The empirical results are consistent with the model's predictions. Drawing lessons from the failures of four insurance companies, When Insurers Go Bust dramatically advances this debate by arguing that the current approach to insurance regulation should be replaced with mechanisms that replicate the governance of non-financial firms. By the law of large numbers, traditional lines of insurance with idiosyncratic non-catastrophic risks cannot be systemic. Copyright The Journal of Risk and Insurance. Based on these considerations, the paper argues that, if certain activities were to give rise to concerns about systemic risk in the case of insurers, regulatory responses other than capital surcharges may be more appropriate. In particular, we find evidence for the use of loss-sensitive premiums when the insurer and reinsurer are not affiliates i. According to Plantin and Rochet 2007 , this fact and the absence of a tough, sophisticated claimholder provide a rationale for the prudential regulation of insurance companies.
To buttress the resilience of the financial system, we lay out a menu of macroprudential policies that deactivate this channel of financial contagion. The resulting scheme has strong flavors of verifiability, simplicity, consistency, and transparency. As an alternative, we propose to approach these phenomena through the eye glasses of betting markets an securitization of insurance contracts. Some actuarial and practical challenges in connection with the determination of suitable premiums for the reinsured risk are discussed. As in other sources, there is inappropriate emphasis on the general theory of excessive risk-taking, which tends to deflect attention from the specific nature of insurance firms, but the theoretical excess is adequately counterbalanced by thoughtful case studies. Financial institutions have been at the forefront of the debate on the controversial shift in international standards from historical cost accounting to mark-to-market accounting. This Article argues, however, that in focusing on the risk that an individual insurance-focused, nonbank financial company could become systemically significant, Dodd-Frank largely overlooked a second, and equally important, potential source of systemic risk in insurance: the prospect that correlations among individual insurance companies could contribute to or cause widespread financial instability.
Because of these perceptions regarding asset quality and risk, investors were relatively uninformed. While the historical cost regime leads to some inefficiencies, marking-to-market may lead to other types of inefficiencies by injecting artificial risk that degrades the information value of prices, and induces suboptimal real decisions. In this paper, we describe the reasons for an insurance regulation. This research presents an analysis of the demographic risk related to future membership patterns in pension funds with restricted entrance, financed under a pay-as-you-go scheme. Finally, the authors propose a method of moving toward such a regulatory framework starting from the current regulatory institutions in the United States and the European Union When Insurers Go Bust applies agency theory and the theories of adverse selection and moral hazard as the motivation for prudential regulation of insurance.
Empirically, we find that intermediary leverage is negatively aligned with the banks' Value-at-Risk VaR. This research presents an analysis of the demographic risk related to future membership patterns in pension funds with restricted entrance, financed under a pay-as-you-go scheme. Both participative decision making and passive management predict higher degree of perceived crisis proneness and so does risk taking. This article attempts to identify moral hazard in the traditional reinsurance market. I have seen no other book like this.
Elements of the Canadian regulatory framework that contributed to the success of the insurance industry in weathering the crisis include the presence of a federal regulator who monitors system-wide issues also ensures consistent solvency standards; investment guidelines that encourage prudent risk-taking; and a holistic approach to insurer monitoring. A First Pass 27 Chapter 3: The State of the Art in Prudential Regulation 29 3. For these reasons, or so the economic argument goes, prudential regulation of insurance firms is necessary. Rather than immediately addressing the minutiae of supervision, Guillaume Plantin and Jean-Charles Rochet first identify a fundamental economic rationale for. On the contrary, life insurers satisfying the classic solvency capital requirements contribute to the liquidity of financial markets thanks to the long-termist approach of their portfolio management. If the author is listed in the directory of specialists for this field, a link is also provided. You can help correct errors and omissions.
This book is useful for the insurance scholar and feasible as a segment of an advanced undergraduate course. In addition, when we split the sample by industry grouping, we find that announcements by life insurance firms generate significant cross-firm effects. The book is timely and well researched, and it brings together the current state of the art in economic analysis with a thorough understanding of the institutions. In this paper, we discuss the systemic relevance of the insurance sector. However, violations to some criteria remain. In this article, the notion of reinsurance as a means for a first-line insurer to pass on part of his underwritten risk for some appropriate premium payment is defined and motivated. The 2007—2009 financial crisis resulted in failures of many large financial institutions and among the G8 countries, only Canada did not have to provide financial support to distressed financial institutions.
Responsibility: Guillaume Plantin, Jean-Charles Rochet. This is because of the presence of pension insurance - which may cover a portion of deficits in the event of a sponsor default - and a sponsoring employer who may make good any shortfall in assets, and who may reclaim some pension surplus. Synopsis In the 1990s, large insurance companies failed in virtually every major market, prompting a fierce and ongoing debate about how to better protect policyholders. In contrast, we find evidence for the extensive use of monitoring when the insurer and reinsurer are affiliates, where monitoring costs are lower. It will become essential reading for anyone interested in this important policy area. Guillaume Plantin is Assistant Professor of Finance at London Business School. .
It will become essential reading for anyone interested in this important policy area. He is the coauthor of Microeconomics of Banking. Jean-Charles Rochet is Professor of Mathematics and Economics at the University of Toulouse and a visiting professor of finance at the London School of Economics and Political Science. Our results are consistent with the hypothesis that the announcement of an equity offering reveals information about the quality of both the announcing firm's portfolio and the quality of rival firms' portfolios. Abstract The purpose of this paper is to challenge the conventional theory of moral hazard and adverse selection. This dramatic increase in the weight of the financial sector has been accomplished over the course of the last 20 years or so.
Implementing the optimal policy implies separating insurance firms into two categories according to their exposure to systemic risk: those with relatively low exposure should be eligible for bailouts, while those with high exposure should not benefit from public support if a systemic event occurs. Jean-Charles Rochet is Professor of Mathematics and Economics at the University of Toulouse and a visiting professor of finance at the London School of Economics and Political Science. Albeit a cost-effective response of the cash lender to a liquidity shock, liquidity hoarding may lead to the bankruptcy of its repo counterparties triggering contagion across asset classes. The findings appear particularly relevant given the current turbulent business environments and the increasing frequency and magnitude of corporate crises. This study complements past studies of contagion effects within the insurance industry. Equity issuance announcements by insurers that offer short-term state-contingent contracts do not produce cross-firm effects. Our analysis yields rich implications for the dynamics of security prices.
Purpose — The purpose of this paper is to examine the extent to which leadership attributes, masculinity, risk taking and decision making affect perceived crisis proneness. While it brings stabilizing effects to the individual lender we argue that it may exacerbate systemic risk through margin call activation. The role of insurance sector has grown in importance. The model gives rise to two features: First, leverage is procyclical in the sense that leverage is high when the balance sheet is large. Our results therefore shed light on why banks and insurance companies have been the most vocal opponents of the shift to marking-to-market.