Showing papers in "Journal of Risk and Insurance in 1987"

Corporate Insurance and the Underinvestment Problem

Abstract: A casualty loss produces option-like characteristics in assets because their value depends on further discretionary investment. With risky debt in the firm's capital structure, the shareholders can have incentives to forgo the discretionary investment, even though it has a positive net present value. Thus a potential incentive conflict exists between the bondholders who want the investment made and the shareholders who do not. The incentive problem can be controlled by including a covenant in the bond contract requiring insurance coverage. Full coverage is generally not required. The maximum deductible depends on the amount of debt in the firm's capital structure and the feasible set of net casualty losses.

An International Analysis of Underwriting Cycles in Property-Liability Insurance

Abstract: Most prior analyses of underwriting cycles have explained cycles as a supply-side phenomenon involving irrational behavior on the part of insurers. This paper proposes instead that insurance prices are set according to rational expectations. Although rational expectations per se would be inconsistent with an underwriting cycle, the authors hypothesize that cycles are “created” in an otherwise rational market through the intervention of institutional, regulatory, and accounting factors. Empirical evidence is presented indicating that underwriting profits in several industrialized nations are consistent with the hypothesis.

Insurance and Corporate Risk Management

Abstract: This paper provides a model of a competitive financial market economy in which there are not only stock and bond markets but also insurance markets. In the model's most naive form, the analysis shows that the corporate value of the insured firm equals that of the uninsured firm and in this case the firm has no active role to assume in managing corporate risk. The model is then modified to incorporate costly bankruptcy and agency problems. Then the analysis shows that the corporation has an incentive to purchase insurance because it may eliminate or reduce the bankruptcy and/or agency costs.

Managerial Indemnification and Liability Insurance: The Effect on Shareholder Wealth

Abstract: Possible manager-shareholder conflicts have increased the debate over the role of indemnification and directors' and officers' (D&O) liability insurance. Arguing that such insurance has adverse incentive effects which harm shareholders, some have recommended regulations to limit such practices. We provide empirical evidence on the effect of D&O insurance on shareholder wealth. To the extent such insurance affects shareholder wealth, it appears to increase it. Broadening of indemnification and the passage in 1941 of a New York law that was the first to authorize corporate indemnification have no significant shareholder wealth effects. These findings suggest no compelling reason for adopting regulations to limit D&O insurance.

Fair Rate of Return in Property-Liability Insurance

Abstract: Property-liability insurance rates for most lines of business are regulated in about one-half of the states. In most cases, this me ans that rates must be filed with the state insurance commissioner and approved prior to use. The remainder of the states have various forms of competitive rating laws. These either require that rates be filed prior to use but need not be approved or that rates need not be filed at all. State rating laws are summarized in Rand Corporation (1985). The predominant form of insurance rate regulation, prior approval, began in the late 1940s following the V. S. Supreme Court decision in United States vs. South-Eastern Underwriters Association, 322 V. S. 533 (1944). This was an anti trust case involving one of four regional associa tions of insurance companies, which constituted an insurance cartel. The case struck down an earlier decision, Paul vs. Virginia, 8 Wall 168 (1869), holding that the business of insurance was not interstate commerce and hence that state regulation of insurance did not violate the commerce clause of the V. S. Constitution. Following South-Eastern Underwriters, the Vnited States Congress passed the McCarran-Ferguson Act, which held that continued state regulation and taxation of insurance was in the public interest. The act also held that the federal antitrust laws would not apply to insurance to the extent that the business was adequately regulated by state law. (See V. S. Department of Justice 1977."

