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Brookings-Wharton Papers on Financial Services
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ISSN (Print) 1098-3651 - ISSN (Online) 1533-4430
Published by Project MUSE

[305 journals]

Extending the Theory to Meet the Practice of Insurance
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  Abstract: Such arrangements are known as bottomry or respondentia bonds. Early insurance arrangements reflected poor understanding of insurance theory. For example, in 1692, England offered life annuities for sale at a fixed price, independent of age. Not surprising, healthy young people bought the policies, and the treasury lost heavily. Mortality tables had not yet been conceived. Indeed, Edmond Halley (from Halley’s comet) produced the first life table in response to this event. Still, many of the modern problems had been anticipated. Understanding of moral hazard dates back to second-century Roman Palestine. For more on this and a detailed description of insurance as understood 100 years ago, see the famed ... Read More
  PubDate: 2020-04-29T00:00:00-05:00
The "Crisis" in Medical Malpractice Insurance
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  Abstract: General Accounting Office (2003a, pp. 5, 12, 13). A claims-made policy covers all claims filed in the year that the policy is written, provided that the policyholder had coverage with this insurer during the year in which the incident occurred. An occurrence policy covers all claims related to incidents in the year in which the policy is written. Thus if a physician with claims-made coverage switches insurers or retires, he or she generally buys “tail coverage" to cover any future claims that may be filed related to his or her prior practice. Danzon (1984); Doherty and Dionne (1993). General Accounting Office (2003b, p. 10). Grøn (1989, 1994); Winter (1994). Cummins and Danzon (1997). ... Read More
  PubDate: 2020-04-29T00:00:00-05:00
Brokers and the Insurance of Non-Verifiable Losses
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  Abstract: Abraham (2002); Stewart and Stewart (2001). The idea of a forfeit is an example of what has been colorfully referred to as the “ugly princess hostage" (Schelling 1960; Williamson 1985). An example noted by Holmstrom and Roberts (1998) is that Northwestern and KLM chose to rely on single support operations, which increases the costs of a holdup and so gives them an incentive to work together more effectively. Grossman and Hart (1986); see Hart (1995) for a summary. Anderlini, Felli, and Postlewaite (2003a, 2003b). Some policies specify the perils and losses that are covered. If a loss occurs that is not specified, then it is not covered. Other policies work in the opposite direction, covering ... Read More
  PubDate: 2020-04-29T00:00:00-05:00
Tort Liability, Insurance Rates, and the Insurance Cycle
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  Abstract: Parts of this discussion draw from Harrington and Niehaus (2000) and Harrington and Danzon (2001). I address many similar issues in my 1988 Brookings paper on the liability insurance crisis (also see Harrington and Litan 1988). All general liability insurance results reported in this paper include separately reported product liability coverage, unless otherwise indicated. Because the data source used—Best’s Aggregates & Averages (A. M. Best, various issues)—ceased reporting Schedule P information by line of business in the 2003 edition, I did not have access to data on accident-year losses for general liability insurance in 2002 at the time this paper was prepared. The figures that show values for 2002 ... Read More
  PubDate: 2020-04-29T00:00:00-05:00
Insuring against Terrorism: The Policy Challenge
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  Abstract: Moss (1999, 2002). Nishiyama and Smetters (2003). Riddiough and Chiang (2003). Real Estate Roundtable (2002a). Buffett (2001). Pan American World Airways, Inc. v. Aetna Casualty & Surety Company, 505 F.2d 989 (2d circuit 1974), applying New York law; Holiday Inns, Inc. v. Aetna Insurance Company, 571 F. supp. 1460, 1499-503 (S.D.N.Y. 1983).Pan American World Airways, Inc. v. Aetna Casualty & Surety Company505F.2d9892d circuit1974applying New York lawHoliday Inns, Inc. v. Aetna Insurance Company571F. supp.146014991503S.D.N.Y.1983 Pan American World Airways, Inc. v. Aetna Casualty & Surety Company, at 1015; upheld on appeal.Pan American World Airways, Inc. v. Aetna Casualty ... Read More
  PubDate: 2020-04-29T00:00:00-05:00
Consolidation in the European Insurance Industry: Do Mergers and
Acquisitions Create Value for Shareholders'
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  Abstract: Perhaps the most important development in the financial services market of the past two decades has been the integration of the financial services sector. Deregulation, advances in communications and information technology, and economic forces have led to the breakdown of the "fire-walls" that traditionally separated financial intermediaries such as commercial banks, thrift institutions, investment banks, mutual fund companies, and insurance companies. The European Union gradually deregulated the financial services sector through a series of banking and insurance directives, culminating in the virtual deregulation of financial services (except for solvency) in the Second Banking Coordination Directive, implemented ... Read More
  Keywords: Insurance companies; Consolidation and merger of corporations; Casualty insurance; Property insurance
  PubDate: 2019-08-27T00:00:00-05:00
Discussion
