Showing papers in "Journal of Risk and Insurance in 1972"

Birth order, anxiety, affiliation and the purchase of life insurance

Abstract: This paper is a preliminary investigation into the role of anxiety in insurance purchasing decisions. Because the psychological literature with respect to birth order provides indications of differential anxiety levels and affiliative behavior under stressful conditions, the study examines the role of birth order in relating anxiety to insurance purchasing decisions. It was hypothesized that first and only children would purchase more life insurance, total and individual, than would later borns. Samples, including demographic as well as insurance purchasing and birth order data, were drawn from two student populations at opposite ends of the country. The data were subjected to multiple regression analysis and support for the hypotheses was indicated by only one of the samples. After analysis of the findings, suggestions for further research are provided. Risk reduction is said to be the basic product or service provided by insurers. Among the more popular definitions of risk are those involving uncertainty of loss. Through the payment of a premium, the insured reduces his uncertainty regarding the possibility of an economic loss. Pfeffer (15), makes this uncertainty

Ownership and Performance: Stock and Mutual Life Insurance Companies

Abstract: Stock and mutual life insurance companies exhibit different performance characteristics. The results of a comparison made with samples of 19 stocks and 27 mutuals, which operated under New York regulations between 1952 and 1966, provided evidence of these differences. Two performance measures were utilized: percentage increase in assets over the 15 year period and percentage change in net premium income. With both measures the difference was significant at the .01 level. Although the observed stocks and mutuals differed in size and product mix, the performance differences could be attributed to ownership. The research design utilized control hypotheses concerning company size and benefit payout level in order to ascertain if ownership was the causal factor. Compared with possible determinants of corporate performance, ownership has received little attention in economic literatuLre. Although capital stock corporations dominate the American economy, vast resources and productive capacity are held by co-operatives, foundations, government-owned corporations, and mutual companies. An important difference between these corporate types and the capital stock corporation is the nature of property rights inherent in ownership shares. Shares of capital stock corporations may be purchased or sold without quantity restriction at a market determined price. In these other ownership types there is usually neither a market determined price nor unconstrained transactions in equity shares. In the case of mutual life insurance companies, owners must be policyholders and generally may hold no more than one equity share. Capital stock life insurance companies in 1950 provided 30 percent of all U.S. Richard Spiller, Ph.D., is Associate Professor of Marketing in California State College at Long Beach. This paper was presented at the 1971 Annual Meeting of A.R.I.A. life insurance in force. By 1969 their share of market had increased to 48 percent.1 This rapid increase relative to mutual life insurance companies competing in the same market suggests possible performance and behavioral differences in the two ownership types. Although some of the change in the relative position of stocks and mutuals may be attributed to the many new stock companies which began operations during these years, there is evidence of behavioral differences in stocks and mutuals. The objectives of this study are to test the hypothesis that performance of stocks and mutuals differ and to consider some possible causal factors underlying any differences. In a more general sense, this is an effort to provide empirical evidence of the effect of alternate ownership forms on corporate performance. In the life insurance industry, mutual companies compete against profit-oriented firms which have the same market opportunities and comply with essentially the same regulations. Both types of com1 Institute of Life Insurance, Life Insurance Fact Book. New York, 1951, 1970.

Insurance Rate Regulation: The Reasons Why

Abstract: Contrary to popular belief, the key provisions of the All-Industry laws were not produced by the All-Industry Committee. Nor did thiey result from cooperation between the Committee and the National Association of Insurance Commissioners. A cartel, composed of stock property insurers, dominated property-liability insurance before the mid-1940's. The All-Industry laws were designed (under the leadership of Commissioner Dineen and with the help of the mutuals) as a means by which the states could bring the previously unregulated cartel under their control. Although suitable for the economic and political environment in which they were enacted, the laws are not necessarily appropriate today. In 1909, only a few months after Kansas adopted the first U.S. insurance rate regulation law, the Governor of Kansas wrote to his Insurance Commissioner complaining that rates were being raised and demanding to know what the Commissioner was doing "to protect the people" of the

Insurer Post-Insolvency Guaranty Funds

Abstract: This study explores the rationales for and against proposals for post-insolvency guaranty regulation, designed to expand public protection against the possibility of loss from the insolvency of an insurance company. Recent year enactments by state legislatures have, with few exceptions, resulted in postinsolvency assessment plans in contrast to a pre-assessment alternative. State programs are compared and contrasted with the proposed federal insolvency fund which would employ a pre-assessment plan; create a Federal Insurance Guaranty Fund; provide for federal administration of the insolvency fund and federal participation with state insurance supervisors in the financial supervision of insurers and in the administration of insolvent insurers. Within the past four years there has been a resurgent interest in legislation to expand public protection against the hazard of loss from the insolvency of an insurance company. As of July, 1971, forty-five states had enacted programs providing that all valid claims against insolvent insurers will be guaranteed by other insurers doing business in these