The Effects of Social Security on Life Insurance Demand by Married Couples

Abstract: The paper develops a simple one period, utility maximizing model of a married couple choosing the amount of life insurance it wants on each of its earners. The model is specialized to predeceasing husbands and tested using income tax and probate data on a sample of Wisconsin households. Husband's future earnings are found to increase the demand for insurance on the husband's life. Social Security survivor benefits decrease this demand, while Social Security benefits conditional on the husband's survival, such as retirement benefits, increase it. These two effects largely offset one another. Wives' future earnings are found to increase the demand for life insurance on the husband, contrary to the model's prediction. While life insurance planning often includes discussion of Old Age, Survivors, and Disability Insurance, more popularly known as Social Security, existing life insurance models do not adequately consider the effects of both Social Security retirement and survivor benefits on life insurance demand.1 Survivor benefits diminish the demand for life insurance, while retirement benefits increase it. This paper develops and empirically investigates this hypothesis in a simple model that distinguishes these two effects. The overall effect of Social Security on life insurance bears on the more frequently asked question about the effect of Social Security on bequests, since life insurance is a key tool in bequest planning.2 The paper models a household with two potential earners, and also investigates the role of a spouse's earnings in determining insurance demand. Members of a household can share risks, so that the potential future earnings John Fitzgerald is an Assistant Professor in the Bowdoin College Department of Economics. He earned a Ph.D. at The University of Wisconsin-Madison. 'For example [3] and [20] consider "income programming" models for life insurance demand where only Social Security survivor benefits are considered. Campbell [5] also neglects retirement benefits. 2The effect of Social Security on bequests remains an unsettled question. In a seminal paper, Barro [2] argued that an unfunded, or "pay as you go", Social Security system should have no effects on aggregate savings, since parents will adjust their bequests to offset any burden the system puts on their children. David and Menchik [8] empirically test this hypothesis using data on actual bequests, and find no significant effect of net Social Security wealth on bequests. For a review of the vast literature on the effect of Social Security on savings, see [6]. This content downloaded from 157.55.39.144 on Wed, 07 Sep 2016 04:37:31 UTC All use subject to http://about.jstor.org/terms The Effects of Social Security on Life Insurance 87 of one spouse can reduce the need for life insurance on the other. Given the rise in the number of two earner couples in the United States, the role of the spouse's earnings has become increasingly important. This paper develops a simple one period model of a household (a married couple) choosing the amount of life insurance it desires on each of its two potential earners. The approach is similar to Campbell [5] who solved a single earner problem. An explicit utility maximization model is used where either earner may die during the planning period. The model assumes that two Social Security wealth measures are relevant: the Social Security wealth available to the family conditional on an earner, say the husband, surviving the planning period, and the Social Security wealth available to the surviving family conditional on the husband dying during the planning period. These two meassures have offsetting effects on life insurance demand: the wealth conditional on the husband's survival increases the demand for life insurance, much like the husband's future earnings, while wealth conditioned on the husband's death (survivor benefits) reduces the demand for life insurance. Since these effects move in opposite directions, the total (unconditional) effect of Social Security wealth on life insurance demand is indeterminate. This paper measures the degree of offset empirically. The remainder of this section briefly reviews past empirical work on life insurance demand. The next section describes a model of household behavior. The rest of the paper empirically investigates the implications of the model. Section II describes the empirical method, including the data used and calculation of the components of household wealth. Section III presents empirical results, and a brief conclusion follows. Several past studies have looked at the total household expenditure on life insurance premiums, and found that household income and wealth have positive effects on premium expenditures.3 Interestingly, Duker [9] found that working wife households have lower total premium expenditures than households in which the wife does no market work. While he terms this "underconsumption of insurance," this paper's model shows this to be rational sharing of risk within the household. To this author's knowledge, only one other study has empirically investigated the effect of Social Security on life insurance demand.4 In a framework similar to that used below, Campbell [4] finds that a person's aggregated future earnings have a moderate positive effect on the total insurance held on that person, while aggregated Social Security survivor benefits have a moderate negative effect.5 He ignores Social 'Most of these studies use data from various years of the Survey of Consumer Finances from the Survey Research Center at Michigan. They include [18] [17] [15] and [9]. 4Two other studies, [1] and [11], look at life insurance purchases over a specified period of time for households, and the type of insurance purchased. Neither study considers Social Security. 'Campbell uses data gathered during 1963 and 1964 from the Survey of Financial Characteristics of Consumers and the Survey of Changes in Family Finances. He imputes Social Security benefits based on earnings, age, and family size. This content downloaded from 157.55.39.144 on Wed, 07 Sep 2016 04:37:31 UTC All use subject to http://about.jstor.org/terms 88 The Journal of Risk and Insurance Security retirement benefits, and studies only single earner households, thus ignoring the potential for risk sharing.

