-utility-of-wealth model does not allow for the possibility that one agent could be “more (Authors) cautious” than another. Keywor&: Self-protection, Expected Utility. 052031 (IWO, E12) A note on beneficial changes in random variables. Hadar J., Kun Seo T., Southern Methodist University, Dallas, U.S.A. , Geneva Papers on Risk & Insurance theory, Vol. 17.2, 1992, pp. 171-l 79. This paper is an extension of Jack Meyer’s paper titled “Beneficial Changes in random Variables under multiple Sources of Risk and their comparative Statics”, published in the June 1992 issue of this journal. The extension consists of showing which of the sufficient conditions in Meyer’s Theorems 1 & 3 are also necessary, and which are not. In addition, conditions are provided which are necessary and sufficient for general beneficial changes to imply a decrease in the demand for insurance. (Author) Keywords: Demand for Insurance, Risk Aversion, First-degree Stochastic Dominance Shifts, MeanPreserving Shifts. M52:

REINSURANCE, RETENTIONS

052032 (M52, M13) An insight into the excess of loss retention limit. Lourdes Centeno, Scandinavian Actuarial Journal, nr. 2, 1991, pp, 97-102. In this paper, the authors provide an algorithm to calculate the optimum retention of an excess of loss reinsurance arrangement of a risk, optimum in the sense that it maximizes the adjustment coefficient, assuming that the reinsurance premium is calculated according to the expected value principle, the loading coefficient of which is dependent on the retention limit. (Author) Keywords: Reinsurance, Excess-of-loss, Adjustment Coeflcient.

052033 (M52, E31, E43, E50, BlO) An analysis of life insurer retention limits. Lee K, Palmer B.A., Skipper H.D., Korea Life Insurance Association & Georgia State University, Journal of Risk & Insurance, Vol. 59, nr. 1, 1992, pp. 57-71.

178

Abstracts and Reviews

This study examines the relationship between ceding life insurers’ retention limits on an insured life basis and certain operational and financial characteristics of the companies. Analysis is performed using 97 major U.S. insurers vary from $25.000 to $2O.OOO.OOOper insured life. Five factors are shown to have the greatest impact on life insurer retention limits. Not unexpectedly, firm size is found to be the most important factor. Four other explanatory factors, each statistically significant at the 0.01 level, provide important additional insight into this relationship. These factors are (1) form of insurer organization (i.e. mutual or stock), (2) the firm’s emphasis on new business, (3) average policy size and (4) the company’s emphasis on term insurance. Collectively, the principal components regression model explains nearly 90 percent of the total variation in retention limits for the sample insurers. (R.C. Witt) Keywords: Retention Limits, Ltfe Insurance, Reinsurance. 052034 (M52)

Dynamic equilibrium and the structure of premiums in a reinsurance market. Aase K.K., Norwegian School of Economics and Business Administration, Bergen, Norway, Geneva Papers on Risk & Insurance Theory, Vol. 17, nr. 2, 1992, pp. 93-136. In this paper, the authors present an economic equilibrium analysis of a reinsurance market. The continuous-time model contains the principal components of uncertainty; about the time instants at which accidents take place, and about claim sixes given that accidents have occurred. They give sufficient conditions on preferences for a general equilibrium to exist, with a Pareto optimal allocation, and derive the premium functional via a representative agent pricing theory. The marginal utility process of the reinsurance market is represented by the density process for random measures, which opens up for numerous applications to premium calculations, some of which are presented in the last section. The Hamilton-Jacobi-Bellman equations of individual dynamic optimization are established for proportional treaties, and the term structure of interest rates is found in this reinsurance syndicate. The paper attempts to reach a synthesis between the classical actuarial risk theory of insurance, in which

virtually no economic reasoning takes place but where the net reserve is represented by a stochastic and the theory of equilibrium price process, formation at the heart of the economics of uncertainty. (Author) Keywords: Reinrurance, Exchange Equilibrium, Intertemporal Economic Model, Market Marginal Utility Process, Densities for Stochastic Processes, Random Measure, Marked Point Processes, Dynamic Optimization, Term Structure of Interest Rate, Incomplete ModeLF, Non-proportional Treaties. M53:

OTHER

052035 (M53) Risk exchange

RISK

EXCHANGES

I: A unification

of some existing

tT!SUltS.

Taylor G., Scandinavian Actuarial Journal, nr. I, 1992, pp. 15-39. The paper unities certain concepts which have arisen within the field of risk exchange. Borch’s theorem on Pareto-optimal risk exchanges is shown to be derivable from a Bowley solution when there are only two participants in the risk exchange. This theorem is then extended to an n-party risk exchange by equating this to a sequence of 2-party exchanges between the n participants. Finally, the conditions for constrained Pareto-optimal risk exchanges are derived as extreme cases of Borch’s theorem. Thus, Borch’s theorem and Btihlmann and Jewell’s theorem on constrained exchanges are shown to be ultimately derivable from the Bowley solution. (Author) Keywords: Risk Exchange, Pareto-Optimal, Bow&v Solution, Constrained Risk Exchange. 052036 (M53) Risk exchange II: Optimal reinsurance contracts. Taylor G., Scandinavian Actuarial Journal, nr. 1, 1992, pp. 40-59. The paper, a sequel to Taylor (1992), discusses risk exchange (REX) and reinsurance. A REX is global if its recoveries depend on just aggregate claims of the insurer in question; local if it depends on individual claims. A reinsurance is a 2-party REX under which recoveries are payable in only one direction between the two insurers; are dependent on the claims of only the insurer making the recoveries (the cedent); are non-negative; and do not exceed the direct claims on the cedent.

Abstracts d

Optimality of these forms of REX is discussed. In each case, the optimal REX is characterized (Sections 3 to 6). Optimization here consists of maximization of the expected terminal utility of the one of the two parties who acts as price taker, given the premium principle applied by the other party , who acts as price maker. Section 7 compares global and a particular class of local REXs in which individual recoveries are generated by individual claims and, perhaps surprisingly, find the former always preferable. Comment is made on reinsurance practice in the light of this result. Section 8 considers the shapes of the optimal reinsurance recovery functions identified in earlier sections, and compares these with the types of reinsurance encountered in practice. (Author) Keyword: Risk Exchange, Optimal Reinsurance, Global Reinsurance, Local Reinsurance.

ElO: INSURANCE RELATED MATHEMATICAL ECONOMICS, GENERAL AND MISCELLANEOUS 052037 @lo)

The demand for insurance on incomplete markets. Kiscbka P., St. Gallen, ZVers Wiss., Vol. 80, 1991, pp. 309-318. The demand for insurance on incomplete markets was first investigated in the early eighties. Contrary to classical insurance demand models, it is not assumed that every risk can be insured totally. The derivation of the optimal degree of insurance, therefore, has to be made with respect to the joint distribution of the insurable and the uninsurable risks. ln this paper, three asp&s of this development are considered. First, it is assumed that the uninsurable risk is a function of the insurable one. Conditions are derived which imply that complete insurance is optimal despite of unfair premiums. Second, the effects of a varying degree of compulsory insurance are analyzed with respect to demand for market insurance. Third, it is shown that expected utility theory is not compatible with plausible behavioral assumptions, when additional risks exist. Local expected utility theory gives a possibility to deal with this case. (Author) Keywords: Incomplete Market, Insurable Risk.

Reviews

179

052038 (ElO) Capital market theory as a basis of insurance pricing? Albrecht P., Mannheim, Germany, ZVers Wiss., Vol. 80, 1991, pp. 499-530. The present paper questions the application of models and results of modem financial theory to the problem of pricing insurance contracts, insurance portfolios and the determination of “fair” gross premiums. They discuss the principles and the application of the Capital Asset Pricing Model (CAPM), Option Pricing Theory (OPT) and models on arbitrage free insurance markets. As a result of these investigations it is concluded that the application of modem financial theory to the problem of insurance premium calculation is not to be considered as adequate and offers no alternatives to traditional actuarial models. The main reasons for these conclusions are: (1) Capital markets do not give an adequate valuation of actuarial risks. E.g. Stock market indices do not possess a significant power of explanation for risks insured and are, therefore, no valid risk or tariff factors. (2) Structural assumptions on markets, which are successfully applied for capital markets (e.g. the no-arbitrage condition) are not adequate for the analysis of insurance markets, which possess different trading structures and market participants as well as products different in nature. However, this does not imply that capital market theory is of no relevance for insurance business administration at all. On the contrary, the results of financial theory are very relevant for problems of investment management of insurance companies and for the valuation of investment risks. They only become inadequate if used to value actuarial risks. (Author) Keywords: Pricing, CAPM, OPT.