Pension Funds, Personal Savings, and Economic Growth

Abstract: Pension funds are the fastest growing of all financial institutions. They now cover half the labor force and represent one-eighth the financial assets of the entire household sector. This study investigates whether pension savings represent a substitution for other forms of personal saving. Past analyses reveal no consensus on this question. The hypothesis examined in this study is that people disregard pension savings and save in other ways and amounts. To the extent this is true, pension funds may enhance economic growth by increasing the aggregate level of savings available for investment. If, on the other hand, people save less in other forms, pension funds may be an important area of concern in the increasing rivalry among financial intermediaries for household deposits. Highlighting the implications of this analysis is the virtual certainty that pension funds will continue to increase in scope and size. As an economic force, pension funds can not be ignored. Their assets presently exceed $258 billion and, with contributions rising at nearly 15 percent annually, they enjoy the fastest growth of all financial institutions.' The economic impacts of pension funds are most noticeable in the channeling of funds to capital markets, the redistribution of income, and wage contract negotiations. Less obvious economic effects, however, may be emerging in the spending and savings habits of many wage earners. And, considering the importance of savings on capital formation and economic stability, the possible impact on saving becomes particularly significant. A savings level change, resulting from pension contributions, could have far reaching implications in terms of national growth and stability. Vincent P. Apilado, Ph.D., is Assistant Professor of Finance in the College of Business Administration at Arizona State University . This paper was submitted in August, 1971. 1 Charles D. Ellis, "Danger Ahead for Pension Funds," Harvard Business Review, May-June, 1971, p. 51. Problem and Hypothesis Employees' contributions to pension plans represent a forced saving unavailable to them until retirement or termination prior to vesting.2 Hence, workers may view these contributions as a tax on their earnings without benefits related to present needs. The savings behavior of these individuals may then be wholly independent of their pension contributions. Conversely, individuals who directly associate pension contributions with other forms of saving, may assume their retirement income problems are resolved and decrease the amount saved in other forms. Or, the prospect of a secure retirement income, plus a guaranteed standard of living, can spur them to increase their 2Vesting refers to the right of an employee, on leaving employment before retirement, to receive all or part of the retirement benefits purchased on his behalf by employer contributions. The extent of this right and the requirements for acquiring it depend on the criteria of the pension plan covering the particular worker. See H. E. Davis and A. Straeser, "Private Pension Plans, 1960 to 1969--An Overview," Monthly Labor Review, July, 1970, pp. 45-56.

Inflation and Saving through Life Insurance: Comment

Abstract: In a recent issue of this Journal,' Seev Neumann tests the hypothesis that inflation is not adverse to "saving through life insurance" and concludes by accepting the hypothesis. This comment suggests several weaknesses in Neumann's methodology and develops and tests an alternative model which is judged to be a better test of the hypothesis. We will conclude that Neumann is correct with respect to the question of the effect of the expected rate of inflation but he is incorrect with respect to the question of the effect of the expected level of the time path of future prices on "saving through life insurance. We find the following weaknesses in Neumann's methodology:

Empirical Utility Functions and Insurance Consumption Decisions

Abstract: In order to investigate the usefulness of the von Neumann-Morgenstern utility concept in an actual decision making context, 30 subjects were interviewed. Their responses to questions were used to acquire a utility function which was then incorporated in a deductible selection model. The utility function was found to have little external validity either when used to predict choices between two lotteries or in hypothetical insurance consumption decisions. Used in this model it did, however, appear to be slightly more useful in describing actual deductible selections when compared with an expected monetary value model. An effort was made to determine the influence of personal variables on the deductible selection decisions. Using chi-square tests it was determined that the level of deductible is related to the individual's subjective probability-of-loss estimate and his income tax bracket. Utilization of the variables in stepwise regression and discriminant analyses yielded insignificant results for all variables. The question of whether utility functions are amenable to use in actual decision-making contexts has been the subject of considerable debate. Reflecting those who disparage its value, Houston states:1 Modem decision theory represents an important breakthrough or contradiction of the traditional interpretation of utility. However, it is only fair to note that many regard the theory as non-operational in all but the most trivial cases. Representing a more optimistic viewpoint are Friedman and Savage who note:2 Michael L. Murray, D.B.A., is Assistant Professor in the College of Business Administration of The University of Iowa. This paper, funded by a research grant from A.R.I.A., was presented at the 1971 Annual Meeting of A.R.I.A. 1 Houston, David B., "Risk, Insurance and Sampling," Journal of Risk and Insurance, December, 1964, pp. 522. 2 Friedman, M. and L. J. Savage, "The Utility Analysis of Choices Involving Risk," The Journal of Political Economy, August 1948, reprinted in Whether a numerical utility function will in fact serve to rationalize any particular class of reactions to risk is an empirical question to be tested; there is no obvious contradiction as was once thought to exist. This paper reports the result of a continuing effort to determine empirically the usefulness of utility3 functions in an actual decision context. The decision which is being analyzed is the selection of an automobile collision insurance deductible. This decision is viewed in both a descriptive and a normative manner. In the descriptive vein, a number of personal variables of the respondents to the study are analyzed for their ability to predict the Hammond, J. D. (ed.), Essays in the Theory of Risk and Insurance, Scott, Foresman and Co., Glenview, Illinois, 1968, pp. 97. 3The utility concept which is used in this paper and which is referred to in the two previous quotations is that which is referred to as "4von Neumann-Morgenstern utility" as developed in their landmark work: von Neumann, John and Morgenstem, Oskar, The Theory of Games and Economic Behavior, Princeton University Press, Princeton, 1944, pp. 1-31.

Optimizing the Structure of Capital Claims and Assets of a Stock Insurance Company: Comment

Abstract: Given (a) a universe of possible insurance policies that could be issued by the firm, (b) a universe of possible investment alternatives available to the firm, and (c) regulatory or traditional constraints on the maximum amount of new business that can be written on a given volume of equity, (1) What is the efficient set of mean/variance portfolios where the choice parameters are the first and second moments of a randomvariable, the return on (levered) equity? (2) What is the retention on each policy in the universe when the firm is operating at a point on the efficient frontier?

"Spatial Risk" and Return Relationships: A Reconsideration

Abstract: Several recent investigations have suggested that there is a meaningful relationship between the returns realized on assets invested in various industries and "spatial risk" -or dispersion in returns among companies within each industry. Application of this type of analysis to the property and liability insurance industry has led to the conclusion that returns on assets invested within this industry have been inadequate in view of the risks to which they were exposed. A critical reappraisal of the spatial risk concept suggests that its relevance is limited for persons who must make capital investment decisions under conditions of risk. Moreover, the apparent relationship between spatial risks and realized returns is found to be simply a consequence of varying levels of competitiveness among industries. Lack of evidence of meaningful return premiums for bearing risk together with other problems in historical data implies that realized rates of return in nonregulated industries may be an inappropriate basis for setting target rates of return in regulated industries such as property and liability insurance. It is a common theme of contemporary analysis in economics and finance that persons who invest their wealth will do so only if the anticipated returns are commensurate with the risks perceived in the investment. The risk-rate of return concept has important economic and political implications in the area of property and liability insurance regulation. The importance of this theme, combined with a lack of valid anticipations measures, had led to a number of investigations of after-thefact or historical relationships between risks and returns. In recent years two studies have been directed to the question of the relationship between the mean returns realized from assets invested in various industries and the "spatial risk"Richard W. McEnally, Ph.D., and Lee A. Tavis, D.B.A., are members of the Finance Department in The University of Texas at Austin. This paper was submitted in July, 1971. The authors are grateful to Robert C. Witt for his careful and constructive review of a prior draft of this paper. or dispersion in returns among companies within the industry-associated with those

The History of British and American Fire Marks

Abstract: Although no longer important to today's fire insurance operations, fire marks, the plaques which were attached by the fire insurers to buildings when the whole or part of the buildings or contents were insured by them, played a very important role in the earliest days of modern fire insurance. The use of fire marks originated in England immediately following the "Great Fire" of London in 1666 and spread all over the world. This article covers the original purposes of fire marks, their design, construction, and numbering. Since it was in Great Britain that fire marks originated, the major portion of the article is devoted to the development and evolution away from the use of fire marks in that country. The last portion of the article examines the role of the fire mark in American fire insurance history and some of the differences between fire marks in the United States and Great Britain. An interesting facet of property insurance history is the role played by fire marks. A fire mark is a plaque which was attached by a fire insurer to a building when the building, or its contents, was insured by the insurance company. Fire marks are believed to be as old as fire insurance itself: they originated in England in the period immediately following the "Great Fire" of London in 1666. Altogether, more than 150 different British fire insurance companies are known to Harry M. Johnson, Ph.D., CLU, CPCU, is Associate Professor of Finance at the University of Connecticut. Dr. Johnson was formerly Assistant Dean of the School of Business at Connecticut. The research for this paper was conducted while the author was on sabbatical leave in London, England. The author wishes to express his appreciation to Catherine H. W. Bickle, Librarian, and her staff at the Chartered Insurance Institute, London, for their generous assistance. Much of the material drawn on for this article is not available in the United States, and the kind cooperation and helpfulness of the Institute staff during the author's many visits to their library in great measure contributed to his enjoyment in conducting this research. This paper was submitted in September, 1971. have issued fire marks with at least 470 variants, while in the United States, over 64 insurance companies issued 117 vari-

