Insurance Innovation Research Articles

The Need for Insurance Education Among Non-financial Companies in Poland – Survey Results

Insurance market is still evolving and an important part of this evolution includes innovation in risk coverage. Such innovation are based on various solutions and a good knowledge of these provides framework for successful implementation of insurance innovation. Lack of such knowledge often results from education gap in insurance-related themes. In this paper we examine whether there is education gap among non-financial companies in Poland. We use respondents’ subjective assessment of their level of knowledge and understanding of selected solutions. We found that there is a visible insurance education gap with regard to more sophisticated solutions and the level of this gap is not associated to company's size.

Stock Market Returns to Financial Innovations Before and During the Financial Crisis in the United States and Europe

Prior studies have focused on innovations in various contexts but largely excluded financial innovations, despite their notable importance. Not surprisingly, financial innovations account for a substantial portion of world economies and the huge market capitalization of banks. Therefore, the authors focus on studying the type, success, and causes of success of financial innovations. Using an event study and financial expert ratings, this study analyzes the types of and payoffs to 428 financial innovations by 39 major banks in North America and Western Europe between 2001 and 2010. The results indicate that security and credit instruments constitute the most common and insurance innovations the least common financial innovations, which vary substantially by economic cycles and location. The average cumulative abnormal stock market returns to a financial innovation are $146 million. They are twice as high in the United States as in Western Europe. Thus, the market considers financial innovations profitable, not harmful, despite their apparent responsibility for the financial crisis. Surprisingly, the cumulative abnormal stock market returns to financial innovations are higher in recessions than in expansions. The authors find that riskiness and radicalness of the innovation increases abnormal returns, while complexity decreases cumulative abnormal stock market returns. Two interaction effects stand out: Riskiness of financial innovations has higher cumulative abnormal stock market returns in the United States than in Western Europe. Radicalness has lower cumulative abnormal stock market returns in recessions than in expansions. The authors discuss important implications of the findings.

Stock Market Returns to Financial Innovations Before and During the Financial Crisis in US and Europe

Prior studies have focused on innovations in various contexts but largely excluded financial innovations, despite their notable importance. Not surprisingly, financial innovations account for a substantial portion of world economies and the huge market capitalization of bank. Therefore, the authors focus on studying the type, success, and causes of success of financial innovations. Using an event study and financial expert ratings, this study analyzes the types of and payoffs to 428 financial innovations by 39 major banks in North America and Western Europe between 2001 and 2010. The results indicate that security and credit instruments constitute the most common financial innovations and insurance innovations are the least common, which vary substantially by economic cycles and location. The average cumulative abnormal stock market returns to a financial innovation are $146 million. They are twice as high in the United States as in Western Europe. Thus, the market considers financial innovations profitable, not harmful, despite their apparent responsibility for the financial crisis. Surprisingly, the cumulative abnormal stock market returns to financial innovations are higher in recessions than in expansions. The authors find that riskiness and radicalness of the innovation increases abnormal stock market returns while complexity decreases cumulative abnormal stock market returns. Two interaction effects stand out: Riskiness of financial innovations has higher cumulative abnormal stock market returns in the United States than in Western Europe. Radicalness has lower cumulative abnormal stock market returns in recessions than in expansions. The authors recommend that banks need to time their launch of radical financial innovations to coincide with periods of expansion rather than recessions.

The Life Care Annuity: A New Empirical Examination of an Insurance Innovation That Addresses Problems in the Markets for Life Annuities and Long‐Term Care Insurance

ABSTRACTThe life care annuity—the integration of the life annuity with long‐term care insurance coverage—is intended to deal with major problems in the currently separate markets for life annuities and long‐term care insurance. The integration would allow the inclusion of most of the population currently rejected by underwriting—those in poor health or lifestyles but who would not go immediately into long‐term care claim—who also have lower life expectancies. We make use of the Health and Retirement Study, on individuals in retirement and their disability incidence, exploiting the panel nature of the survey to estimate transition probabilities in and out of disability states according to numerous demographic and health characteristics. This allows for analysis of disability and mortality risk across a number of dimensions. We find that different risk groups at age 65 have similar projected long‐term care expenses, but that the level‐periodic‐premium structure of most long‐term care insurance policies creates incentives for individuals to separate into different risk pools according to observable characteristics, justifying the underwriting observed on the market. Yet we also find that gender‐rated life care annuities could succeed in pooling risks currently segmented in the market for long‐term care insurance, thus qualifying individuals at or near retirement for permanent long‐term care insurance coverage who do not currently qualify, and allowing for life annuities to be purchased more cheaply than in the stand‐alone annuity market now subject to adverse selection.