052039 (ElO) Cash flow matching, horizon matching, riding the yield curve, selected strategies for the management of bond portfolios. Benz R., Mannheim, Germany, ZV&s Wiss., Vol. 80, 1991, pp. 583-597. The present contribution discusses strategies for the management of bond portfolios. First, a classification into three basic types of strategies is

180

Abstracts and Reviews

given. Passive strategies primarily aim at the immunization of the value of the portfolio against interest rate changes, active strategies aim at return maximization trying to take advantage of the chances of interest rate changes, finally hybrid strategies exhibit both active and passive elements. The discussion of three selected strategies follows. First, the method of Cash Flow Matching is presented. The strict version requiring an exact match of the cash flows of assets and liabilities as well as a variation involving one period cash carry forward are treated including the corresponding linear programs for the determination of the optimal (minimum cost) portfolio. Subsequently, the method of Horizon Matching combining elements of Cash Flow Matching and Duration Matching is discussed. A presentation of the Riding the Yield Curve Strategy follows where one tries to take advantage of an upward-sloping yield curve by investing in bonds with a longer term-to-maturity than desired, selling them before they mature, thereby capturing extra capital gains. Finally, the chances and risks of the basic techniques of bond portfolio management are illustrated by means of risk-return-diagram. (Author) Keyword%: Bond portfolio, Strategy.

EII:

EQUILIBRIUM

THEORY

052040 (Eli, E30, E41, B20) Evidence of adverse selection in the individual health insurance market. Browne M. J., University of Georgia, Journal of Risk & Insurance, Vol. 59, nr. 1, 1992, pp. 13-33. In this article, the author tests the market for individual health insurance to determine if adverse selection is present. Evidence is found that low risk consumers do purchase less insurance in the individual market than they do in the group market. This finding is consistent with adverse selection existing in the individual market for insurance. However, the finding may also be explained by low risks being off their demand curve in the group market. A second finding of the study is that equilibrium in the individual market is characterized by a subsidization of high risk consumers’ insurance purchases by low risks. This is consistent with the pooling equilibrium models of Wilson and Miyazaki

but not the separating equilibrium model of Rothschild and Stiglitz. (R.C. Witt) Keywor&: Health Insurance Markets, Adverse Selection, Subsidies.

052041 (Eli, E30, E44, BSO, B30, B40, B50) Moral hazard, insurance and public loss prevention. Lee K, Towson State University, U.S.A., Journal of Risk 81 Insurance, Vol. 59, nr.2,1992, pp. 275-283. The effect of public provision of a loss-preventive good on equilibrium in sn insurance market under moral hazard is analyzed. The primary advantage of public provision lies in its ability to produce information, which alleviates moral hazard since the level of public good is publicly known. However, public provision entails an efficiency loss since the public good level cannot be tailored to suit individual demands. The analysis formalizes this cost-benefit trade-off involved in public provision, and discusses when public provision improves on market equilibrium. (R.C. Witt) Keywords: Loss Prevention, Moral Hazard, Public Gooa’s, Information. EZ2:

UTILITY

THEORY

052042 (E12, E30, B20) Implications of uncollectibles for hospitalization coinsurance rates. Elliott C.S., University of South Florida, Journal of Risk & Insurance, Vol. 58.4, 1991, pp. 616-646. The aim of this article is to study the effects of hospital care uncollectibles on optimal coinsurance rates for group health plans. A model isolates the influence of uncollectibles from the influence of risk aversion. It is found that if hospitals are willing to negotiate price concessions with payer groups, in return for lower patient-copayment responsibilities, a representative risk neutral consumer may purchase actuarially fair insurance. ln addition, because the benefits from lower bad debts and any risk pooling may outweigh the costs of moral hazard, the optimal insurance contract may specify full insurance. The theory helps to explain price concessions negotiated by numerous payer groups, such as health maintenance and preferred provider organizations, the contractual allowances given to insurers such as Blue Cross, the attraction of complete prepayment, and non-random health care coverage. (Author)

Absrracrs and Reviews

Keywords: Group Health, Uncolledble.s, Pricing.

Coinsurance

Rates,

052M3 (E12, E30, E41, B30, B40, B50) Inrrease in risk and the optimal deductible. Deters F., Demurs M., Carleton University, Journal of Risk & Insurance, Vd. 58, nr. 4, 1991, pp. 670699.

Using Arrow’s (1971,1974) model of the optimal determined) deductible, this article examines the impact of increases in risk (RothschildStiglitz mean-preserving spreads and DiamondStiglitz mean-utility-preserving spreads) and firstorder stochastic dominance shifts in the distribution function of losses on the optimal insurance contract between a risk-averse decision-maker and a riskneu&al insurer. Iu particular, it is found that a firstorder stochastic dominance shift in the distribution of losses has generally an ambiguous impact on the deductible. This result raises some doubt about the asymmetric information (sign&ng) literature’s identification of low (high) risk with smaller (greater) (R.C. Witt) demand for insurance.

(endogenously

Keywords: D~u~ib~~ Risk Aversion, Decreases Risk, Stochastic Dominance.

in

052044 (E12, E32, EN, B30, B40, BSO, B60) The ~p~~ve statics of ~f-p~~~on. Sweeney G.H., Beard T.R., Vanderbilt University, Auburn University, Journal of Risk & Insurance, Vol. 59, nr. 2, X992, pp. 301-309. This article considers the effects of changes in

initial wealth and loss size on optimal self-protection (loss prevention) activity iu a simple model of selfprotection choice. The effect of an initial wealth increase is shown to depend on both the probability of a loss and characteristics of the agent’s absolute risk-aversion function, while increases in the size of the potential loss are shown to lead to increased selfprotection under a variety of plausible restrictions on risk preference. A set of sufficient conditions for signing comparative static results are obtained. (R.C. Witt) Keywords: Loss ~~e~ion, Risk Aversion, Serf Protection.

181

Tversky A., Kahnen~au D., Stanford University, Stanford, U.S.A; University of California at Berkeley, USA, Journal of Risk & Unee~ai~, Vol. 5.4, 1992, pp. 297-323. The authors develop a new version of prospect

theory that employs cumulative rather than separable decision weights and extends the theory iu several respects. This version, called cumulative prospect theory, applies to uncertain as well as to risky prospects with any number of outcomes, and it allows different weighting functions for gains and for losses. Two principles, di~nis~ng sensitivity and loss aversion, are invoked to explain the characteristic curvahrre of the value function and the weighting functions. A review of the experimental evidence and the results of a new experiment confirm a distinctive fourfold pattern of risk attihrdes: risk aversion for gains aud risk seeking for losses of high probability; risk seeking for gains and risk aversion for losses of low p~bability. (Author) Keyvordr:

Cumulative Prospect

Theory.

052046 (E12, MSO) Bayesian decisions with ~biguo~ ~li~ave~ion. Viscusi W.K., Magat W.A., Duke University, Durham, U.S.A., Journal of Risk & Uncertainty, Vol. 5, nr. 4, 1992, pp. 371-287. l&is study provides an empirical perspective on

the effect of ambiguous environmental risk information on lottery preferences using a sample of 646 adults. The learning process follows a Bayesisn expected utility model in terms of the overall magnitude and sign of the weights that respondents place on the risk information. Significant ambiguous belief aversion that is consistent with the Ellsberg paradox is also evident. The extent of this aversion increases with the size of the risk spread, but at a decreasing rate. These results are consistent with both probability-based and preference-based models of ambiguous probabilities. The findings also indicate the presence of cognitive limitations in the processing of risk information, but lead to rejection of more extreme models in which individuals respond in alarmist fashion or do not learn at all. (Authors) Keywords: Ambiguous Belief Aversion, Bayesian Decisions, Risk-Information Processing.

052045 @x2)

Advances

in

representatiou

prospect of mnty.

theory:

curative

052047 @X2) Subjective utility with upper probabilities on finite states.

and

lower

182

Abstracts

Nakamura Y., University of Tsukuba, Japan, Journal of Risk & Uncertaiq, Vol. 6, nr. I, 1993, pp. 33-48. This article is concerned with thresholds of discrimination of preference judgements under uncertainty. The author establishes an axiomatic characterization for a threshold representation, where thresholds are represented by inexact measurement of subjective probabilities, i.e. upper and lower probabilities. Since upper and lower probabilities need not be additive, the representational form adopts the Choquet integration. (Author) Keywords: Subjective Utility, Upper and Lower Probabilities, Choquet Integration. 052048 (E12) Determinants of risk-taking: Behavioral and economic views. Schoemaker P.H.J., University of Chicago, IL 60637, U.S.A., Journal of Risk and Uncertainty, Vol. 6, nr. 1, 1993, pp. 49-73. The concept of risk-taking is examined from various perspectives: economic, decision theoretic, and psychological. Multiple factors are discussed as complicating the extraction of any presumed risktaking propensity from a person’s real-world behavior. Problem structuring, beliefs, and values (defined here as riskless as opposed to risky utility) may of course underlie differences in risk behavior. In addition, context and process factors can induce variance in risk-bearing. Also, portfolio effects cross-sectional, (including multiattribute and longitudinal) may greatly complicate the measurement of risk-taking propensity. Lastly, the presence of incomplete markets (via which risks can be partially diversified and traded) may further mask the link between intrinsic and observed risk-taking. This article examines each of these measurement obstacles and sources of variance. (Author) Keywords: Risk-taking, Revealed Preference, Utility theory, Intrinsic Risk Attitude. 052049 (E12) Multivariate risk aversion and uninsurable risks: Theory and applications. Demers F., Demurs M., Carleton University, Ottawa, Ontario, Canada, Geneva Papers on Risk & Insurance lIeory, Vol. 16, nr. 1, 1991, pp. 7-43. The objective of this paper is to develop conditions for global multivariate comparative risk

