Optimal Insurance in Incomplete Markets

Doherty, Neil A.; Schlesinger, Harris

doi:10.1086/261199

Cited by 247 publications

(110 citation statements)

References 12 publications

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“…7 Schlesinger and Schulenburg (1993); Ben-Arab et al (1996); Kuo et al (2003); Wells and Stafford (1995); Stafford et al (1998). 8 Doherty and Schlesinger (1983); Schlesinger and Doherty (1985); Gollier and Scarmure (1994). 9 Guille´n et al (2003).…”

Section: Customer Loyaltymentioning

confidence: 99%

The Need to Monitor Customer Loyalty and Business Risk in the European Insurance Industry

Guillén

Nielsen

Pérez-Marín

2008

Geneva Pap Risk Insur Issues Pract

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Policy cancellations directly influence daily business operations and have an impact on the risk assumed by insurance companies. In this paper, we describe the reasons why insurance companies should perform customer loyalty and business risk monitoring and develop guidelines for the implementation of this procedure. We emphasize the advantages of this practice for the operation of the company. The Geneva Papers (2008Papers ( ) 33, 207-218. doi:10.1057Papers ( /gpp.2008 Keywords: business risk; policy cancellations; marketing in insurance Significance of customer loyalty and business risk monitoringInsurance companies have to manage a great number of risks, which can be classified in many different ways. One possibility is to distinguish between financial risk and operational risk. 1 Financial risk is either classified as liability risk, the risk that the insurance company is assuming by selling insurance contracts, or as asset risk, associated with an insurer's asset management. These two types of risks are directly related to the business activity of the insurance company and are therefore well known and easily managed by means of various quantitative techniques.The risk that cannot be classified as either asset or liability risk is called operational risk, and it is subdivided into business risk, driven by the competitive environment, and event risk, such as, for instance, the computer system having errors or breakdowns. Business risk is defined as the variability of intrinsic business value due to business volumes and margins fluctuations triggered by the competitive environment. 2 Operational risk in general has been rarely taken into account by the insurance industry. However, the Solvency II project in Europe requires that business risk be monitored in order to improve the control and measurement of all sources of risk. The difficulties in managing operational risk stem from the lack of empirical data about the sources of this newly recognized hazard.We will develop guidelines for the implementation of customer loyalty and business risk monitoring in the insurance industry, based on our previous research. We realize that European insurance companies operate in a highly competitive market. Customers, who may want to switch from one insurer to another can easily, and at www.palgrave-journals.com/gpp low cost, obtain all the information they need about various companies via the Internet. They can compare policy prices offered by different insurance companies just by accessing their homepages or by using websites that specialize in comparing prices of several companies. This is mainly the case in property and casualty insurance, but not health and life insurance (for instance in Germany) because of the specific calculations. Therefore, information from life and health insurance contracts may lead to a false measurement of the customer loyalty because the termination of these contracts has high costs for the insurance customers. Overall, the insurance market is becoming more and more aggressive, and companies e...

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Section: Customer Loyaltymentioning

confidence: 99%

The Need to Monitor Customer Loyalty and Business Risk in the European Insurance Industry

Guillén

Nielsen

Pérez-Marín

2008

Geneva Pap Risk Insur Issues Pract

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“…In the field of insurance, Doherty & Schlesinger (1983) have shown that Arrow's famous result about the optimality of the deductible may no longer hold true when the insured faces a background risk that is correlated with the risk to be insured.…”

Section: Introductionmentioning

confidence: 99%

Correlated risks, bivariate utility and optimal choices

2009

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In this paper, we consider a décision-maker facing a financial risk flanked by a background risk, possibly non-financial, such as health or environmental risk. A decision has to be made about the amount of an investment (in the financial dimension) resulting in a future benefit either in the same dimension (savings) or in the order dimension (environmental quality or health improvement). In the first case, we show that the optimal amount of savings decreases as the pair of risks increases in the bivariate increasing concave dominance rules of higher degrees which express the common preferences of all the decision-makers whose twoargument utility function possesses direct and cross derivatives fulfilling some specific requirements. Roughly speaking, the optimal amount of savings decreases as the two risks become "less positively correlated" or marginally improve in univariate stochastic dominance. In the second case, a similar conclusion on optimal investment is reached under alternative conditions on the derivatives of the utility function.

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“…Another answer is to have aggregate risk incorporated into insurance contract design (Cummins Mahul (2001), Cass Chichilninsky and Wu (1996)). Some argue that aggregate risk is dealt with in secondary markets such as reinsurance (Borch (1984) insurance and investment decisions (Doherty Schlesinger (1983), Gollier (1994), Vercammen (2001)). This paper is within the line of research that studies how secondary markets (specially stock markets) aid optimal risk sharing.…”

Section: Implications Of Dynamic Trading For Insurance Marketsmentioning

confidence: 99%