The Design of Optimal Insurance Contracts Without the Nonnegativity Constraint On Claims

Abstract: 1. IntroduICtion The purpose of this paper is to generalize previous results on optimal insurance. Trhe most famous theorem onl this topic is due to Arrow (1971), 1974). He examines the optimal choice of insurance coverage subject to two constraints. First, he assumes that the insured is confronted with a premium which depends only upon tile actuarial value of the policy. A particular case of this pricing constraint is given by a premium contaiiling the expected value of claims plus a loading proportional to it. Second, insurance payments are constrained to be always nonnegative. The policy chosen by a rational purchaser is shown by Arrow to have full coverage above a deductible. If the premium contains a loading, consumers will be unwilling to purchase insurance against small losses for which administrative costs exceed the value of the risk reduction generated by the insurance. In recent works (liberman (1983), Gollier (1985)), the first constraint stated by Arrow has been dropped and some alternative pricing mechanisms have been analyzed. However, the second assumption concerning tile nonnegativity of claims has not been investigated. This paper relaxes the constraint. Raviv (1979) concludes that tile deductible in insurance exists due to two sources: the nonnegativity constraint and the variable insurance cost. We can thus presume that if we relax the constraint by allowing the coverage function to be negative, we will find an insurance coverage Ewhich dominates the

The Effect of Voluntary Termination of Overfunded Pension Plans on Shareholder Wealth

Abstract: This paper examines abnormal returns of the common stock of firms with excess assets in their defined benefit pension plans around the time the sponsors announce their intention to terminate the plan. Previous research in this area has developed several economic reasons for a sponsor to terminate voluntarily an overfunded pension plan. The implications of each theory for stock prices are discussed and hypotheses for testing the managerial incentive theories are developed. Two types of analyses are performed on the sample: (1) a series of tests suggested by Dodd et al [12] to study the information content of a financial disclosure, and (2) multiple regression analysis to examine the explanatory power of the managerial incentive hypotheses. The findings suggest that the sample of firms experienced a statistically significant positive abnormal return around the time of the termination announcement, although the abnormal performance varies with the disclosed reason for termination and the type of successor pension plan adopted. Results for the multiple regression tests are consistent with the theory that stockholders will experience positive abnormal returns if the termination is a result of (1) a renegotiation of the wage contract by financially troubled firms or (2) an optimal borrowing strategy from the pension plan.

The Transition from Wife to Widow: The Importance of Survivor Benefits to Widows

Abstract: The Retirement Equity Act of 1984 is the latest attempt by the federal government to encourage married men who are eligible for pensions to choose the joint-and-lastsurvivor option. This paper examines the importance of that choice for the well-being of widows and then estimates the effect of making a survivor benefit universal. The Retirement Equity Act of 1984 (Public Law 98-397) is the latest attempt by the federal government to encourage married workers to choose a joint-and-last-survivor pension option. Under the Employee Retirement Income Security Act of 1974 pension plans were required to offer a choice of a single-life or a joint-and-survivor annuity to married workers upon retirement, with the latter being the default form unless the worker chose otherwise. The Retirement Equity Act now requires that the spouse also consent when the joint-and-survivor annuity is declined. Both pieces of legislation were designed to lead to a more equal sharing of resources across the life of both marriage partners, thus reducing the disproportionate burden of poverty carried by aged widows.' Pension regulation clearly can force greater use of joint-and-survivor annuities. Yet, despite a decade of legislation concerning this issue, little solid Assistant Professor, Department of Economics at Western Kentucky University. Professor, Department of Economics at Vanderbilt University. Senior Research Scientist, Institute for Research on Poverty at University of WisconsinMadison. This work was supported in part by grants from the U.S. Department of Health and Human Services (No. 84ASPE133A) and from the AARP Andrus Foundation. Additional support for computational work was provided by the Center for Demography and Ecology at the University of Wisconsin-Madison. All opinions expressed in this paper are solely those of the authors. 'Today the incidence of poverty is no greater among the aged than it is among the population as a whole (Danziger, van der Gaag, Smolensky, and Taussig, [5]). But over one-quarter of all widows aged 65 and over are poor (U.S. Bureau of the Census, [11]). Widows accounted for over one-half of all the aged poor, a large percentage of whom had not been poor while married (Holden, Burkhauser, and Myers, [7]). This content downloaded from 157.55.39.105 on Fri, 07 Oct 2016 04:26:54 UTC All use subject to http://about.jstor.org/terms The Transition from Wife to Widow 753 evidence is available to pinpoint either the degree to which couples willingly shared resources across time or the importance that joint-and-survivor annuities played in this sharing. For this reason it is difficult to evaluate the potential for either ERISA or REA to affect the well-being of widows. This paper traces the well-being of women before and after the death of their husbands and measures the difference that pension coverage and the choice of pension options made on their income and poverty incidence. To put into perspective the degree to which the regulation of the pension option choice would have affected the well-being of these women, a simulation is performed to measure the impact on income and poverty rates of the universal acceptance of a joint-and-survivor pension option.