and Reviews

aversion in the presence of uninsurable, or background, risks, and thus generalize Kihlstrom and Mirman (1974) and Kami (1979, 1989). They analyze von Neumann-Morgenstem (VNM) utility functions as well as smooth preference functional which are nonlinear in distribution but locally linear in probabilities. In each case, they provide an economic application which illustrates how the theorems can be used. They analyze a risk sharing, a portfolio choice, and a labor supply problem for VNM utility functions, and the optimal allocation of effort to risky technologies in the presence of a random supply (or quality) of a public good for nonlinear preference functionals. They consider the case where the random variables are mean-independent as well as the case where they are independent. In the labor supply application for VNM utility functions, they show that if the two risks are independent, the comparative statics effect of greater risk aversion on labor supply in the presence of a background non-wage income risk is determined by a monotonic relationship between labor supply and the wage rate under certainty. That is, they extend the applicability of the Diamond-Stiglitz (1974) Kihlstrom-Mirman (1974) single crossing property to the case where an independent background risk is (Author) present. Keywords: Multivariate Risk Aversion, Uninsurable Risks, Global Interpersonal Comparisons of Attitude Towards Risk, Multivariate Risk-Sharing, Expected Utility, Non-expected Utility. EI3:

PORTFOLIO

THEORY

052050 (E13, E23, E30, E50, B30, B40, BSO, B60) Tax sheltering behavior of property-liability insurers: Some additional evidence. Chen C., PonArul R., California State University, U.S.A., Journal of Risk and Insurance, Vol. 58, nr. 4, 1991, pp. 722-728. Past tests of the tax sheltering behavior of property-liability insurers have looked at the relation between net income and tax-exempt income. This article proposes an alternative test that uses the data on insurers’ portfolio choices. The relation between insurers’ equity level (policyholders’ surplus to total assets) and their portfolio choice is formally derived and tested using data for California insurers. The prediction that insurers with higher equity levels will invest more in tax-favored securities is supported by

Abstracts and Reviews

the data. The test results also support the view that policyholders bear the corporate tax burden of (R.C. W&t) iUSUrerS. Tax Sheltering, Portfolio theory, Keywordr: Property-Liability Insurance.

052051 (E13, E23, E53, B30, B40, BSO, B60) Grandfather clauses and optimal portfolio revision. Tuckman B., Vila J.L., University of New York, Stem School of Business & MIT, Sloan School, Journal of Risk & Insurance, Vol. 59, tar. 3, 1992, pp. 398-408. Grandfather clauses protect a security from adverse changes in the tax law. One such clause in the 1986 Tax Reform Act raised the effective tax rate that property-liability insurers pay on newly acquired tax-exempt bonds. This article derives an optimal switching strategy between taxable and exempt bonds that reflects the enhanced value of previously purchased exempts relative to those newly acquired. (R.C. Witt) Keywords: Taxation, Portfolio Revision, Grandfather Clauses.

052052 (E13) The valuation of contingent claims markets. S&lee E.E., Schlesinger H., Arizona State University, Temple, AZ 85287; University of Alabama, Tuscaloosa, AL 35487, Journal of Risk & Uncertainty, Vol. 6, nr. I, 1993, pp. 19-31. This article studies an agent’s valuation of the right to trade in a complete contingent claims market. The proposed measure generalizes that Pratt (1964) risk premium, which captures the willingness to pay to replace a given risky wealth prospect with an actuarially equivalent, nonrisky wealth. Specifically, they define a generalized risk premium to be willingness to pay to trade at going market prices. If state prices are actuarially fair, the Pratt premium is obtained as a special case. They derive several properties of this generalized premium and note its relationship to the option price of a public project

under uncertainty. Keywords: Uncertainty,

Complete Markets, Werfare Risk Premium, Option Price.

(Author) under

MACRO-ECONOMIC INFLUENCES, GENERAL AND MISCELLANEOUS

E20:

183

052053 (E20$31,E50,BlO) Output price indexes for the U.S. life insurance industry. Reece W.S., West Virginia University, Journal of Risk & Insurance, Vol. 59.1, 1992, pp. 104-115. This article derives a nonparametric index number of output prices for the life insurance industry based on the modem theory of the index numbers and the economic theory of the financial firm. The method is illustrated by calculating an output price index for the U.S. life industry for 1976 through 1989. The price index is then used to deflate nominal to get an index of real output. (R. C. Witt) Keywor&: Index Numbers, Life Insurance, Output Prices. 052054 (E20, E30, E40, B40)

An econometric model of the aggregate motor insurance market in the United Kingdom. Chambers M.J., University of Essex, Journal of Risk & Insurance, Vol. 59.3, 1992, pp. 409-425. Annual data for 1950 through 1984 are used to estimate a model of the aggregate motor insurance market in the United Kingdom. Because the demand for motor insurance is a derived demand, an appropriately specified model can use this information to identify the supply schedule in a recursive system. However, the durability of motor vehicles must be taken into account in modeling the exogenously determined demand schedule. Time series models of the ARIMA type, as suggested by the theory, are compared with the popular econometric approach of cointegrating regressions and error correction models. The results suggest that the error correction models provide an adequate description of the data. (R.C. Witt) Keywords: Auto Insurance, Markets, Econometric Model. 052055 (E20, E25)

Zu den dynamischen Methoden in der Versicherungsmathematik: Neue Bedingungen, die das Bestehen relativer finanzieller Beharrungszustide gew&rleisten/ Anwendung in der Krankenversicherung. Huber H., Mitteilungen der S. V. V.M., Heft I, 1992, pp. 31-46. The dynamical mathematical methods of social insurance are based on the assumption of the perennial population. Of a particular interest is the

184

Abstracts and Reviews

relative stationary (stable) situation, in which the three forces of growth (of premium income, of benefits and the reserves) are equal. The author derives sufficient conditions for the relative stationary situation. It is also shown that convergence of the three forces of growth when t goes to infinity implies convergence of the system to the relative stationary situation. The model is then applied to examine different funding methods in the context of Swiss health insurance, in particular health care. (Author) Keywords: Social Insurance, Funding Method?.

052056 (E20, B20) Commitment problems medical insurance. Glazer A., Niskanen

justify

subsidies

for

E., Carnegie Mellon University, Pittsburgh, PA 15213, U.S.A.; University of California, Irvine, CA 92717, U.S.A., Geneva Papers on Risk & Insurance meory, Vol. 17, nr. 2, 1992, pp. 137-145. Consumers who believe that government will provide them with some public medical care, even if they did not purchase medical insurance, may choose to purchase no such insurance. The amount of medical care consumed will then be less than the first best optimum. Under specified conditions, government can then increase the welfare of consumers by subsidizing insurance, or by providing public health care at a more generous level than the minimum it would otherwise give. (Authors) Keywords: Insurance, Commitment, Subsidy. E23:

TAXATION

052057 0323, E31, E41, BlO, B20, B30, B40, B50) Market insurance versus self-insurance: The taxdifferential treatment and its social cost. Porat M.M., Spiegel U., Yaari U., Zion U.B. et.al., Journal of Risk and Insurance, Vol. 58, nr. 4, 1991, pp. 657-669. Much resources have been expended over the years debating the tax treatment of insurance versus self insurance. This article reviews and analyzes the principle at concepts and inconsistencies that have evolved in dealing with the issue of premium tax deductibility. The Internal Revenue Service considers market insurance as the only visible means of risk shifting and therefore the only one worthy of tax deductibility. It is argued that other forms of risk

reduction can be equally effective in reducing risk. The social cost associated with the present tax policy that favors market insurance over other forms of preloss risk financing are evaluated and depicted. The implicit objective of the article is to shift the debate by refocusing on the question of an appropriate tax policy concerning risk financing, one that maximize social welfare. (R.C. Witt) Keywords: Self-Insurance, Market Insurance, Tares, Social Costs. 052058 (E23, E31, E43, E50, B30, B40, B50, B60)

