1、Springer Texts in Business and Economics For further volumes: http:/ Zweifel Roland Eisen Insurance Economics 123Prof. Dr. Peter Zweifel University of Zurich Department of Economics Hottingerstrasse 10 8032 Zurich Switzerland peter.zweifelecon.uzh.ch 8 9 10 11 12 13 14 Prof. Dr. Roland Eisen Dr. B o
2、ttcher-Str. 12 81245 Munich Germany Original German edition published with title “Versicherungs okonomie” ISBN 978-3-642-20547-7 e-ISBN 978-3-642-20548-4 DOI 10.1007/978-3-642-20548-4 Springer Heidelberg Dordrecht London New York Library of Congress Control Number: 2011945421 c Springer-Verlag Berl
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6、 is part of Springer Science+Business Media ()Foreword While insurance can be traced back over millennia, it is only in the last half century that we have come to a comprehensive and deep understanding of this most vital, yet complex, economic institution. To really understand insurance takes a deep
7、 knowledge of the subtleties of risk and probability, of how rational (and not so rational) people behave when faced with risk; of how insurance companies can be structured to cope with risk; of how governments can effectively intercede when insurance markets fail to deliver. Such a journey will tak
8、e us to such interesting phenomena as “adverse selection” and “moral hazard”; it will expose us to modern nancial theories such as asset pricing theory and option theory and, in doing so, will expose us to such exotic nancial instruments as catastrophe bonds. It will take us deep into public policy
9、and the welfare state and into the challenges of operating universal health insurance programs. And it will face us with the challenges of a world where new and unpredicted risks (many of which were revealed in 2007/9 nancial crisis) are appearing and for which normal insurance mechanisms may not fu
10、nction. Such is the journey for which Peter Zweifel and Roland Eisen will guide us. It would be hazardous to try to pinpoint the rst attempts to explain an economic theory of insurance. Adam Smith, predictably, had something sensible to say. With commendable parsimony, he captures in two sentences t
11、he essential ingredients for such a theory, risk aversion, diversication and the need for capital. “The trade of insurance gives great security to the fortunes of private people, and, by dividing among a great many that loss which would ruin an individual, makes it fall light and easy upon the whole
12、 society. In order to give this security, however, it is necessary that the insurers should have a very large capital. (Wealth of Nations, page 619)”. But Smith does not have too much more to offer on insurance. While the actuarial processes for insurance have been in continuous development since Ad
13、am Smiths time, it really took till the second half of the twentieth century for a modern theory of insurance economics to emerge. I would suggest that the catalyst was Kenneth Arrows 1963 paper in the American Economic Review which laid out a model of an optimal insurance contract between risk-aver
14、se consumers and an insurance company capable of diversication. From this seminal paper has sprung an ever growing eld of enquiry in which rational consumers and rational vvi Foreword insurers come to together in a mutually benecial trade of risk. While this line of enquiry deepened our understandin
15、g how people come to share risk in an insurance market, and the natural frictions that occur (particularly the conicting incentives of the policyholders and insurers), there was growing dissatisfaction with a theory that ignored the quirkiness of actual behavior; in real life people might not be qui
16、te so rational. How would insurance market work in a world of limited rationality? At about the same time that Kenneth Arrow was describing how insurance might be explained from rational consumer behavior, the Norwegian actuary and economist, Karl Borch was to produce another idea that was to have p
17、rofound implications, not only for our understanding of insurance, but also for the manner in which capital markets functioned. In a paper nominally about reinsurance, Borch laid out a complete theory of asset market pricing, which appeared shortly thereafter as the Capital Asset Pricing Model (and
18、for which Bill Sharpe was awarded the Nobel Prize). This had fascinating implications for insurance, for it implied that publicly traded rms should not need insurance their shareholders could diversify risk just as well as insurance companies. Thus, we needed a new theory for corporate insurance whi
19、ch would explain not only why rms bought insurance, but also how insurance companies manage risk. But modern nancial theory has another set of fascinating implications for those interested in insurance. An insurance policy is simply a nancial instrument - strictly speaking it is of the class of inst
20、ruments known as options. This insight itself may help us to understand, and to price, insurance policies in different ways. But it also reveals why the function of insurance (to transfer risk from one person to another) can also be achieved with other nancial instruments. These include options and