State Price Densities Implied from Weather Derivatives

A State Price Density (SPD) is the density function of a risk neutral equivalent martingale measure for option pricing, and is indispensible for exotic option pricing and portfolio risk management. Many approaches have been proposed in the last two decades to calibrate a SPD using financial options from the bond and equity markets. Among these, non and semi parametric methods were preferred because they can avoid model misspecification of the underlying and thus give insight into complex portfolio propelling. However, these methods usually require a large data set to achieve desired convergence properties. Despite recent innovations in financial and insurance markets, many markets remain incomplete and there exists an illiquidity issue. One faces the problem in estimation by e.g. kernel techniques that there are not enough observations locally available. For this situation, we employ a Bayesian quadrature method because it allows us to incorporate prior assumptions on the model parameters and hence avoids problems with data sparsity. It is able to compute the SPD of both call and put options simultaneously, and is particularly robust when the market faces the illiquidity issue. By comparing our approach with other approaches, we show that the traditional way of estimating the SPD by differentiating an interpolation of option prices does not hold in practice. As illustration, we calibrate the SPD for weather derivatives, a classical example of incomplete markets with financial contracts payoffs linked to non-tradable assets, namely, weather indices. Finally, we study the dynamics of the implied SPD's and related to weather data.

New evidence on the first financial bubble

The Mississippi Bubble, South Sea Bubble and the Dutch Windhandel of 1720 together represent the world's first global financial bubble. We hand-collect cross-sectional price data and investor account data from 1720 to test theories about market bubbles. Our tests suggest that innovation was a key driver of bubble expectations. We present evidence against the currently prevailing debt-for-equity conversion hypothesis and relate stock returns to innovations in Atlantic trade and insurance. We find evidence consistent with the innovation-driven bubble dynamics documented by Pastor and Veronesi (2009) for new economy stocks. Our evidence seems inconsistent with clientele-based theories that emphasize bubble-riding and short-sales restrictions.

New Evidence on the First Financial Bubble

The series of events in 1720 called the Mississippi Bubble, South Sea Bubble and the Dutch Windhandel represent the first and by some measures the largest global financial bubble in history. Stock prices of more than 50 companies rose by 100% to 800% in less than a year and then lost nearly all of their gains within two months. The question is: why? In this paper we hand-collect new, high-frequency, cross-sectional data from 1720 to test theories about market bubbles. Our tests suggest that innovation was a key driver of bubble expectations. We present evidence in contrast with the currently prevailing debt-for-equity conversion hypothesis and relate stock returns to innovations in Atlantic trade and insurance. We find evidence consistent with the innovation-driven bubble dynamics documented by Pastor and Veronesi’s (2009) for new economy stocks. Using detailed transactions data for one major bubble company in the Netherlands we also test recent clientele-based theories about bubbles. In contrast to results for the recent tech bubble, we find no evidence that the trades of either insiders or arbitrageurs were coordinated or that they triggered the Dutch 1720 crash. We also show little evidence of arbitrageurs liquidating their positions shortly after the price collapse.

Oral Health in North Carolina: Innovations, Opportunities, and Challenges

Dental disease can have negative and lasting effects on overall health and quality of life. The Institute of Medicine of the National Academy of Sciences reported last year that close to 5 million children in the United States did not receive needed care in 2008 because of costs. Increasing use of dental care has been selected by the U.S. Department of Health and Human Services as one of a small number of national leading health indicators, designating it as a national priority. Innovative initiatives have been undertaken in North Carolina to promote oral health, and there have been improvements in the state. For example, both the use of dental services among children and their oral health status are improving. Yet persistent and difficult challenges remain, such as ensuring an adequate workforce for the future, improving oral health literacy, maintaining existing programs, and resolving disparities in oral health and lifetime access to preventive and treatment services for all North Carolinians. This issue brief reviews some oral health initiatives and their outcomes--with a focus on youth. Commentaries in the policy forum also focus on access to oral health care; assessing, educating, and building the dental workforce; new practice models and trends; insurance innovation; and patients with special needs.