An exposition of the implications of limited liability and asymmetric taxes for propertyliability insurance. Garven J.R., University of Texas, Journal of Risk & Insurance, Vol. 59, nr. 1, 1992, pp. 34-56. This article elaborates upon the intuition underlying Doherty and Garven’s (1986) option pricing model and extends its basic results to a further consideration of the implications of limited liability and asymmetric taxes for pricing and risk incentives in property-liability insurance. When compared with CAPM-based models of the insurer, a number of important insights emerge. First, the option pricing framework is shown to encompass the CAPM framework as a special case and may help to explain a number of empirical phenomena. Second, the option pricing framework is used to develop a “risk incentive” hypothesis which suggests that limited liability and asymmetric taxes provide mutuals with greater disincentives for riskbearing even in the absence of than stock companies, (R.C. Witt) owner/manager conflicts. Keywords: Option Pricing Model, Limited Liability, Tares, Risk Incentives. 052059 (E23, E31, E50, BlO, B20, B30, B40, B50) Tax reform’s impact on insurance industry stock returns. Graddy D.B., Homaifar G., Hollman K.W., Middle Tenessee State University, U.S.A., Journal of Risk & Insurance, Vol. 59, nr. 2, I992, pp. 284290. This article analyzes the market response of insurers’ stock returns to the formulation, debate, and enactment of the Tax Reform Act of 1986. Provisions of the Tax Reform Act portended increases in the effective tax rates of insurers despite the proposed lowering of marginal rates. The stock

185

Abstracts and Reviews

reacted negatively in the prices of insurers formulation, debate and Committee mark-up phases of the legislative process. Significant abnormal returns were not evidenced in the enactment phase. (R.C. W&t) Keywords: Tax Reform, Stock Return, Tax Rates, Market Response. 052060 (E23, ElO) Risk taking and taxation in complete capital markets. Konrad K.A., University of Munich, Germany, Geneva Papers on Risk & Insurance, Vol. 16, nr. 2, 1991, pp. 167-177. In general equilibrium, with complete conventional securities markets and endogenous asset supply, taxes on risk renumeration are ineffective but harmless. They do not alter the real allocation of goods ore the distribution of wealth, they impose no exce.ss burden, and, in particular, have no impact on risk taking. (Author) Risk Taking, T-ion, Compkte Keywords: Conventional Securities Markets. E24:

EMPLOYMENT

052061 (E24, E50, BlO, B20) The effect of stochastic variable on estimating the value of lost earnings. Brooking C.G., Taylor P.A., Millsaps College, Journal of Risk & Insurance, Vol. 58, nr. 4, 1991, pp. 647-656. Courts are frequently asked to calculate the correct compensation to an individual or family for income lost due to injury or death where others are responsible for the occurrence. The usual procedure is to apply point estimates of all relevant values including the award itself. Such a process ignores, however, the probabilistic nature of actual events. Inflation, wages, and length of work life are all stochastic variables. A Monte Carlo simulation experiment accounting for randomness illustrates that the single value method of calculating awards systematically overstates damages. The experiment shows that most of the bias comes from failing to recognize the stochastic nature of remaining work life in particular. (R.C. Witt) Keywords: Wrongful Death or Injury, Lost Earnings, Point Estimates, Stochastic Variables.

052062 (E24, E43, E50, BlO, B20) Ageearnings profile estimates for older persons in wrongful death and injury cases. Gohmann S.F., Journal of Risk Q Insurance, Vol. 59, nr. 1, 1992, pp. 124-135. Recent work estimating earnings profiles in wrongful death and injury cases deals with specifying profiles for different levels of education. Lane and Glennon (1985, 1988) use a method which is theoretically appealing because it accounts for the human capital literature by including education and experience in the earnings equation. Their model is extended here to account for differences in profiles by a variety of individual specific variables. Further, higher order tenure and education variables are included to account for slower decreases in earnings late in life. Pension wealth calculations using these estimates are also discussed. (R.C. Witt) Keywords: Earnings profiles, Education. E25:

SOCIAL SECURITY

052063 (E25, E40) Unemployment insurance: Risk sharing versus effhziency. Gollier C., Department of Finance, Groupe HEC, Jouy-en-Josas, France, Geneva Papers on Risk & Insurance Iheoty, Vol. 16, nr. I, 1991, pp. 59-74. Two models of spot labor markets are presented in which labor suppliers have heterogeneous attitudes toward effort and in which uncertainty prevails on labor productivity and growth. The problem of selecting efficient rules to manage unemployment insurance (UI) systems is considered. They show that there does not exist any system which combines an efficient allocation of labor with an efficient allocation of risks among employees, unemployed workers and capitalawners. Pareto-efficient policy rules are a best compromise between these two conflicting objectives. It implies that productive efficiency could be improved in periods of mass employment by reducing UI benefits. That would be at the expense of more inefficiencies in the sharing of macro-economic risks. At the optimum, the UI benefit is positively correlated to growth and it is negatively correlated to labor productivity. (Author) Keywords: Unemployment Insurance, Risk Sharing, Social Security.

186

Abstracts and Reviews

OS= w5) Incentives, redistribution and social insurance. Rocbet J.C., Universit6 de Toulouse, France, Geneva Papers on Risk & Insurance i’heory, Vol. 16, nr. 2, 1991, pp. 143-165. The author extends the familiar income taxation model a la Mirrlees, so as to include income uncertainty, due for instance to a risk of illness. Following a line of research initiated by Blomqvist and Horn (1984), he proves that the existence of a Social Health Insurance system may be justified even when the insurance market is efficient. Moreover, if there is a negative statistical dependence between probability of illness and labor productivity, then the optimum of a Utilitarianist Social Welfare function implies that Social Insurance provides a complete coverage for every household. (Author) Keywords: Social Insurance, Redistribution, Incentives.

INSURANCE RELATED MICROECONOMICS THEORY, GENERAL AND MISCELLANEOUS E30:

052065 (E30, E41, BlO) Effects of life insurance price rebating on simulated sales encounters. Crosby L.A., Evans K.R., Jacobs R.S., Arizona State University, University of Missouri, University of North Texas, USA, Journal of Risk and Insurance, Vol. 58, nr. 4, 1991, pp. 583-615. Pressure exists for the repeal of insurance antirebating laws. Research on price negotiation and insurance selling suggests consequences in terms of agent/consumer behavior, attitudes and perception. Hypotheses are evaluated in an experimental simulation of the life insurance sales situation under different rebating conditions. Evidence suggests little actual rebating but a tendency for consumers to delay purchase as a bargaining ploy. Consumers’ psychological reactions are found to be contingent on their price negotiation orientation and insurance involvement. Female negotiators and highly involved males are favorable, while other are unfavorable. Agents have a negative evaluation of participating in price negotiation and question the effectiveness of sales interaction. (R.C. Witt) Keywords: Life Insurance, Price Rebating, Simulation.

052066 (E30, E41, E50, B40) Cost implications of no-fault automobile insurance. Johnson J.E., Flanigan B., Wiukler D.T., Journal of Risk and Insurance, Vol. 59, nr. 1, 1992, pp. 116-123. No-fault advocates commonly predict automobile insurance cost savings for consumers in states adopting no-fault statutes in place of a tort system. For states implementing no-fault, the cost results have been mixed. This study compares the loss costs of no-fault from 1974 through 1985. Not surprisingly, the findings suggest that the bodily injury liability loss costs were lower on average in no-fault states than in tort states after controlling for the influence of wages, population density, and the presence of comparative negligence. However, total bodily injury related costs were not significantly lower on average in no-fault states, and they were significantly higher in states with compulsory add-on laws and to a lesser extent in states with high tort thresholds. Whether the lack of estimated cost savings on average in no-fault states is attributable to selection bias or not, the causes of this result are important issues for further research. (R.C. Witt) Keywords: No-fault Automobile Insurance, Cost Savings, Tort-Liability.

052067 (E30, E46, B40, BSO) Rate suppression. Harrington S.E., University of South Carolina, Journal of Risk & Insurance, Vol. 59, nr. 2, 1992, pp. 185-202. This article considers why insurance markets may be especially vulnerable to regulatory suppression of insurance prices in response to political pressure for lowering rates or limiting rate increases. The analysis focuses on why exit by insurers will likely be too slow to deter significant rate suppression. The first possibility considered is that valuable state-specific investments by insurers are subject to appropriation through rate suppression without producing rapid exit. The second and more speculative possibility is that rapid growth in claim costs may allow part of the market to be insured under government mandated pay-as-you-go premium arrangements that at least temporarily permit lower than market premiums (at least temporarily) without producing substantial incentive to exit. The likely adverse effects of these policies on insurance markets are discussed.

Abstracts and Reviews

Keywod: Exit.

