Insurance Economics

Aug. 26, 2015

On August 24 – 25, 2015 SIFR gathered academics, practitioners and regulators for a two day conference on Insurance Economics: New Risks, New Regulation, New Approaches.

Key-note speakers at the conference were Nobel laureate Robert Merton, MIT Sloan School of Management, Viral Acharya, Stern School of Business, New York University, Dwight Jaffee, Haas School of Business, University of California at Berkeley, Ralph Koijen, London Business School and Howard Kunreuther, Wharton School of Business, University of Pennsylvania.

Howard Kunreuther started the first day by giving a talk on insurance and behavioral economics. He discussed how the insurance industry should handle the increasing frequency of environmental catastrophes or so called Low Probability – High Cost (LP-HC) events. He stressed that insurance companies can encourage risk mitigation by being allowed by regulators to set premiums that reflect risk and by partnering with financial institutions to provide long-term loans.

The second speaker of the day was Robert Merton. He gave a talk on the topic “Challenges and Solutions in Retirement Funding and Retirement Payout”. He talked about a goal-based investment strategy where a specific income goal is replacing the more general target of “wealth accumulation”. The asset allocation strategy would be dynamic and based on age, income and a success measure of the portfolio.

Ralph Koijen gave an overview of the shadow insurance industry. The shadow insurance market grew from $11 billion in 2002 to $364 billion in 2012. Regulators do recognize the risk of shadow insurance but the elimination of it would raise both prices and costs and affect equilibrium in the retail market, according to Ralph Koijen.

Both Dwight Jaffee and Viral Acharya focused on the role of regulation. Dwight Jaffee gave examples of when government regulation works and when it is dysfunctional. Sometimes the government even bears 100 percent of the risk although private insurers still run the market, which is the case for example in the US National Flood Insurance-program. Viral Acharya said that insurance firms could perhaps be categorized as systemically important financial institutions (SIFIs). In fact, the regulatory and risk-taking practices in the insurance sector look as problematic as those at precrisis banks.

Peter Englund and Johan Walden from SIFR moderated two panel discussions on “Insurance and Human Behavior” and “Systemic Risk and Regulation” respectively. The second conference day had a standard academic format with presentations of frontier research papers, discussant comments and general discussion.

The conference was funded by the Torsten Söderberg Foundation.