Handbook of Insurance

1133 Pages·2013·16.421 MB·English

by  Henri Loubergé (auth.), Georges Dionne (eds.)

Georges Dionne Editor
Handbook of
Insurance
Second Edition
Handbook of Insurance

Georges Dionne
Editor
Handbook of Insurance
Second Edition
123
Editor
GeorgesDionne
HECMontre´al,Que´bec,Canada
ISBN978-1-4614-0154-4 ISBN978-1-4614-0155-1(eBook)
DOI10.1007/978-1-4614-0155-1
SpringerNewYorkHeidelbergDordrechtLondon
LibraryofCongressControlNumber:2013942303
©SpringerScience+BusinessMediaNewYork2013
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To:
Myfamily,
fortheircontinuoussupport
ClaireBoisvert
forher excellent collaboration
Mystudents
fortheirhunger forlearning

Preface
WhatapleasureitistodiscoverthesecondeditionoftheHandbookofInsurance,editedbyGeorges
Dionne, 12 years after the first! Almost all original basic texts are there, for the most part updated
to incorporate the scientific foundations of insurance, and have been re-explored through 15 new
contributionsofgreatrelevance.Thefieldofinsuranceeconomicsisindeedexpandingeveryyear,and
itisfascinatingtoseethedepthandbreadthofthisgrowth.Oldproblemsarerevisited,reformulated,
andremodeled,bringingnewconclusionsandsolutions.Andthroughaprocessofgermination,these
fruitfuldevelopmentsgenerateanewstreamofhighlyinterestingresearch.
Many key concepts at the core of risk, uncertainty, and insurance economics have been further
refined, reassessed, and reanalyzed over the past 12 years—for example moral hazard, adverse
selection,thesymmetryandasymmetryofinformation,andriskaversion.Traditionalissueshavebeen
re-explored,suchasunderwritingcycles,theperformanceofinsurancecompanies,riskmanagement,
distribution networks, regulation, recourse to reinsurance, coexistence between private and public
insurance, health insurance, and fraud. New issues have emerged or have grown in importance,
including systemic risk, longevity risk, long-term care, interactions and dependencies between
variables, the corporate governance of insurance companies, capital allocation within insurance
companies, and alternative risk transfer devices such as industry loss warranty (ILW), sidecars, cat
bonds,swaps,andsecuritization.
What is striking when reading these various contributions is the recurring issue of optimization.
How do youdesign an optimalinsurancecontractto minimizemoralhazard,whether exante orex
post, and reduce or eliminate adverse selection? What is the optimal demand for insurance from a
corporationandforreinsurancefromaninsurancecompany?Howdoyoudraftanoptimalregulation,
allowingmarketforcestooperateandcompetitiontofunction,whileminimizingcostlyfailures?How
doyouoptimizecapitalallocationwithinacompanybetweenthevariousbranches,linesofbusiness,
and markets? How do you optimize a portfolioof risks by minimizing dependencies?How do you
optimize the amountof capitalfora giveninsurancecompany,while maximizingthe rate of return,
yetrespectingthesolvencylevelcorrespondingtothechosenriskappetite?
These37newcontributionsandupdatesprovideanswers—sometimesstraightforward,sometimes
morecomplex—toallofthesequestions,andprovidehighlyusefultoolsforagreaterunderstanding
of the markets and institutions transferring and sharing risks. This handbook contains a wealth of
ideas, insights, models, data and empirical tests, providing food for thought for academics, policy
makers,andlastbutnotleast,managersofinsuranceandreinsurancecompanies.Iamconvincedthat
carefulreadingofthishandbookwillhelpresearcherstodetectnewfieldsandhypothesestoexplore,
policymakerstodrawupregulationsbasedonsolidgrounds,andmanagersofinsurancecompaniesto
innovate,redesigncontractpolicies,improvetheuseofcapital,reorientdistributionnetworks,protect
againstfraud,andsoon.Inanever-expandingriskuniverse,increasedsophisticationistheonlywayto
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pushbackthefrontiersofinsurabilityandthereforemaintain,orevenimprove,thelevelofprotection
offeredtoindividualsandcorporationsthroughouttheworld.
May I take the opportunity of this preface to congratulate Georges Dionne for his outstanding
contributiontothescienceofriskanduncertainty.Hiscapacitytodeveloptheoriesandmodels,while
validating them through empirical work, and to deal with the real issues at the core of insurance
industrypractice,isunique.MayIalsothankeachoftheauthorsofthisnewhandbook,forproviding
contributionsofsuchhighquality.
I have a simple wish that this handbookbe diffused to as wide an audience as possible, both in
academicandprofessionalspheres.Itwillhelptoimproveunderstandingintermsofthedemandand
supplyofinsuranceandreinsuranceandtopromotemarketsolutionsformoreefficientrisktrading.
Thedevelopmentofinsurance—bothforP&CandLifelines—isundoubtedlyofbenefittothewelfare
ofsocietyasawhole.
ChairmanandCEOofSCOR DenisKessler
Contents
1 DevelopmentsinRiskandInsuranceEconomics:ThePast40Years .................. 1
HenriLouberge´
2 Higher-OrderRiskAttitudes................................................................ 41
LouisEeckhoudtandHarrisSchlesinger
3 Non-ExpectedUtilityandtheRobustnessoftheClassicalInsuranceParadigm...... 59
MarkJ.Machina
4 TheEconomicsofOptimalInsuranceDesign............................................. 107
ChristianGollier
5 TheEffectsofChangesinRiskonRiskTaking:ASurvey .............................. 123
LouisEeckhoudtandChristianGollier
6 RiskMeasuresandDependenceModeling ................................................ 135
PaulEmbrechtsandMariusHofert
7 TheTheoryofInsuranceDemand.......................................................... 167
HarrisSchlesinger
8 PreventionandPrecaution .................................................................. 185
ChristopheCourbage,Be´atriceRey,andNicolasTreich
9 OptimalInsuranceContractsUnderMoralHazard ..................................... 205
RalphA.Winter
10 AdverseSelectioninInsuranceContracting .............................................. 231
GeorgesDionne,NathalieFombaron,andNeilDoherty
11 TheTheoryofRiskClassification .......................................................... 281
KeithJ.CrockerandArthurSnow
12 TheEconomicsofLiabilityInsurance ..................................................... 315
JanM.Ambrose,AnneM.Carroll,andLaureenRegan
13 EconomicAnalysisofInsuranceFraud ................................................... 349
PierrePicard
14 AsymmetricInformationinInsuranceMarkets:PredictionsandTests................ 397
Pierre-Andre´ChiapporiandBernardSalanie´
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