CDO: A modeling prospective

Credit derivatives were the fastest growing financial products in capital markets, assuming complex structures and forms, vilified by some and called financial weapons of mass destruction and by many others who bought, sold and invested in such products, new and modern means to create liquidity and profits. Banks, insurance companies, hedge funds, pension funds, asset managers and structured finance vehicles have used and are likely to continue to use credit derivatives for arbitrage, speculation, hedging, securitization and pass through their credit risks. Essentially these structured products combine insurance and financial innovation to allow risks to be shared far more extensively then “vanilla options, insurance and credit products”. Credit derivatives were introduced in the last decade but have expanded immensely prior to the financial crisis of 2008–2009, both quantitatively and qualitatively in a plethora of marketed names (see M. Gordy’s edited book on Credit Risk Modeling [48] and Jon Gregory, book on Credit Derivatives: The Definitive Guide [50], forerunners of an extensive credit derivatives literature). Credit derivatives came to the attention of the public at large in an article of Global Finance in March 1993, pointing to three Wall Street firms: J.P. Morgan, Merrill Lynch and Bankers Trust who were marketing early forms of credit derivatives (note that only JP Morgan remains standing). Global Finance predicted then that within a few years, credit derivatives would rival the $4-trillion market for interest rate swaps. In retrospect, this turned out to be both true and with far reaching consequences, some of which have been revealed in the 2008 financial crisis. For example, a re-

Life insurance and income growth: the case of Sweden 1830–1950

In this paper we provide an analysis of the life insurance market in Sweden from the early nineteenth century to the mid-twentieth century. We consider determinants put forward in the financial history literature to explain the growth of life insurance. The paper shows that income elasticity of demand gives a fairly good approximation of the development in the twentieth century, while the development of risk and insurance innovation among other things need to be taken into account to explain the growth of life insurance in the nineteenth century. The price of life insurance, measured as the overhead-to-premium-income ratio, remained fairly constant during the second half of the nineteenth century, while the risk, as indicated in terms of crude mortality rates and its volatility, did decline. This probably improved the return on life insurance savings and further helped the entry of new firms. The average premium size was reduced to enable the diffusion of life insurance to workers.

Health care reform: without a correct diagnosis, there is no cure

Health care reform: without a correct diagnosis, there is no cure

Innovations In Health Services Delivery From Transition Economies In Eastern Europe And Central Asia

During the past fifteen years, the countries of the former Eastern Bloc transformed their centrally planned, supply-driven health care systems. Modernization of service delivery required innovations in financing and insurance and the restructuring of primary care and hospital networks. This review of experiences from Central and Southeast Europe, the Baltic States, Central Asia, and the Caucasus spot lights innovative health reforms in low- and middle-income countries, including contributions to improved service delivery, access to care, evidence-based medicine, and overall improvement in health system performance.

Challenges for use of index‐based weather insurance in lower income countries

This article offers some perspective on the progress and challenges of managing catastrophic weather risk in lower income countries through the use of index insurance. Innovations in insurance for natural disaster risk are critically important to help the rural poor improve their lives and to contribute to the overall economic growth in lower income countries. By reviewing lessons learned from various index insurance projects, several conclusions are made about how best to approach weather risk management to benefit the livelihoods of the rural poor. It is important to recognize the limitations of index insurance and that it is not a substitute for crop insurance. However, using index insurance to address catastrophic risk can serve as the foundation for the development of broader financial services by removing one of the major constraints to market development. This in turn can offer households more effective strategies for consumption smoothing in the face of different sources and magnitudes of risk.

Innovations in Index Insurance for the Poor in Lower Income Countries

This article focuses on innovation in weather insurance designed to fit the special circumstances of the poor in lower income countries where rural and agricultural financial markets are largely underdeveloped. Index insurance is an innovation that circumvents many of the fundamental problems that hamper the development of insurance for weather risks in lower income countries. With index insurance, payments are made based upon an objective and independent index that serves as a proxy for significant losses to crops, livestock, or other property. For example, the index can be based upon extreme rainfall measures that create either drought or flooding. Weather stations or even satellite imagery coupled with computer models can be used to create reliable “indexes” as the basis of payments. This article reviews this innovation by providing the background for its development and the motivation for using the innovation for the poor.