Financing Asbestos Claims: Coverage Issues, Manville's Bankruptcy and the Claims Facility

Abstract: Asbestos liability claims are ilte imost dramatic example of m11ass toxic torts. The c:itical inlsIanice comem age issues ol approlpriate mm igger ol coverage and duty to defend after exhausL ion of' limits are examimimed. Mianville's hbankrtptcy and the Asbestos Claims Facility are analy7ed. Finally the effect of asbestos developments onl clanges in thle (CI. policy and other umass toxic torts are explored. Asbestos claims have produced unprecedented liability, litigation, and compensation problems. Since the first lawsuit brought against the Manville Corporation in 1968, in excess of 35,00() bodily injury claimis have been made. Through 1982, $1 billion has been spent for asbestos compensation and litigation expenses. Estimates of future cost range fromt $4 billion to $87 billion [21, p. v.1 The impact of asbestos litigation has been enormous. Precedent setting court cases have expanded coverages utnder traditional liability insurance policies. Manville Corporation antd five otier manufacturers of asbestos have been forced into bankruptcy. Proposed bankruptcy settlelilents mliay adversely affect the financial condition of these compatlies for years to comie. A unique Asbestos Claim Facility established through the Wellington Agreetnent will attempt to deal nmore efficiently wvih thie tiousands of unsettled claims. Many of the recent ISO proposed changes in the Comprehensive General Liability (CCL) policy were to a substantial degree influenced by developments in thie asbestos area. Other tort cases itivolving large numbers of claimants like DES, the l)alkon Shield, and hazardous waste will be impacted by precedents set in asbestos litigation. The calls today for tort reform are being caused at least in part by thie asbestos situation. D)an R. Anderson is professor and Chair of time Actuarial Scienmce, Risk and Insurance tDepartnmemmt at thle University of' Wisconsin. Ile earmed a Ph.). at time sante itustitution ammd also imas received time Chartered Property anld Casualty Utnderwriter designation. I)r. Anderson, a past President of the American Risk anud Itusuramece Associatioum, has previously published articles in this Journal and otimer professional jourmals. This content downloaded from 157.55.39.144 on Thu, 22 Sep 2016 05:35:27 UTC All use subject to http://about.jstor.org/terms 430() 1eiI' .IJoirnI of Risk (111(1 Ilsuirtiiice The purpose of this article is to examine the principal developments that have affected the financing of asbestos product liability claims.' The dcvelopments include insurance coverage issues decided by precedlent setting court cases, the proposed settlement to the Manville Corporation bankruptcy, and the Asbestos Claimi Facility established by the Wellington Agreement. In addition the impact of asbestos litigation on proposed changes in the CCL policy and other mass toxic tort areas will be examined. Insurance Coverage Issues Considerable disagreement exists between asbestos manufacturers and their insurers as to the extent of coverage provided by liability insurance contracts for asbestos claims. The two key insurance coverage issues are (1) what is tile appropriate trigger of coverage?, and (2) what is the insurer's duty to defend after the policy limlits have been exhausted'? These twvo coverage issues along with key court cases will be analyzed below.