Rate Regulation,

(R.C. Witt) Suppression, Markets,

052068 (E30, E41, E50, B40) Equity in automobile insurance optional no-fault. Powers M.R., Temple University, Journal of Risk & Insurance, Vol. 59, nr. 2, 1992, pp. 203-220. insurance laws have No-fault automobile historically been justified by both efficiency and equity arguments. In this article, the author proposes that optional no-fault systems be justified solely on the basis of two-fundamental equity principles. A review of the entire spectrum of mandatory and optional automobile insurance recovery systems reveals that one specific type of optional no-fault the selfdete rmining system now operating in New Jersey and Pennsylvania, is more equitable than traditional tort, mandatory no-fault, or any other optional no-fault system. Further, it is shown that no mandatory or optional no-fault system can be truly equitable if premiums are based solely upon projected loss experience, without explicit premium reductions for the decrease in expected losses attributable to the insured’s tort restrictions. Finally, two mechanisms are reviewed for assuring that, under the selfdetermining no-fault system, expected losses for insurers are exactly balanced by the (R.C. Witt) premiums that they receive. No-fault Auto Insurance, Equity, Keywords: Eficiency, Optional. 052049 (E30, E50, BlO) Ownership structure and perfomumce: The demutualization of life insurers. McNamara M.J., Rhee S.G., University of Rhode Island, Journal of Risk & Insurance, Vol. 59, nr. 2, 1992, pp. 221-238. This article examines the pre- versus postdemutualization performance of 33 legal reserve life insurers. Product, financial, and management welfare variables are analyzed to provide evidence relating to two competing hypotheses: efficiency and expropriation. Demutualization did not significantly affect premium income, the mix of cash value versus noncash value policies, lapse rates, or operating expenses. However, following demutualization, capitalization and management turnover increased, while the percentage of participating insurance decreased. The evidence supports the hypothesis that

187

efficiency rather than expropriation is the motivation and the result of demutualization. (R.C. Witt) Ownership Structure, P~ormance, Keywords: Demutualizadon. 052070 (E30, E40, BlO) An econometric analysis of the demand for life insurance policy loans. Carson J.M., Hoyt R.E., University of Georgia, U.S.A., Journal of Risk & Insurance, Vol. 59, nr. 2, 1992, pp. 239-251. This article assesses the impact that redesigned life insurance policy loan provisions and changes in financial markets have had on the demand for policy loans. The study investigates policy loan demand for the years 1970 through 1989, which encompasses periods of fixed and variable loan rates. The results suggest that policy loan demand has changed since the introduction of variable loan rates and the redesign of policies. Specifically, the findings show that demand for policy loans driven by arbitrage (R.C. Witt) potential has been reduced. Keyword& Life Insurance Policy-Loan Demand, Policy Design, Loan Rates. 052071 (E30, E43, E44, B20, B52, B80) Predictions disputes in workers’ compensation. Roberts K., Michigan State University, Journal of Risk & Insurance, Vol. 59.2, 1992, pp. 252-261. The author uses claims data from the Michigan Bureau of Workers’ Disability Compensation to examine what type of workers’ compensation cases are most likely to be contested. Logit regression results indicate that how a claim is handled is the most important factor. Uncertainty about recovery increases the likelihood of dispute but can be mitigated by claims handling. Claimant labor market alternatives and strength of the employment relation affect the likelihood of disputes. But, claims handling appears to vary with employment relation and may be the more decisive factor. (R.C. Witt) Keywords: Workers ’ Compensation, Claim Disputes, Contested. 052072 (E30, E42, B30, B40, B50, B60) Independent and exclusive agency insurers: A reexamination of the cost differential. Barrese J., Nelson J.M., University of New York, College of Insurance and University of PeM, Journal of Risk & Insurance, Vol. 59.3, 1992, pp. 375-397.

188

Abstracts and Reviews

Using 1967 data, Joskow (1973) found the independent agency system relatively inefficient for marketing insurance. Cummins and VanDerHei (1979) extended the study through 1976 and wnfirmed Joskow’s findings. However, they found a smaller cost differential using total expenses rather than underwriting expenses alone. The current study extends the investigation through 1990, links the empirical evidence with the logic of agency theory, and provides an alternative measurement of marketing methods. The existence of a cost differential is reaffirmed, and the alternate marketing specification shows that exclusive agency firms have lower expenses than independent agency firms but that direct mail merchandisers have lower expenses than either type of agency firm. The estimated cost differentials are insignificant in some years when losses are used as a proxy for output. (R.C. Witt) Keywordr: Marketing, Property-liability Insurance, Eficiency. 052073 (E30, E41, E50, Bll) A comparison of term insurance rates to protection related charges in universal life insurance. Corbett R.B., Nelson J.M.,Florida State & College of Insurance, New York, U.S.A., Journal of Risk & Insurance, Vol. 59, nr. 3, 1992, pp. 470-475. Universal life insurance is designed to be a “transparent” product. Policyholders make deposits into a fund, from which mortality and expense charges are deducted, with the balance accumulating at interest. Policyholders have the alternative of buying individual term insurance and investing through other media. This article shows that the mortality and expense charges in a sample of universal life policies are generally higher than the annual renewable term premiums charged by the same wmpanies. This suggests that transparency may not be complete or that some other feature of universal life justifies the higher costs. (R.C. Witt) Keywords: Universal Life Insurance, Mortality, EjEpenres, Term Insurance. E31:

FIRM BELATED

MICRO-ECONOMICS

052074 (E31, E42, BlO) Ef&ient contracting in a market for life insurance agents with asymmetric information.

Puelz R., Snow A., Memphis State University and University of Georgia, USA, Journal of Risk and Insurance, Vol. 58, nr. 4, 1991, pp. 729-736. The incentive conflict between the life insurance firm and its agents is examined. Conditions for firstbest contracting in a symmetrically informed environment entail a fixed wage payment by the firm. In contrast, when the firm is constrained by both the uncertainty of consumer demand and the allocation of effort by the agent, a high commission rate for new policies sold and a low commission rate for policies renewed is an efficient contractual arrangement between the firm and its agents, if and only if an agent’s effort is more productive when directed at increasing the expected flow of revenue from new rather than renewal customers. The prediction of the model is consistent with the contractual arrangements currently observed in the life insurance industry, where customers are lockedin by a renewal premium lower than the premium for a new customer who otherwise has the same characteristics. (R.C. Witt) Keyworcts: Life Insurance, Agents, Contracting, Commissions. 052075 (E31, E40, E50, BlO) An examination of cost economies in the United States life insurance industry. Grace M.F., Timme S.G., Georgia State University, Journal of Risk and Insurance, Vol. 59, nr. 1, 1992, pp. 72-103. Using an industry sample of 423 U.S. life insurers, this study reports estimates of overall and product specific scale economies, as well as, pairwise cost wmplementarities for a wide variety of products. Estimates of these cost characteristics are provided for numerous output vectors since theory suggests that the magnitude of scale economies and cost complementarities may vary with the scale and mix of outputs. In contrast, previous studies only provide a single point estimate of industry cost characteristics using the sample mean output vector. This study, therefore, provides a more complete representation of the industry’s cost characteristic and, in turn, new insights into decisions related to the optimal scale and mix of outputs. (R.C. Witt) Keywords: Economies of Scale, Life Insurance, Cost Complementarities. 052076 (E31, E50, E53, B13)

Abstracts and Reviews

Additional evidence on the reaction of shareholder to the reversion of surplus pension assets. Alderson M.J., VanDerHei J.L., University of Missouri-St. Louis & Temple University, U.S.A., Journal of Risk and Insurance, Vol. 59, nr. 2, 1992, pp. 262-274. A dichotomy exists in the literature regarding the share price response to pension reversions. Mitchell & Mulherin (1989) report positive abnormal returns in response to a reversion announcement, but Mittelstaedt and Regier (1990) provide evidence that any abnormal returns are due to contamination or event data misspecification. This article resolves that dichotomy by providing evidence of a relationship between the stock price reaction to the reversion announcement, the tinancial strength of the plan sponsor, and the type of successor plan adopted (R.C. Witt) subsequent to the reversion. Keyworcls: Share Price Response, Pensions, Asset Reversions. 052077 (E31, ESO,BlO, B20, B30, B40, BSO,B60)

The effects of Best’s rating changes on insurance company stock prices. Singh A.K., Power M.L., Iowa State University, U.S. A., Journal of Risk & Insurance, Vol. 59, nr. 2, 1992, pp. 310-317. In this article, the authors examine whether A.M. Best & Co. rating changes convey significant new information to the capital markets. The objective is to determine whether the agency monitors and repackages existing information or processes and disseminates previously unavailable information. The study documents statistically insignificant stock price reactions to both rating upgrades and downgrades. These results suggest that A.M. Best & Co is most accurately described as a monitor of publicly available information. It provides a certification of insurer financial soundness to policyholders, but it is not an agency that reveals new information to the financial markets. (R.C. Witt) Keywords: Rating Changes, Information, Capital Markets, Price Reactions.

052078 (E31, E40, ESO, B30, B40, BSO,B60) Organizational capital and corporate insurance hedging. of Constance, Germany, Grillet L., University Journal of Risk & Itwurance. pp. 462-469.