Innovations in Climate Risk Management: Protecting and Building Rural Livelihoods in a Variable and Changing Climate

We argue that more effective management of climate risk must be part of the response of the international agriculture community to the double crisis of persistent poverty and a changing climate. The most promising opportunities to adapt to climate change involve action on shorter time scales that also contributes to immediate development challenges. Climate risk management (CRM) combines systematic use of climate information, and technology that reduces vulnerability and policy that transfers risk. The cost of climate risk comes both through damaging extreme events and through forfeited opportunity in climatically-favorable years. Effective CRM therefore involves managing the full range of variability, balancing hazard management with efforts to capitalize on opportunity. We discuss several innovations for managing climate risk in agriculture, which have not yet been fully mainstreamed in international agricultural research-for-development. First, effective rural climate information services enable farmers to adopt technology, intensify production, and invest in more profitable livelihoods when conditions are favorable; and to protect families and farms against the long-term consequences of adverse extremes. Second, information and decision support systems synthesize historic, monitored and forecast climate information into forms that are directly relevant to institutional decisions (planning, trade, food crisis response) that impact farmer livelihoods. Third, innovations in index-based insurance and credit overcome some of the limitations of traditional insurance, and are being applied to pre-financing food crisis response, and to removing credit constraints to adopting improved technology. We present a typology of CRM interventions around the concept of dynamic poverty traps.

Time to Master Disaster: Innovations in insurance can help countries manage the fiscal impact of natural disasters

Time to Master Disaster: Innovations in insurance can help countries manage the fiscal impact of natural disasters

The Emerging Role of Patent Law in Risk Finance

Until recently, financial intermediaries have behaved as though immune from the bite of intellectual property law. However, recent decisions of the federal courts and acquiescence by Congress have created a new legal landscape. This article explores the basic principles and implications of patent law for risk finance, specifically in terms of emerging opportunities and incentives related to structured risk management solutions. In so doing, the discussion introduces the trade‐off between past reliance on trade secret law versus the evolving trend toward financial patents. The author addresses its influence within the convergence markets, and argues that patents may play a significant role in future financial and insurance innovation.

Towards an Historical Model of Services Innovation: The Case of the Insurance Industry, 1700–1914

There has been a recent shift in the historiography of the modern British economy towards an emphasis on the success of the service sector. This article examines one criterion of success, namely innovation, in British insurance between 1700 and 1914. Factors determining innovation are surveyed and comparisons drawn with European insurance. The relevance of existing models of industrial innovation is challenged and a new model is constructed for insurance. This model suggests that insurance innovation ran broadly counter‐cyclical to innovation in industry during this period, and was relatively undynamic. The article concludes by speculating about the relationship between industrial growth, liquidity constraints, and innovation in insurance.

The Bermuda offshore market in transition

AbstractIn summary, the Bermuda insurance industry is undergoing a major upheaval, with the ultimate outcome being presently unclear. However, offshore markets have been at the forefront of innovation in international insurance for the past decade, and this innovation is likely to continue. The successful companies of the future will take full advantage of the regulatory and accounting freedoms offered in Bermuda, the Cayman Islands, and other Caribbean locations. In the end, the offshore captive industry could well be transformed into an offshore specialty insurance market. The players will be fewer, but the business volume may be larger than ever.

Flood insurance and extreme events: the role of crisis in prompting changes in British institutional response to flood hazard

Insurance represents an effective response to natural hazards, spreading the cost of damage in space and time. The development of flood insurance for buildings and building contents in the UK is examined in order to assess the extent to which it fits a crisis-oriented model whereby changes in the nature and effectiveness of the response are triggered directly (and exclusively) by individual hazard events. The model is confirmed in outline, some factors influencing the imperfect link between insurance innovation and individual flood events are identified, and implications both of the widespread insurance cover availability and of the crisis orientation evident in the evolution of insurance policy are discussed.