Insurance Premium Pricing and Ratemaking in Competitive Insurance and Capital Asset Markets

Abstract: This paper develops an equilibrium model of insurance pricing integrating both the insurance and capital asset markets from the insurers' viewpoint. In contrast to the capital assets based models, it emphasizes the importance of the insurance market, i.e., the claim payments by all insurers as a whole, in pricing insurance premiums. The premium for insurance is found to be a function of both the systematic insurance market risk and the systematic capital market risk. An important practical implication of this model is that the fair profit rates for most lines of insurance should be higher than those recommended by current models based on the CAPM. The purpose of this paper is to develop a general equilibrium model of insurance premium pricing under both competitive insurance and capital markets. Largely motivated by the need to find alternative solutions to the fair-rate-of-return problem, several researchers have applied the asset pricing models to insurance premium pricing. In particular, Cooper [4] develops and tests a model based on the portfolio theory. Biger and Kahane [2], Hill [8], and Fairley [6], Urrutia [15] applies the Capital Asset Pricing Model [CAPM] approach, while Kraus and Ross [10] adapts the Arbitrage Pricing Theory [APT] to the insurance case. Because these models are borrowed from the finance literature where the market of interest is the asset market, they share a common shortcoming: it is concerned mainly with the systematic risks associated with the asset market. The insurance market, ironically, is ignored. From the balance sheet relationship that equity is the residual claim in which the asset return is netted out by the insurance loss, the expected return on the insurance company equity is expressed as a function of both the systematic risk of the insurance portfolio with the asset market portfolio and the James S. Ang is the William 0. Cullom Professor of Finance at the Florida State University. He received his Ph.D. from Purdue University. Dr. Ang has published estensively in Finance and Economics Journals. Tsong-Yue Lai is an Assistant Professor of Finance at the Florida State University. He received his Ph.D. from Yale University. This content downloaded from 207.46.13.120 on Thu, 15 Sep 2016 05:41:45 UTC All use subject to http://about.jstor.org/terms 768 The Journal of Risk and Insurance systematic risk of the investment portfolio with the asset market portfolio, e.g., [2], [6], [8]. However, it is important to note that in these models, the fair-rate-of-return for ratemaking purposes or the premium for pricing an insurance policy is a function of only the systematic risk of that insurance policy and the asset market [see equation (9) of Biger and Kahane [2], equation (8) of Hill [8], and equation (11) of Fairley [6]). From the insurance industry viewpoint, there are not one but two important markets. The first is the familiar asset market which encompasses all assets, traded or nontraded, that are held. The second, equally important but often neglected market, is the insurance market. The difference between these two markets is not trivial. The asset market has a positive net supply, while the insurance market has a zero net supply. In other words, if all the asset portfolios are aggregated, the resulting figure is the wealth of the economy. An increase (decrease) in the aggregate wealth (or shares of IBM) leads to a corresponding increase (decrease) of those who hold a diversified portfolio (or shares of IBM). On the other hand, an insurance policy is a contract between the insurer and the insured. When a loss occurs, money is transferred from the insurer to the insured. Wealth is being redistributed but the aggregate does not increase. Although it is tempting to include all insurance contracts in the definition of the asset market portfolio, it will not work. Because a zero net supply exists for each insurance policy, and for the insurance market as a whole, the distribution of wealth between the suppliers (insurer) and the demanders (the insured) has absolutely no effect on the asset market portfolio, i.e., the asset market portfolio will behave as if no insurance contracts existed. Here, a troubling question arises: if the insurance market does not affect the asset market portfolio, can it be ignored in the pricing of insurance policies? The answer is no. If needs for insurance exist in the society, individuals and insurers must either be suppliers or demanders of a particular type of insurance policy. Thus, insurance contracts, which are netted out in the aggregate, are in positive net supply or demand for individuals and insurers. Specifically, the insurers, being net suppliers of insurance, cannot ignore the aggregate insurance loss (payments on all insurance claims in a given period) in the pricing of insurance policies. For insurers with a diversified insurance portfolio, e.g., multi-line insurers and their competitors, i.e., all single line insurers, it is reasonable to expect that the price or premium on a policy, whose claim arises in a period when the aggregate insurance claim is high, i.e., a positive correlation with the aggregate insurance market, should also be high. In this case a higher premium is charged because the insurer is less able to shoulder the payment of many claims at the same time. The risk includes financial insolvency as well as possible ruin. This intuition is formally developed in an integrated model of insurance and capital markets. The model gives a pricing equation for an insurance premium which may be used for the calculation of the fair-rate-of-return. It is shown that this model generates all other models of insurance premium pricing in competitive markets as special cases. Conclusions are presented in the last section. This content downloaded from 207.46.13.120 on Thu, 15 Sep 2016 05:41:45 UTC All use subject to http://about.jstor.org/terms Insurance Premium Pricing and Ratemaking 769

An Empirical Analysis of the Magnitude and Accuracy of Incurred-But-Not-Reported Reserves

Abstract: This paper investigates the Incurred-But-Not-Reported (IBNR) components of the reserves established by Property/Liability insurance companies for five liability lines. The size of the IBNR reserves relative to the size of the total reserves is measured for the time period 1975 through 1982, and the accuracy of the IBNR reserves established from 1975 to 1979 is tested. Comparisons are made between small and large firms and between stock and nonstock companies. Product mix among lines is investigated further as a possible explanatory factor of the size and accuracy of the IBNR reserves.

