1. Introduction 2. Jurisprudence and arbitrage 3. Two major prohibitions: Riba and Gharar 4. Sale-based Islamic finance 5. Derivative-like sales: Salam, Istisma' and 'Urbun 6. Leasing, securitization and Sukuk 7. Partnerships and equity investment 8. Islamic financial institutions 9. Governance and regulatory solutions in mutuality 10. Beyond Shari'a arbitrage Conclusion.

http://digilib.umpalopo.ac.id:8080/jspui/bitstream/123456789/195/1/0521864143__Islamic%20Finance%20-%20Law%2c%20Economics%2c%20and%20Practice.pdf

Islamic Finance: Law, Economics, and Practice

This paper examines the relationship between mergers and acquisitions, efficiency, and scale economies in the US life insurance industry. We estimate cost and revenue efficiency over the period 1988–1995 using data envelopment analysis (DEA). The Malmquist methodology is used to measure changes in efficiency over time. We find that acquired firms achieve greater efficiency gains than firms that have not been involved in mergers or acquisitions. Firms operating with non-decreasing returns to scale (NDRS) and financially vulnerable firms are more likely to be acquisition targets. Overall, mergers and acquisitions in the life insurance industry have had a beneficial effect on efficiency.

Consolidation and efficiency in the US life insurance industry

Property-liability insurance is distributed through a direct-writer system, where agents represent one insurer, and an independent-agency system, where agents represent several insurers. Independent-agency insurers have higher costs than direct writers. The market-imperfections hypothesis attributes the coexistence of the two types of insurers to impediments to competition, while the product-quality hypothesis holds that independent-agency insurers provide higher-quality services. The authors measure cost efficiency and profit efficiency for property-liability insurers and find strong support for the product-quality hypothesis, implying that independent-agency insurers produce higher-quality outputs and are compensated by higher revenues. Copyright 1997 by University of Chicago Press.

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The Coexistence of Multiple Distribution Systems for Financial Services: The Case of Property- Liability Insurance

This article examines the impact of an insurer's level of insolvency risk on the prices the insurer obtains for its products in the property-liability insurance market. The measures of insolvency risk used are those implied by the option pricing model of insurance. The key finding is the existence of a negative relation between insolvency risk and insurance prices. This implies that property-liability insurers are penalized for default risk through lower prices, despite the existence of guaranty funds. Other firm-specific determinants of insurance prices are also identified. The results have significant implications for insurance researchers and regulators.

The Impact of Firm Risk on Property-Liability Insurance Prices

The authors investigate the role of outside directors in the corporate-control process by exploiting variation in ownership structure within the insurance industry. In mutuals, ownership rights are not transferable. This inalienability restricts the effectiveness of control mechanisms like external takeovers, thus increasing the importance of monitoring by outside directors. Consistent with this hypothesis, the authors find that mutuals employ more outside directors than stocks; firms that switch between stock and mutual characters make corresponding changes in board composition; mutuals' bylaws more frequently stipulate participation by outside directors; and mutuals with more outside directors make lower expenditures on salaries, wages, and rent. Copyright 1997 by University of Chicago Press.

Board Composition and Corporate Control: Evidence from the Insurance Industry

This article provides empirical tests of the risk differences between two types of ownership structure in the property-liability insurance industry. Empirical evidence is provided that suggests stock insurers have more risk than mutuals where the risk inherent in future cash flows is proxied by the variance of the loss ratio. Further evidence suggests that stock insurers write relatively more business than do mutuals in lines and states having higher risk. Copyright 1993 by University of Chicago Press.

Stock Versus Mutual Ownership Structures: The Risk Implications

This study further substantiates the presence of insurance underwriting cycles and analyzes their causes. A generalized least squares analysis of changes in premium levels is used to test the rational expectations/ institutional intervention hypothesis across countries as well as within each country. We also examine the relation between cycle length and the market/institutional features of each country. Finally, a logistic model is used to predict the presence of a cycle based on the market/ institutional features. The results suggest that the rational expectations/ institutional intervention hypothesis explains many aspects of the underwriting cycle, including cycle length. INTRODUCTION The cyclicality of underwriting profits for the property-liability insurance industry has been extensively researched.1 The industry results tend to follow a cycle consisting of alternating uniform periods of rising and then falling underwriting profits. The period in which the cycle "bottoms out" is typically characterized by withdrawal of insurers from some markets resulting in availability crises for some lines (Cummins, Harrington, and Klein, 1992a). Periods of rising underwriting profitability are characterized by increased entry of insurers and expanded coverage for many lines of business. Studies show that the underwriting cycle in the United States tends to follow a second-order autoregressive process with a total period (or cycle) averaging six years (Cummins and Outreville, 1987; Venezian, 1985; Doherty and Kang, 1988; and Smith and Gahin, 1983). But cycles are not limited to the United States; Cummins and Outreville (1987) observe underwriting cycles over long periods of time and in many countries. Explanations for the cycles follow two schools of thought. The first explanation is based on the premise that insurance markets operate irrationally (Venezian, 1985) and/or exhibit market imperfections (Gron, 1994; Winter, 1994), while the second emphasizes rationality with institutional intervention. The argument of irrational behavior suggests that insurance markets are destabilized by phenomena such as extrapolative forecasting and so-called "cash flow underwriting," which can result in prices considerably higher or lower than competitive levels due to erroneous estimates of losses or investment income. The Winter/Gron "capacity constraint" theory posits that cycles are caused by impediments to capital flows that result in alternating periods of excessive and inadequate capacity in the industry.2 According to this scenario, the underwriting cycle is most prominent in longtail lines (usually liability lines) because forecasting horizons are longer and anticipated investment income is more substantial for these lines.3 The other school of thought, which we call the rational expectations/ institutional intervention hypothesis, emphasizes insurance market rationality and considers whether underwriting cycles are caused by external events and market features not under the control of the insurer. Reactions to these phenomena make it appear that insurers behave irrationally. These external events include: (1) institutional, regulatory, and accounting characteristics (Cummins and Outreville, 1987; Witt and Miller, 1981; Outreville, 1990; and Tennyson, 1991); (2) exogenous shocks to surplus attributed to natural catastrophes, unexpected increases in claim costs, or shifts in loss distributions (Cummins and McDonald, 1992); (3) interest rate changes coupled with changes in equity values (Doherty and Garven, 1992; and Cummins and Danzon, 1997); and (4) uncertainties in the market environment (Berger and Cummins, 1992). Although the evidence is extensive regarding the existence of and causes for underwriting cycles in the United States, the examination of international underwriting cycles is limited to Cummins and Outreville (1987). The purpose of the present article is to explore further the presence of underwriting cycles in international property-liability insurance markets and to test the hypothesized explanations for these cycles. …