Vol. 59, nr. 3, 1992,

189

Insurance may discourage the opportunistic externalization of the social costs of a firm’s activities in a way that enhances optimal risk allocation for the firm’s explicit, implicit and tort claimants. Insurance enables a firm to exploit more fully the quasi rents associated with the profitable use of its organizational capital. At a critical level of insurability, internal coordination of the insurance function by common or joint ownership will create more net organizational capital than market insurance would. (R.C. Witt) Keywods: Risk Allocation, Corporate Insurance, Organizational Capital. 052079 (E31, E40, ESO, B37) Gaining from loss: Property-liability insurer stock

values in the after-math of the 1989 California earthquake. Shelor R.M., Anderson D-C., Cross M.L., Louisiana Tech. University, U.S.A., Journal of Risk & Insurance, Vol. 59, nr. 3, 1992, pp. 476-488. The October, 17, 1989, California (Loma Prieta) earthquake led to substantial loss payments by insurers. This article is motivated by two opposing hypotheses regarding such catastrophic losses: that the rapid depletion of surplus accounts fostered by catastrophic events causes investors to discount insurance firm stock values, and that insurers benefit from an isolated catastrophic event because of subsequent increased demand. The latter hypothesis is supported by their results, which show that property-liability insurer stock values increased after the earthquake. (R.C. Witt) Keywords: Earthquakes, Catastrophic L_osses, Surplus, Demand, Stock Values. E40: BUSINESSECONOMICS, GENERAL AND

MISCELLANEOUS 052080 (E40, BlO) The buyers of life insurance: Their sources of information, their information level and their behavior. Schulenburg J.M., Hannover, Germany, ZVers Wiss., Vol. 80, 1991, pp. 287-307. To get an impression about the behavior of buyers on life insurance markets the authors of the article have conducted a representative enquiry. The main questions focus on the reasons for consumers’ choice and on the sources of information and the satisfaction

190

Abstracts and Reviews

with the decisions made by the buyers. The enquiry was carried through twice, in 1983 and 1990, whereby the same questions were asked. This method allows to make some comments on time trends. The results of both enquiries show that the service quality is an important factor for choosing a certain insurer. Insured persons are better informed in the year 1990 than they were in 1983. As for the information level it is not only important to find out whether people try to get information at all but also which sources of information they use. The paper presents a detailed analysis of how information is gathered and which information is most beneficial for insurance buyers on life insurance markets. (Author) Keyworak Consumer, Life hurance, Service Quality. 052081 (E40, B21) Occupation associated risks in disability insmxnce. Cbristlieb M., Nuremberg, Germany, Zvers Wiss., Vol. 80, 1991, pp. 329-336. Occupationally associated risks play a major part in disability claim settlement procedures. Claim statistics are quite different depending on the kind of occupation. Therefore, it is necessary to pay more attention to the special occupational risk to be insured. only then the right risk assessment and basis of premium calculation can be achieved. A possible occupational reclassification should be taken into account as well. The possibility of changing into another occupational classification should not be limited by insurance conditions. Generally, knowledge of occupational characteristics become very important in claim settlement. (Author) Keyworak Disability Insurance, Occupation. 052082 (E40, B13, B80, BSl) Betrieblicbe Alterversorgung in der Diskussion . zwlschen Praxis und Wissenscbaft (Occupational Pension schemes in the discussion between practice and science). Fiirster W., R6ssler N. (eds), Dr. Otto Schmidt, 1992. This is a ‘festschrifi dedicated to P. Ahrend, a renowned expert in the area of occupational pension schemes, on the occasion of his 60th birthday. It contains 40 papers on various aspects of occupational pension schemes written by well-known pension

specialists. The contributions are divided into the following 7 groups: 1. Statutory pension schemes as the first pillar of pension schemes. 2. Second and third pillar, occupational pension schemes and private life assurance. 3. Labour law 4. Personal policy 5. Business economics and accounting 6. Taxation 7. International issues. This volume provides an excellent survey of current issues in occupational pension schemes. (W.R. Heilmann) Keywords: Occupational Pensions, Pension Schemes, lhree Pillar System. 052083 (E40, B70) Solvabilititspolitik als Untemebmenspolitik von Kompositversicherungsunternebmen (Solvency policy as a corporate policy of general insurance companies). Wagner F., Duncker & Humblot, 1992. This book represents the author’s doctoral dissertation written at the Institute of Insurance Sciences at the University of Cologne. It deals with the solvency as a corporate goal of a general insurance company, in particular with the ratio of actual solvency and target solvency. It is divided into the following 4 chapters: 1. Corporate policy of insurance companies. 2. The solvency system of insurance supervision policy. 3. Individual issues of corporate policy in solvency policy. 4. Solvency policy in a comprehensive survey of corporate policy. (W.R. Heilmann) Keywords: Solvency, Corporate Policy, Supervision. E43:

RISK MANAGEMENT

052084 (E43, B20) Lines of development in insurance medicine. Rae&up 0, Oberursel, Germany, ZVers Wk., Vol. 80, 1991, pp. 319-327. The voluntary nature of private insurance involves the risk of antiselection which under aspects of insurance medicine should be prevented. Incontestable forecasting based on objective data

191

Abstracts wd Reviews

constitutes an important task of insurance medicine. In retrospect, the methods of risk assessment are explained. Epidemiological indications of the changing pattern of diseases and considerations regarding insurance benefit reviews leave no doubt about the shift in the role of insurance medicine. This, particularly, applies to disability insurance. In future, insurance fraud, doctors’ duty of secrecy, data protection, new diseases, modem medical techniques and their costs as well as methods of genetic analysis will have to be considered very (Author) carefully. Keywords: Health Insurance, Anti-Selection. 052085 (E43, E12) Reliability of risk management, market insurance, self-insurance and self-protection reconsidered. Briys E., Schlesinger H., v.d. Schulenburg J.M., Groupe HEC, Jouy-en-Josas, France; University of Alabama, U.S.A.; University of Hannover, Germany, Geneva Papers on Risk & Insurance Theory, Vol. 16, tar. 1, 1991, pp. 45-58. This paper examines the three main tools of risk management in a setting where reliability cannot be guaranteed. Thus, for example, insurers might be insolvent, sprinkler systems might be inoperative and alarm systems might be faulty. These types of nonreliability are shown to have significant wnsequences for risk management. In particular, the relationships between increased risk aversion and the use of the various risk management tools do not carry over from models with full reliability. Moreover, the well-known result of Ehrlich and Becker, that market insurance and self-insurance are substitutes, is shown to fail in the presence of nonreliability risk. (Authors) Keyword: Default Risk, Reliability, Risk Aversion, Risk Management. E45:

TECHNOLOGY

052086 (E45) Applications of modern communication technology in controlling and business planning of insurance companies. Sale&n N., Aachen, Germany, ZVers Wiss., Vol. 80, 1991, pp. 467-497. The paper looks at different aspects of the network of interrelations between modem communication technology, planning and controlling. The question

Do the arising is: who is driven by whom? production and organization structures and production processes of business administration react on what is offered by wmmunication technology or do the problems involved in business administration call for new products of communication technology. An introduction presents corporate planning and controlling as a typical user of modem communication technology. Among other things, the task of the latter consists in ensuring three essential corporate objectives: flexibility, elasticity, and a high reaction speed. For preparing and making available the involved information, it is necessary to have recourse to most recent communication techniques. Within the field of tension wnceming the question of “Who is driven by whom?” an analysis is made, in a first step, of the communication technology environment of planning and controlling in the German insurance industry and, in a second step, of applications or development tendencies of future installations in the insurance industry. (Author) Keyword: Communication Technology E60: SURVEYS, MISCELLANEOUS

GENERAL

AND

052087 (E60, E45) Some comments concerning section 102GWB (restrictive trade practices act) Kollhosser H., Mfinster, Germany, ZVers Wiss., 1991, pp. 105-119. Agreements in restraint of trade or commerce are in principle declared to be per se illegal in the German Restrictive Trade Practices Act (GWB). But hitherto a special rule in paragraph 102 GWB gave an exemption for agreements and practices in financial services. Ch principle they were allowed and could get declared to be illegal only in case of abuse. This rule collided with article 85 European Economic Community Treaty (EEC). Article 85 EEC does give some exemptions too, but only under special conditions and not for a whole branch. Therefore, paragraph 102 GWB has been modified in 1990 with the aim to avoid collisions between national law and community law. Now, in principle also in national law restrictive practices in financial services are per se illegal but with some exemptions. The rule is a compromise. It is unnecessarily complicated, and the text is not in all points in accordance with Art. 85 EEC. This essay tries to

192

Abstracts and Retiews

reconcile by interpretation the national law (paragraph 102 GWB) with the community law (Article 85 EEC). (Author) Keywords: Trade, Financial Services. 052088 (E60, BlO) The law applicable to border-crossing Life insurance contracts: An overview of the conflict of law rules. Lorenz E., Mannheim, Germany, ZVers Wiss., 1991, pp. 121-144. The method of determining the law applicable to border-crossing life insurance contracts became very intricate starting the 1st of September, 1986. The new German statutes on Private International Law came into force on that day. These statutes contain, inter alia, for the first time in German legal history a detailed regulation of the international law of contracts. This regulation is to be found mainly in Articles 27 to 37 of the Introductory Law of the Civil Code. The mentioned articles transformed into German law the EEC-Convention on the Law applicable to Contractual Obligations (EWGilbereinkommen iiber das auf vertragliche Schuldverhiiltnisse anwendbare Recht (EVO)) concluded on the 19th of June, 1980, in Rome. These articles apply to international life insurance contracts, however, solely to those which cover risks located outside the EEC or which are reinsurance contracts. Anxious to unify the private international law on life insurance contracts covering risks located inside the EEC, the Council passed an EC-Directive on the 8th of November, 1990. This Directive is the ‘Second Directive concerning Life Insurance’ (ABl. EG L 330/5041). All member states of the EEC are required to transform this Directive into their respective national law. This, however, has not been done yet. As soon as the transformation is exercised, a common statutorial framework of private international rules will exist in Germany and the other member states in respect to all international life insurance contracts that fall under the ‘Second Directive concerning Life Insurance’. Egon Lorenz’s study examines and evaluates all the above mentioned legal principles and their relationship to each other. It concludes with the statement that the private international law on life insurance contracts which has been growing in the EEC is very complicated. This set of rules, in Egon