The Rate of Return on Universal Life Insurance

Abstract: Universal life insurance is one of the newest products in the industry. It has been heavily promoted and has been acclaimed as an alternative to direct investment in the financial markets by policyholders. Because the policyholder purchases both term insurance protection and an investment stream, it is useful to compare the rate of return on this package to the alternative of buying term protection in the open market and investing in the financial markets on an individual basis. This article carries out the comparison by assessing internal rates of return on a large sample of universal life policies and comparing them to the current interest rates quoted by the companies. Under the assumptions made, the investor benefits from buying term insurance and investing premium residuals directly rather than purchasing a universal life policy. Further, this article examines the reasons underlying this result and concludes that in a vast majority of cases the annual "loading and expense charges" attendant to the universal life contract make it inferior to an open market insurance and investment strategy, assuming the open market strategy returns can, over time, approach the current interest rates quoted by the issuers of universal life insurance.

Compensation for Occupational Disease: Evaluating the Options

Abstract: This paper evaluates alternative rules of liability and compensation for occupational disease. The criterion applied is minimization of the sum of the costs associated with occupational disease, disease prevention, uninsured risk costs, and litigation and insurance overhead or transaction costs. Options considered include the workers' compensation system, the tort system, first party insurance, and potential government programs. It is argued that the costs of insurance and uninsured risk significantly affect the optimal liability rule for occupational disease, because the long latency of many occupational diseases undermines diversification of risk through liability and first party insurance. The workers' competisation system, with pro rata division of liability among contributing employers, appears to be superior to the alternatives.

Economics of Oligopoly: Medical Malpractice Insurance as a Classic Illustration

Abstract: Recent surges in medical malpractice insurance rates have resulted in claims of another crisis in the malpractice insurance marketplace, not of "availability" as in the inid 1970's, but of "affordability." The central thesis (of this paper is that the current crisis was not motivated by thle actions of legal, health care provider or insurer groups, but by the inherent oligopoli.stic structure of the medical malpractice insurance market and the failure to requlire experience rating, both of which considerations are outside the control of the various market participant groups.

The Determinants of Fringe Benefits: Additional Evidence

Abstract: In the private nonfarm economy, employee compensation in the form of direct payment for time worked declined from 75.1 Wo in 1961 to 63.3Wo in 1982. Paid leave (vacations and holidays) grew from 7.6Wo to 9.1Wo of total payroll. Employer contributions to social security and other retirement programs went from 9.3Wo to 11.5% while employer expenditures for life, accident, and health insurance increased from 2.7Wo to 6.6Wo, with the remainders for 1961 and 1982 equalling expenditures for sick leave, unemployment compensation, bonuses, and other items.' Labor-market analysts generally have neglected these important components of total compensation. A reason for this neglect has been paucity of data on the value of fring benefits that firms provide their individual employees.2 While the growth in fringe benefits has been attributed to several factors, the following are particularly important: preferential treatment of non-wage benefits under social security, state and federal tax laws, the changing age and sex composition of the work force, and the effect of rising disposable incomes.3 The objective of this paper is to investigate the determinants of the dollar value of total fringe benefits as well as its taxable and nontaxable components. The specific concern is with the impact of marginal tax rates, age, gender, and family disposable income on these benefits. In the analysis that follows, a unique data set is used that contains information on the value of annual pension contributions, sick leave and vacation days that employers

The Probabilities of Life and Work Force Status in the Calculation of Expected Earnings