Should There Be an Undergraduate Insurance Program

Abstract: these questions: (1) Is there a need for such a program among the audiences served by the college? (2) What will be the objectives of the insurance and risk program in view of the objectives of the college of business administration? (3) Are the resources available to provide a quality educational program without affecting the educational efforts in other programs? (4) Will the ultimate objectives of the insurance and risk program along with the available resources adequately meet the original determined needs of the audiences served?

Automobile Insurance Reform

Abstract: The purpose of this paper is to put together already defined concepts and ideas for auto insurance reform into a plan which has merit and which might be acceptable to all involved. The core provision of the suggested plan involves creation of a state pool in which individual insurers would participate. The pool would be confined to premiums and losses on compulsory automobile liability and medical paymentsdisability coverages. The insurer would be paid a servicing fee with no possibility of underwriting losses or gains. Further, a proposal is made which it is hoped would obviate the need for "no-fault" provisions, while still assuring prompt payment of claims. "The matter of automobile insurance reform is a very complex problem." Of the dozens of articles, reports, hearings, and conferences on this subject which the writer has read and attended, this statement almost invariably is made at the start of the discussion and in the summation. In between are figuratively mountains of data to support one contention or another or to further validate the proposition that this is a complex problem. To some extent, it is another instance of "too much information and not enough understanding." It is suggested that the first step should be to analyze the problem on a purely theoretical basis, and then to look for solutions indicated by these findings. Although this approach has been pursued in depth by many writers on the subject, James R. Young, M.A., C.L.U., is Assistant Professor in Marketing Management at East Texas State University. From 1951-52 and 195366, he was with Rio Grande National Life Insurance Company, serving as Vice President and Agency Director and member of the Board of Directors the last ten years. He was Director of Publications for the American College of Life Underwriters, 1952-53. Since 1966, Mr. Young has been on the faculty of East Texas State. This paper was submitted in Apr-l, 1971. it seems that the conceptual perspective tends to be warped by a resulting bias and eventually is lost in the maze of data. Hopefully, any plan for automobile insurance reform would be one which would be basically compatible with the existing situation in each of the fifty states. For reasons which will become obvious as the proposed plan is described, the system in Texas is used for analysis and for modification to incorporate the essentials of the proposed plan. Perhaps a comment of a colleague recently moved to Texas will make the point, "If it will work in Texas, it will work anywhere." It takes little imagination to accept the proposition that no soft, moderate reforms are going to correct a situation such as that in Texas automobile insurance where these elements exist: 1. Over 300 companies are in competition for sales and profits, although by law they cannot compete either on price or on product. 2. A marketing system exists where little or no creative selling takes place. In fact, the function of the individual

True Catastrophe Medical Expense Insurance

Abstract: Rising medical care costs combined with rapid advances in medical technology again have brought into sharp focus the problem of catastrophic medical expenses for the public. For those families exposed to medical costs that exceed even the limits of current major medical policies, the result often is financially ruinous. The "traditional" primary plans by which the public has been protected against catastrophic medical costs, including major medical coverage, have various limitations in meeting this risk. These limitations are explored in the article. Also, the excess medical expense coverage currently written as a part of personal umbrella policies has important weaknesses and very little other health insurance presently is written on an excess basis. Therefore, it is proposed that broad, excess type medical expense coverage be made widely available to the public to enable consumers to protect themselves against potentially catastrophic losses. Various criteria are suggested in the article for such catastrophe coverage, including: (1) no maximum limit, (2) a "stop-loss" limit on all cost sharing, and (3) broader coverage. The current debate over national health insurance may produce a plan covering catastrophic medical costs under either private or social insurance. The article analyzes the major national health insurance proposals in terms of how they would provide such catastrophe coverage.