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  Abstract: Henry Aaron of Brookings opened the discussion by asking what impact tort reforms in the various states have had on the malpractice insurance market. Danzon responded that the reforms have had long-lasting effects. While most were enacted in the 1970s or 1980s, effects persist even to the present. Since many caps on damages were set in nominal terms, more claims face the constraint over time. The frequency, rather than the severity, of claims seems to drive claims paid. Steve Carney of Medical Mutual of Maryland agreed that, although there has not been a major increase in the frequency of claims, there has been an increase in the "embedded frequency," the percentage of claims requiring a payment to be closed. ... Read More
  Keywords: Insurance companies; Consolidation and merger of corporations; Casualty insurance; Property insurance
  PubDate: 2019-08-27T00:00:00-05:00
Discussion
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  Abstract: Robert Litan of Brookings commented on the comparative reforms of the 1990s in the United States and Europe. Much of the activity in the U.S. banking industry had no parallel in the domestic insurance industry. Perhaps a pent-up agenda of mergers due to interstate banking provisions explains the flurry of banking mergers. Dave Cummins responded that Reigle-Neil and similar regulatory change in Europe led to mergers and acquisitions in the banking industry and that the United States never had significant restrictions on interstate mergers. Without closely examining the relative size of European insurers, Cummins did acknowledge the existence of very large European companies due to a precedent of involvement in ... Read More
  Keywords: Insurance companies; Consolidation and merger of corporations; Casualty insurance; Property insurance
  PubDate: 2019-08-27T00:00:00-05:00
Discussion
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  Abstract: This paper generated a lively discussion among many of the conference participants. Howard Kunreuther of the Wharton School opened the discussion by calling for a broader view of errors in judgment within the demand and supply framework when dissecting reasons for the divergence between insurance theory and practice. On the demand side, consumers seem to view insurance as an investment rather than a contingent claim. This view creates a strong preference for low deductibles and rebate schemes so that the insured can "get something back." Also on the demand side, paying a premium over and above the expected value is rational for consumers who derive peace of mind from the risk transfer. On the supply side, only a ... Read More
  Keywords: Insurance companies; Consolidation and merger of corporations; Casualty insurance; Property insurance
  PubDate: 2019-08-27T00:00:00-05:00
Discussion
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  Abstract: Bill Murray of Chubb suggested a closer examination of the role of the broker. In reality brokers, rather than acting disinterestedly, generally act on different motivations. In many cases, they receive compensation from the insurers to whom they present business and with whom they sometimes have profit-sharing arrangements. The status of a broker's compensation may partly influence where the broker chooses to place business. The paper seems to suggest that the insured should always act through a large national broker, who can provide greater clout in the market and have a greater effect on the insurer's reputational interest; in reality, however, regional brokers thrive. Moderate or midsize companies may receive ... Read More
  Keywords: Insurance companies; Consolidation and merger of corporations; Casualty insurance; Property insurance
  PubDate: 2019-08-27T00:00:00-05:00
Discussion
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  Abstract: Bill Murray of Chubb and Son discussed reputation as a major motivator in the decision not to invoke the war exclusion after September 11. The decision to cover those losses was voluntary, but the post-September 11 world left insurers vulnerable. While reinsurers have the option of closing shop, the primary business is bound by cancellation and nonrenewal restrictions. Debra Ballen of the American Insurance Association agreed that the Terrorism Risk Insurance Act (TRIA) should be reauthorized for three main reasons. First, a lack of precedent hinders informed projection of future risk. Second, preexisting regulatory constraints do not allow a "free-market" solution. Finally, truly turning risk evaluation over to ... Read More
  Keywords: Insurance companies; Consolidation and merger of corporations; Casualty insurance; Property insurance
  PubDate: 2019-08-27T00:00:00-05:00
Comment and Discussion
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  Abstract: Comment by Ralph A. Winter: Scott Harrington has highlighted the most puzzling aspect of the property-liability insurance market: its sporadic volatility. Premiums are relatively stable, even declining, for long periods (such as 1977-84 or 1988-2001). Then policyholders renewing their policies find that their premiums have skyrocketed. The number of transactions drops dramatically in these hard markets: for many lines, insurance is described as unavailable—meaning unavailable at moderate prices. In 1985-86 and again in 2001, many policyholders renewing their policies saw their premiums double or triple and their coverage drop. Harrington discusses several hypotheses in light of the evidence and then offers some ... Read More
  Keywords: Insurance companies; Consolidation and merger of corporations; Casualty insurance; Property insurance
  PubDate: 2019-08-27T00:00:00-05:00

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