International Insurance Cycles: Rational Expectations/Institutional Intervention

The terrorist attacks on the World Trade Center caused unprecedented economic and structural ramifications in the insurance markets, resulting in considerable uncertainty and informational asymmetry We test several theoretical models of how markets respond to and recover from extreme capital shocks Using the capacity constraint, post-loss investment and implicit insurance contract models, we develop testable hypotheses predicting the temporal and cross sectional variation in insurance company stock prices following September 11th We find evidence consistent with the models’ predictions, in particular, the predictions regarding relations between net losses and leverage and stock price performance after the shock

Insuring September 11th: Market Recovery and Transparency

We propose a process for identifying potentially insolvent insurers on a cost-effective basis. A loss cost function is developed such that the effectiveness of monitoring is maximized relative to a cost constraint. The loss cost function is supported by a model that provides a rank ordering of financial institutions according to their probability of insolvency. When tested against a full sample of property-liability insurance companies , the procedure provides information critical to maximizing the effectiveness of regulatory resources available for solvency surveillance and performs well as a predictor of insolvency. Likewise, the rank ordering of insurers overcomes an estimation problem critical to establishing risk-adjusted guaranty assessments.

Considerations of cost trade-offs in insurance solvency surveillance policy

Asset/Liability Management for the Life Insurer: Situation Analysis and Strategy Formulation ABSTRACT Asset portfolios of life insurers support the performance of obligations to customers and contribute to the profitability of insurers. The obvious risks associated with these portfolios are magnified by the instability of financial markets. Insurers should have a heightened awareness of the simultaneous effects of unstable markets and changes in interest rates not only on the assets, but also on liabilities. This study examines the current operational status and planning procedures of seven asset/liability management processes appropriate for life insurers and offers recommendations. Introduction The concepts and techniques of asset/liability management (ALM) [see Babbel and Stricker (1987), Babbel and ,amm-Tennant (1987)] are of concern to both industry leaders and academicians. The simultaneous effects of unstable financial markets and changes in interest rates on both the assets and liabilities of insurers have resulted in the recognition of ALM as a necessary part of prudent portfolio management. Before implementing a comprehensive ALM process, a life insurer should complete a strategic planning process which includes three distinct phases: situation analysis, strategy formulation, and implementation. This study analyzes the planning, evaluation and use of ALM techniques appropriate for the life insurance industry. In addition, the advantages and disadvantages of each technique are identified. Guidelines for an investment management strategy are provided based on situation analysis. Further research is necessary for completion of the strategy formulation and implementation phases. The article proceeds in the following manner: data source and respondents are described; the first phase of a strategic ALM plan--situation analysis--is addressed by analyzing the current operational status of seven ALM processes and the planning/evaluation procedures currently used by the industry regarding ALM; and conclusions and recommendations are given. Data and Survey Method A survey of management philosophy and utilization rates of seven ALM techniques was mailed to senior investment officers at a random sample of 250 life insurers, during late 1986 and early 1987. Seven ALM techniques were identified in the survey, nevertheless other techniques or variations may be appropriate for a particular product or circumstance. Respondents were invited to discuss these additional ALM techniques, such as dedication or contingent immunization. Ninety-four insurers responded; 102 were represented because, in some cases, the investment process was centrally performed for a group of insurers. Respondents were invited to submit a partially completed questionnaire whenever data were unavailable. As a result, all questions yielded fewer than 94 responses. Respondents were profiled by six characteristics: organizational type, location, size, number of state licenses, product mix, and asset mix. The respondents are a fair representation of the industry. Forty-two percent of the firms are mutual insurers and 58 percent are stock insurers. Home offices of the firms are predominantly located in the northeast although all regions of the United States are represented. Seventy percent of the firms report net invested assets of $4 billion and less, whereas 30 percent report net invested assets greater than $4 billion. Forty-four percent of the firms are licensed to sell insurance products in 50 states with the remaining 56 percent licensed to sell in fewer states. The product mix of the firms include numerous interest sensitive products and the representation of these products as a percentage of net statutory liabilities is significant. Exposure to interest rate risk is evident among the firms due to a significant percentage of invested assets held in long-term bonds. …

Joan Lamm-Tennant

Papers

Stock Versus Mutual Ownership Structures: The Risk Implications

International Insurance Cycles: Rational Expectations/Institutional Intervention

Insuring September 11th: Market Recovery and Transparency

Considerations of cost trade-offs in insurance solvency surveillance policy

Asset/liability Management for the Life Insurer: Situation Analysis and Strategy Formulation