A Managerial Theory for the Non-Life Stock Company

Abstract: The essence of this paper was presented to the 1970 Risk Theory Seminar as "A Progress Report on an Investigation Concerned With Relating Chebyshev's Inequality to Insurance Theory". A first approximation to a comprehensive, yet relatively simple theory of the financial behavior of the non-life stock insurer is presented. The paper models the quantitative relationship between selected administrative policies prescribed by top management and the financial welfare of both policyholders and shareholders. In its capacity as an estimator of the probability of ruin for the combined insurance and investment operation, Chebyshev's inequality may be the key to simplifying the analysis to the point where it may be applied to practical management problems. A comprehensive theory of insurance company financial behavior has not yet been developed. Consequently, insurance scholars, company officials and regulatory bodies cannot consistently explain, predict or control company financial performance. This paper seeks a first approximation to such a theory for the non-life stock insurer. Further study will be needed to refine, empirically validate and apply the theory to other types of

The Measurement of Moral Hazard

Abstract: Insurance that lowers the cost of insured services to the insured may increase the usage of those services. This phenomenon is called "moral hazard" in the insurance literature. This paper demonstrates how price elasticities of demand can be utilized to provide quantitative estimates of moral hazard. Empirical estimates of moral hazard, which are based on hospital patients in Iowa and their demand for hospital services, are presented. It is shown that the amount of moral hazard varied significantly with age class, type of illness, type of accommodation, and whether there were complications, but not with the sex of the patient. Recent papers by K. J. Arrow,' H. G. Grubel,2 and M. V. Pauly3 have been concerned with the question of how the existence of moral hazard may affect the welfare case for public provision of insurance in some instances. All three agree that the quantitative importance of moral hazard depends crucially on the price elasticities of demand for the insured

Financial Accounting Practices of Property and Liability Insurance Companies

Abstract: A sample of annual financial reports to stockholders issued by stock property and liability insurance companies indicates that many insurers are deviating from statutory accounting methods in order to develop financial statements more in accord with generally accepted accounting principles. In addition the professional accounting community is currently considering a change in interpretation of these principles as they apply to the handling of equity securities. This paper analyzes current accounting practices and the possible impact of this contemplated change. The study was made using a computer model to explore the financial effects of these practices given various company growth rates, policy mixes, investment mixes and investment yields. The results indicate that, depending on these factors, very significant differences in such reported financial measures as net income and return on net worth may be generated by changes in accounting methods. The paper concludes by pointing out the possible significance of these findings for the insurance industry. In recent years many stock property and liability insurance companies have become increasingly concerned with the manner in which they account for their operations in annual reports intended for the investing public. Many companies have altered the practices used to prepare financial statements appearing in these reports so as to bring them into line with generally accepted accounting principles as interpreted by the professional accounting community-i.e., the American Institute of Certified Public Accountants (AICPA) and individual public accounting firms. Despite this trend, insurance companies still employ a variety John J. Anderson, Ph.D., is Assistant Professor of Business in the Graduate School of Business at The University of Wisconsin. This paper was submitted in April, 1971. The research on which this paper is based was sponsored, in part, by the University-Industry Research Program at The University of Wisconsin. of accounting practices and financial statement formats in preparing their annual reports to shareholders. The AICPA is currently considering a new interpretation of accounting principles as they apply to reporting unrealized gains or losses on marketable securities which, if adopted, could have a very significant impact on insurance financial statements. The intent of this paper is to describe the accounting practices currently in use and the change being studied by the AICPA and to point out the possible significance and implications of these practices. Statutory Accounting Practices Historically insurance companies have been required to develop elaborate and detailed annual reports for state regulatory commissions, using standard forms and procedures developed by the National Association of Insurance Commis-

The Cost of Capital of Insurance Companies: Comments

Abstract: In the June, 1971 issue of this Journwl, Professor J. J. Launie published an article concerning the application of the cost of capital concept to insurance companies.' Such a topic is clearly a legitimate area of investigation and one which is potentially quite rewarding. However, Launie's article falls short of an adequate preliminary treatment of the topic and thus leaves much of this potential undeveloped. The authors contend that his article is inadequate in two major respects: (1) The analogy between financial intermediaries and industrial firms is not complete, i.e., the cost of capital concept must be modified to account for some of the characteristics of intermediaries, particularly the interaction between assets and liabilities; and (2) Even if one accepts the intermediary-industrial firm analogy, the article leaves too many questions unanswered to constitute a successful seminal treatment of the topic. The remainder of this paper discusses these deficiencies and offers some remedial suggestions.