Lore&s view, can only be understood by experts and not, however, by the consumers concerned. (Author) Keywords: International Law, Life Insurance, Contracts. 052089 (E60)

The invention of insurance and the conditions of its development during the last 150 years. S&ewe D.D., Oberwinter, Germany, ZVers Wiss., Vol. 80, 1991, pp. 155-l 73. In contrary to the widespread idea, that there has been a continuous development of insurance during the last 700 years or more, this article makes a difference between the early invention of insurance on the one hand and its modem development since the middle of the 19th century on the other. Insurance could only spread after the necessary economic, administrative, and social conditions e.g. money economy had come into existence. The conditions for a development of social and individual insurance are outlined, amongst others such different influences as must be seen in religious denominations or the level of prosperity. Regarding the latter, international comparisons show that the total expenses for certain safeguarding measures, e.g. the health system, depend on the amount of the gross national product whereas the apportioning between public and private expenses shows greater differences and needs additional explanations. (Author) Keywork: Insurance Market, Development. 052090 (E60, BlO, B50) Legal insurance problems in connection AIDS.

with

Werber M., Hamburg, Germany, ZVers Wiss., 1991, Vol. 80, pp. 203-232. The article deals with legal problems caused by AIDS in the fields of several insurance branches. These problems are due to the very special character of this new disease, influenced for example by the circumstance that very often an infect is unknown to a person interested in health or life insurance. Other serious problems have arisen in the frame of liability insurance, so far as is concerned the liability of manufacturers of plasma products toward their consumers, when their product is infected by HIV. As a sick person is provided, in the course of years, with plasma products of different manufacturers, he normally has no chance to find the infected product,

Abstracts and Reviews

its manufacturer, and the liability insurer of the latter. The article deals also with these problems and shows how they are resolved by special agreements between hemophilia associations, Pharmapool and liability insurers. Summarizing, the article shows how in different branches German insurers have accepted their responsibility to cooperate in finding social solutions for those severe problems which are caused by AIDS, the new scourge of mankind. (Author) Keyworak AlDS, Health, Liability Insurance. 052091 (E-60, BlO) Life insurance in the EC single market, interaction affecting product spectrum and market condition. Nonhoff D.D., Munich, Germany, ZVers Wk., Vol. 80, 1991, pp. 233-265. A life insurer looking abroad has to be careful not to misinterpret what he is seeing but must relate it to the local conditions. The relevant features that influence the success of a life insurance product and the organization of the life insurance industry in a country’s financial services area consist of economic, legal, and structural components, but also mentality and local tradition may have certain effects. Some of the most important factors are: affluence of a country’s population, tax laws, monetary stability, the scope of state pension systems and company pension schemes, although not necessarily in this order. Furthermore, size and structure of the market, distribution systems, insurance regulation and industry standards, not to forget consumer protection, influence a market’s product sp@ntbr) Keyworak: European Market, Ltre Insurance. 052092 (E60, BlO) Influence of domestic and foreign financial service companies on the design of financial service products. Peiner W., Cologne, Germany, ZVers Wiss., Vol. 80, 1991, pp. 267-278. In this article the role of the various sectors of the financial service industry and their impact on product design is described. It is stated that the market is going to split into low price standard products and sophisticated high value individualized products. The most significant impact on product development well stem from the brokers’ side and from Anglo-Saxon companies. This development will force German life

193

insurance companies to modify their products and to intensify their services for clients as well as for brokers and tied agents. The traditional split of functions between commercial banks and life insurance companies will, however, prevail. Both industries will make more use of capital investment companies. In line with these changes a split in sales forces is likely: distributors for low cost products and distributors for sophisticated high value products. The author stresses the important role of tied agents with regard to the future success of a German life insurance company. (Author) Keywords: Financial Services, Product Development. 052093 (E60) Problems of taxation of insurance premiums in the common market. Mackscheidt K., Cologne, Germany, ZVers Wiss., Vol. 80, 1991, pp. 561-581. Compared to other taxes insurance tax is a young tax but it seems to be promising in the face of a growing basis for taxation. The demand for any kind of insurance - with the exception, perhaps, of motor insurance - is constantly increasing together with the development of need for cover in an economy and a society based on a division of labour. Assuming insurance tax will persist we should then clarify its characteristics in the various member countries of the EC, and consider the question how these different kinds of insurance tax should develop in a common market which is becoming more and more tightly knit. The various types of insurance taxation in the Community countries are set forth, followed by a broad discussion concerning a systematic argumentation in favor or against insurance taxation. Looking at this discussion, it appears that the opponents to insurance taxation have a considerable lead in argumentation. However, the advocates can argue ghat insurance cover is a special type of good. The more this security function in the area of nonlife insurance can be stressed, the stronger will be their position. (Author) Keywords: Taxation, European Market. 052094 (E60, B70) An empirical regularity in the market for risk and insurance research output.

194

Abstracts and Reviews

Chung K.H., PueIz R., Memphis State & Southern Methodist University, Journal of Risk and Insurance, Vol. 59, nr. 3, 1992, pp. 489-498. 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. The 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, the authors 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. (R.C. Witt) Keywora!~: Research Output, Productiviry, Journals. 052095 (E60, E41, BlO, B20, B30, B40, B50) Versicherungslehre II (Insurance teaching II).

Berufsbildungswerk Versicherungswirtschaft

der e.V.

Deutschen Verlag (ed.),

Versicherungswirtschaj, Karlsruhe, Z992. This is the second volume of a series of textbooks on the foundations of private insurance. It has been developed by the so-called “Vocational Training Institution of the German Insurance Industry” and is intended primarily for courses included in or accompanying the vocational training of insurance officers. The book consists of 10 parts each of them dealing with a special insurance branch. Householder’s comprehensive insurance (34p.) 1. Fire insurance (24p.) 2. Comprehensive residential housing insurance 3. (28~s) 4. Fire business interruption insurance (16p.) Life insurance (40p.) 5. Health insurance (48p.) 6. Private accident insurance (28p.) 7. 8. Law of liability and third party liability insurance (64p.) 9. Legal expenses insurance (22p.) 10. Motor insurance (66p.) Each chapter contains a detailed and comprehensive description of the different branches and forms of insurance with many practical examples and explanations. So the text is also well suited for selfinstruction. (W.R. Heilmann)

Keywords: Insurance Branches, Personal Insurance, Property and Casualty Insurance. 052096 (E60, ESO, E40, B70, BlO) Finanzdienstleistungen (Financial services). Stracke G., Geitner D., K&I, Germany, Verlug Recht und Wirtschafl, 1992 (ed.). This is a comprehensive and detailed manual describing the (German) market of financial services, in particular banks, building societies and other credit institutions, and insurance companies, especially life assurance companies and products. The book has 6 main chapters entitled: 1. Financial services: Fundamentals of a new market phenomenon. 2. Financial services in Europe and the U.S.A. 3. Historic-systematic representation of the suppliers of financial services for the private customer in the Federal Republic of Germany. 4. The changed structural environment in the German market of financial services. 5. Representation of the competitors in the market of financial services (status analysis). 6. Future development of the market of financial services for the private customer. There are several parts on insurance companies, their products and their strategies. (W.R. Heilmann) Keyword: Financial Services, Comprehensive Finance, Insurance Products, Insurance Companies. E62:

NATIONAL SURVEYS

052097 (E61) Insurance claims as surrogates of property. Sieg K., Hamburg, Germany, ZVers Wiss., Vol. 80, 1991, pp. 175-186. Surrogation in this context means that a certain property is substituted by an insurance claim or an insurance benefit. The author finds examples for such a surrogation in the Law of Obligations (Section 281, 818 I BGB) and in the Law of Property as well. As to the latter the basis is to be found in section 1127 seq. BGB. According to these provisions the mortgage pertains to the respective insurance claim if a building of the mortgaged site is destroyed or damaged. In contrast, the right of lien on movable chattels regularly does not extend to the insurance claim, i.e. it becomes void with the loss of the good. In this respect, the author follows the prevailing opinion. The execution of sect. 22 OLSchVO does

Abstracts and Reviews

only apply to the statutory lien of the warehouse keeper, the provision of the carrier. In cases where a surrogation takes place it is usually decreed in the interest of the creditor and only in rare exceptions in the interest of the insured as is shown in section 15 VVG in connection with sect. 851 ZPO; insofar as household effects are exempt from execution the same is true for the respective (Author) insurance claim. Keywords: Surrogation, Property. 052098 (E61, BlO)

Selected legal questions of life assurance. Winter G., Hamburg, Germany, ZVers Wiss., 1591, pp. 203-232. Life assurance is a branch with special legal aspects. There are violent arguments about the question of who is entitled to the insured value: the policyholder’s legal heir, the person appointed beneficiary by the policyholder, the policyholder’s creditor or the assignee. Insurer and policyholder are not obliged to follow the model of the entitlement to insured benefit which has been created by the German Insurance Contract Act. These regulations are not cogent law. The German Insurance Contract Act, does not restrict product shaping in life assurances. (Author) Keywords: Life Insurance, Legislation.