Abstract: A starting point for most calculations of lost future earnings resulting from wrongful death or injury is an estimate of tile worklife expectancy of tile subject had death or injury not occurred. In assessing this worklife expectancy attention is drawn to the U.S. Bureau of Labor Statistics increnment-decrement worklife tables. Unlike other BLS tables of labog force participation, tile increment-decrement tables trace the work force statuses of a specific cohort as it ages 1101. Only the increment-decrement approach comilbilles the chance of mortality and the possibility that a person could in the future leave (or enter) the work force and then return (or leave). In a previous article, a model was developed to show how the incrementdecrement tables call be used to calculate a mathematically defensible estimate of expected earnings. This paper describes in greater detail the way in which age specific earnings are embodied in these calculations. A new model, which is algebraically equivalent to the earlier model, is developed to explicitly show tile interaction of the probability of life, the probability of work force activity, and earnings at later ages. The importance of these interactions in calculating expected earnings is demonstrated through a comparison of this method with three other methods that are representative of those currently being used in wrongful death and injury litigation. In the simplest method for calculating expected earnings, net earnings are projected only for the period from death or injury to the BLS estimate of remaining worklife. A second method calls for an adjustment of the BLS estimate of remaining worklife to obtain a measure of the time until final separation from tile work force. Earnings are then projected from the time of death or injury to this estimate of final separation (for example, see Nelson [61 and Boudreaux [21. This article argues that these two methods are inappropriate because they fail to capture the age specific entry and exit probabilities that can be derived from the increment-decrement tables. Consequently, they do not reproduce the appropriate proportions of persons

Sex, Marital Status, and Medical Utilization by Injured Workers

Abstract: Research on gender and marital differences in medical utilization has been hampered by the quality of the data. The prices of medical care and the qualitative differences in insurance coverage have not been available, and the medical costs and type of care received have not been precisely measured. We use a very large sample drawn from workers' compensation claims to overcome some of these deficiencies, and test for structural differences in gender and marital status in an economic model that takes account of the institutional nature of the workers' compensation system. We find a pervasive lack of significant coefficient differences that suggests the need to carefully control for the type of care received and the importance of precisely measured

On Job Satisfaction: It's the Relationships That Count!

Abstract: Dubinsky and Yammarino [5] recently investigated job-related responses of insurance agents in terms of the relationships among predictor (agent effort, supervisor attention, autonomy, variety) and criterion (role ambiguity, satisfaction with supervisor, job involvement, work motivation, organizational commitment, job performance) variables. In an attempt to build on this research, Outreville and Zins [13] report on the job satisfaction of insurance agents. Professors Outreville and Zins should be commended for their efforts. In particular, they employed an extensive sample of life insurance agents from the province of Quebec; developed a 45-item measure to describe several components of job satisfaction; and focused on both the importance given to, and performance associated with, several facets of job satisfaction. The work of Professors Outreville and Zins, however, seemingly possesses a key limitation: it fails to examine directly and explicitly the relationships among job satisfaction and various antecedents and consequences, or, simply, correlates. Citing previous work [12], they mention some apparent relationships but provide no specific evidence for these associations. Although it may be interesting to describe one concept in detail, as Professors Outreville and Zins have done, scientific knowledge and management practice can be advanced when relationships among concepts/variables are empirically investigated directly [2]. Through direct empirical investigation of relationships, concepts and variables can be understood in terms of what they are and are not relative to others. Researchers in other disciplines have conducted extensive research focusing on relationships among antecedents, consequences, and facets of job satisfaction (see reviews by Comer and Dubinsky [1], Locke [10], Mitchell [11], and Schneider [15]). Shown in Table 1 is a summary of this prior conceptual and empirical work. Presented in the table are key antecedents and

The Effect of Interest Rates on Surrender Values of Universal Life Policies

Abstract: It is probably true that the average prospective purchaser of a universal life (UL) policy places considerable weight on the current rate of interest being credited to the policy's cash value. Certainly, it is true that current interest rates of UL policies figure prominently in virtually all UL policy advertisements. Far less emphasis is placed on the level of the mortality and surrender charges and on the expense component. It is, of course, possible that a relatively high current interest rate could be more than offset by relatively high expense, mortality and surrender charges. To the extent that this were true, the prospective purchaser who relied on the interest rate as an indicator of value could be misled. The purpose of this article is to examine the reliability of current interest rates as a guide to low-cost UL policies.