052099 (E61, BlO) Scopes for innovations in life insurance. Wesselkock K., Hamburg, Germany, ZVers Wiss., Vol. 80, 1991, pp. 279-286. The types of innovations are classified in innovations of risks, bases of calculation and product design. The types of risks covered by a German life insurance company are death, long life, accident (death), marriage, long-term sickness and long-term care. An extension of this list seems limited with the exception of dread disease cover. For the bases of calculation a variation of the interest rate (which is fixed in Germany) is discussed. Furthermore, separation of the insureds is deliberated for an individual pricing with different mortality tables and loadings. The impact of some variations in the product design is investigated in the last part. A shift from risk bearing to saving products is deliberated as well as a decreasing in surrender values (which are guaranteed

195

in Germany) while increasing the lump sum at maturity, profit guarantee versus profit participation, and simplicity of the product design versus dynamics and flexibility. Restrictions of the innovations are (Author) shown. Keyword: Innovation, Life Insurance, Product Design. 052100 (E61, ESO)

Considerations on claims reserve in the trade and tax bahmces on the basis of the established law system. Germany, ZVers Zimmermann J., Mannheim, wiss., Vol. 80, 1991, pp. 337-354. Different terms of reserve liability regulation for insurance companies can be found in the HGB (Commercial code), general provisions for all companies that can be applied to insurers, and the VAG (Insurance Supervision Act), special provisions for insurance companies. This article examines which legal framework has to be applied to reserving losses incurred but not reported (IBNR) and losses reported but not settled (RBNS). Consequences for tax accounting are also considered. Even though the special provisions sound more extensive, a close scrutiny reveals that they do not imply a preferred (Author) treatment of insurance companies. Keywods: Claim reserves, Legal framework, Tar implication. 052101 (E61, BlO, B20, B30, B40, B50)

The structure and disciplinary boundaries of insurance: A citational analysis of Journal of Risk & Insurance articles. Holhnan K.W., Murrey J.H., Homaifar G., Middle Tennessee State University of Mississippi, USA, Journal of Risk and Insurance, Vol. 58, nr. 4, 1991, pp. 714-721. This paper provides a description of nature, trends and changing patterns of references in the Journal of Risk & Insurance (JRI) in three sample volumes: 1980, 1984 and 1988. Findings reveal that (1) over one-half of the references in the JR1 are from noninsurance fields (primarily finance and economics), (2) journals are the most frequently cited wmmunications media, and (3) authors of JRI articles cite it more than any other journal. An important conclusion is that insurance is a still emerging field without a strong identity or a strong bonding between the contributors to its literature.

1%

Abstracts

Scholars in the field of insurance often discuss and debate the structure and boundaries of their discipline. To a large extent, these introspective contributions have been of the normative-polemic type based on subjective views and casual empiricism. Participants in these discourses have shown little interest in factual evaluation of insurance source literature to ascertain the structure of discipline and the changes that have taken place therein. The purpose of this article is to fill this information gap in the insurance literature by presenting the findings of an explorative study analyzing one important facet of the scientific activities of insurance scholars, the exchange of ideas and research through publishing. An analysis is made about the nature, trends and changing patterns of references cited in the JRI in three sample volumes. The study should be beneficial in several respects. It should help to identify those sources of scholarly publications that influence the diffusion of knowledge and concepts in the field of insurance. It should also provide evaluative information about the areas and journals upon which JRI authors depend most heavily for references. Finally, it will reflect the degree to which the discipline of insurance has been able to establish its own identity. This research relies heavily on theoretical concepts developed by Goldman (1979) and Brown and Gardner (1985) for other business and social science fields. It is based on the assumption that disciplines define themselves by their citational links to other disciples, that is, through references to other scholarly works that support, provide precedent for, and illustrate their content. A study of citational links is useful in assessing the scientific activity in a discipline and in determining the structure, methods, and boundaries of that discipline for two reasons. First, they are an objective, quantitative measure of the influence or impact on a discipline of a journal, book or other communications media. Second, they reflect authors’ perceptions about which previous works anchor their work and have the greatest utility to them, and the authors to whom they owe an intellectual debt. As Hamelman and Maze (1974) note: “Scientists and scholars are obliged to note the relationship between the work which engages their attention and related studies that have appeared on the same subject in the past. By so doing, authors

and Reviews

acknowledge the link between the subject and the different points of view which have been brought to bear on it in the past. Thus, citation indexes rely on the most skilled experts of all the authors (pp. 23-24) (R.C. Witt) Keywords: Insurance literature, References. 052102 (Ebl, E45) The development of telecommunication and its e&As on the insurance industry. Witte E., Munich, Germany, ZVers Wiss., Vol. 80, 1991) pp. 445-451. Insurance companies as service providers are especially affected by the rapid developments in the field of telecommunication. Digitalization allows the combination of voice and data processing and thus creates completely new forms of communication. Market liberalization now permits free competition between DBP TELEKOM and private enterprises. Only the network monopoly and POTS are exempted. Under these circumstances new chances for innovation and market opportunities arise for insurance companies both as users and suppliers of telecommunication services. These should be utilized. (Author) Telecommunication, Market Keywords: Opportunities. 052103 (E61) The Turkish insurance industry in transition. Eggerstedt H., Washington DC, USA, Zvers I&s., Vol. 80, 1991, pp. 625-654. The Turkish insurance industry is underdeveloped compared to other countries that have achieved a similar degree of economic development. The main reasons are excessive discretionary regulation, little competition among the major companies, insufficient distribution channels, high rates of inflation and underdeveloped financial markets, a low level of public awareness about insurance possibilities and a lack of public confidence.However, the situation is changing rapidly. Government intervention has been relaxed, in some cases triggering a sharp increase in competition and growth rates. Technical efficiency is improving from very low levels and investment policies are becoming more sophisticated. The agencies face the challenge of supervisory transforming a regulation based on product and price controls into a system that focusses on solvency control and strict supervision. (Author)

197

Abstracts and Reviews Keyword:

Turkish insurance industry, Supervision.

052104 (Jsl) Scale and scope economies in the Cauadian property and casualty insurance industry. Suret J.M., Universiti Laval, Canada, Geneva Papers on Risk and Insurance, Vol. 16, nr. 59, 1991, pp. 236-256. This study investigates scale and scope economies in the Canadian property/casualty insurance. Use of the translog cost function allows the estimation of a U-shaped cost curve and of cost elasticities that vary with the size of the insurance company. The model is estimated on a sample of 180 companies over the period 1986 to 1988, and considers four outputs: property, automobile, civil liability, and other types of insurance. The factors of production are labour, rentals, and capital, but the cost of the latter is taken as a constant. Using data for the years 1986 tot 1988, they show that there exists significant economies of scale for insurance companies with assets between $40 and $100 million. However, the evidence in favor of the existence of economies of scale for smaller and larger firms are limited to one year in each case. They do not observe systematic evidence of significant cost complementarities between insurance products, nor do they note significant economies of scope. No cost complementarities exist between the two main product lines of property/casualty and automobile. Furthermore, there is some evidence of diseconomies of scope. Diversification economies can only be obtained with liability and other product line%

Their evidence of slight economies of scale and no economies of scope is compatible with observation that many insurance companies in Canada are small and undiversified. (Author) Keywords: Canadian Properry/Casualty. E62:

INTERNATIONAL

SURVEYS

052105 (E62, B50) International P/L insurance output, input and productivity comparisons. Temple University, PA 19122, Weiss M.A., U.S.A., Geneva Papers on Risk & Insurance l%eory, Vol. 16 , nr. 2, 1991, pp. 179-200. This research provides (bilateral) divisia and multilateral divisia indexes of output, input and productivity for property-liability (P-L) insurance industry for the following countries: United States, West Germany, Switzerland, France and Japan. The time period studied is 1975 and 1987. The results indicate that considerable diversity exists among different countries, with Japan showing the weakest productivity growth. The United States and West associated overall with high Germany are productivity. (Author) Keywords: Divisia Index, Productivity, Insurance, Trtnslog.