The expected cost of ruin and insurance premiums in mutual insurance

Abstract: The purposc of thiis paper is to provide a quanititative definition andl assessmicnit of the expectcd cost of ruin in milutual inisuranlce. In addition, some imiiplicationis arc drawn regardiiig the actuarially fair premiiiumn policyloldlers imay bc willinig to pay for mutual instiranice. A special case is treated yieldiiig analytical rcsults wlhichi allow a comilparative static anialysis of the effects of ruin oni prcmium,i, paynments andt an, asscssmient of the cost of ruin,-free mlut,ttual inisuranicc conitracts. First, we assumle as in Tapiero 181, that thle miutual inisurance firnm does niot cngage in investimenits, blut reduces the premiuimn payments to be incurred by a imeniber accordinig to the firim's caslh reservcs anid the expectatioln of future liabilities. Sucih an assumilption, unilike Daykinis aned Bernstein [31, Pentikanen et al [41, Tapiero aiid Zuckerimian [01J1, Tapiero [81, presumes that investment chioices are best made by insured anrd thierefore, the mutual firilm is seen as a vehiicle for payinent transfer ainong nmembers (see also, Tapiero, Kallane andl Jacque 19]). Ruini in such circumiistances is tiot the conisequence of a gelleral business failure but of the unwillingness of imiemilbers to ptirsue mutual protectioni. TFle expected cost of ruini is thierefore a fuinction of the alternative mieanis of risk protection, whlichi is hiiglher for instired members (for otherwise thicy will leave thie mutual inisurance r firm). Secomid, as in [81, [101, for example, issuies of imutual inisurance witil investment are presenited anid discuisse(l. Unilike stock insurance firms (Tapiero [81), inivestiimenits are miiotivated by t he imut ual's ability to seek hiighier retiurin than tlhosc obtainiable by (inisured) mieimlbers and( by multitual benefits and adlvanitages implicit in an inisturanice tranisactioni. These facets of investment (lecisiolls, altlhotigh iniportanit for imiutiual inisuranice are left as topics of f urtlier researcih. Nonictlheless, a hietiristic "planiar barrier" policy for invcstmnent and(i reserves maniagemiienit is formlulated in qtanltitative terms.

Universal/Variable Life Insurance versus Similar Unbundled Investment Strategies

Abstract: Universal/variable life insurance combines the tax advantages of cash value life insurance wvith investment in money market, hond, or equity funds. lespite expense loatinigs and( stirsunder charges o( n univers.tl/variable life policics. tIhis tax treat ment often generates a gi-mear aIter tax retuirn than alternativc investm;ient strategies. This paper provi(les a method for calculating relative after tax proceeds for universal/varinble life and comparable investment strategies based on the provisions of the Tax Reform Act of 1986. In general, uaniversal/variabic life insurance policies inust he kept ini force for at least eight years before providing a greater return than comparable investmsenlt strategies.

Risk Aversion, Insurance Costs and Optimal Property-Liability Coverages

Abstract: The standard mean-variance portfolio model can be modified to show how individuals select deductibles and face amounts of coverage. Optimal insurance decisions balance the portfolio holder's desire for insurance protection against the cost of insurance. This same conclusion has been derived by insurance economists who considered insurance and insurable risks in isolation from other assets. However, the broader portfolio setting allows the portfolio holder's behavior towards other risky assets to provide an objective measure of risk tolerance for tile insurance transaction. This setting extends many conclusions from traditional insurance economics into modern portfolio theory. The mean-variance approach also leads to specific predictions about behavior by individuals towards deductibles and amounts of coverage.

An Evaluation of Three Payment Strategies for Capitation for Medicare

Abstract: Capitation payment for health care costs is one type of incentive-based or prospective payment system. Under capitation, payments are made for all medical services delivered in a fixed period of time (e.g., one year). In contrast, the DRG system provides for payment made for all services required during a hospital visit. Like the DRG system, capitation payment places the provider at risk because the payment amount will be the same irrespective of the resources needed to treat that person for the predetermined interval. This risk creates incentives for the individual or organization that receives the capitation rates to control the use of services in order to earn a profit. An important dimension in developing a capitation system is the selection of the appropriate institutional entity to receive payment (and hence to manage risk) and the relationship of that entity to those who directly provide services. Three capitation strategies with different entities (Medicare carrier or intermediary, physician gatekeeper, physician service provider) receiving the capitation payment are identified. The three capitation strategies are then evaluated in terms of the risk transferred to providers by each strategy.