21、forward and future contracts in many simple and complex forms. Such instruments are now used routinely as alternatives to insurance by sophisticated risk managers, but are also used by insurance companies to ofoad their own risk so that they can enhance the security they provide to their own policyh
22、olders. But such strategies are not for the faint of heart. Derivatives also have their dark side and have been at the heart of several nancial crises, including the recession of 2007/9 (in this case in the form of credit derivatives such as default credit swaps). Thus, rather like a surgeons scalpe
23、l, derivatives can be used for good or bad and their treatment will demand some care and subtlety. These historical illustrations reveal what a rich and complex phenomenon modern insurance is. And the delight of this book is that it addresses insurance in all its subtleties and richness. Any foundat
24、ional book on modern insurance will need to prepare students well in the basic disciplines of probability, economics and nance and this is achieved admirably by Roland Eisen and Peter Zweifel. After preparing the reader with a thorough grounding in risk and diversication, they introduce the theory o
25、f decision making under risk which leads seamlessly to model of insurance in which all can benet by a pooling of risk. They guide us through the frictions that can hinder insurance markets when information is not available or shared. With appropriately dismal titles, moral hazard (the lack of care p
26、eople often exercise when they are protected by insurance) and adverse selection (the tendency for insurance to be bought by those most at risk), are examined along with theForeword vii clever strategies for their resolution. The nancial theory of risk and insurance is dealt with in similar exquisit
27、e detail including, not only a rationale for corporate risk management, but also detailed explanation of the nancial and operational management of insurance companies, and of the use of reinsurance options and other nancial instruments for hedging risk. Given their intellectual background, it is not
28、 surprising that the authors go much further than simply explaining the economic and nancial foundations of insurance. Insurance markets are, not surprisingly, quite heavily regulated and such regulation presumably should improve equity and efciency. Having examined theories of regulation, and descr
29、ibed existing and new regulatory initiatives (such as Solvency II), they review the evidence and show when regulation contributes to the common good and when it does not. In similar vein, their treatment of Social Insurance goes far beyond a simple description of programs in place, to address the po
30、litical-economic foundations for state insurance programs and to embark on a critical examination of such programs and the challenges these face. Throughout all, Peter Zweifel and Roland Eisen are careful to blend the basic theoretical concepts, with real life illustration and a dispassionate review
31、 of the evidence. But the world is changing. And as it does, new risks are appearing which will create a demand for their management and will present new challenges to insurers. Certainly cyber risk has emerged as a mega concern. Climate change is creating new risks of quite unknown magnitude and wh
32、o will ever be quite so complacent about systemic risk after the recent nancial crisis. No treatise can accurately anticipate these new risks. But by careful preparation, we can be prepared, not only to respond to these risks as they arise, but to structure our affairs so that we can be more robust
33、in the face of unknowable shocks. As Louis Pasteur famously said, “chance favors only the prepared mind”. This is a book of surprising substance and, in the changing world of risk, it will prepare us well. Philadelphia Neil A. DohertyPreface This book is dedicated to the memory of Wolfgang M uller (
34、 1993), who made the two authors join him for performing a critical review of insurance regulation as envisaged by the European Union at the time. The three of us soon noticed that there did not seem to exist a textbook on insurance economics we could refer to. It would have to be at the crossroads
35、of insurance as one way to cope with risk and insurance as an industry with its own peculiarities. We therefore planned to write a textbook that would be quantitative enough to permit its readers to understand a concept such as “ex-ante moral hazard” while being accessible to (future) practitioners
36、who also want to know “how insurance works”. The two survivors nally realized this plan in 2000, when a rst edition of the textbook was published in German. Its success suggested that it indeed lled a gap. Since then, important works have appeared, notably Risk Management and Insurance by Harold W.
37、Skipper and W. Jean Kwon (2007) and Economic and Financial Decisions under Risk by Louis Eeckhoudt, Christan Gollier, and Harris Schlesinger (2005). The rst covers a very wide range of topics but in turn avoids all those mathematical formulations and graphical illustrations that are so heavily used
38、in the pertinent scientic literature. The other goes to the other extreme by providing a great deal of advanced theory without ever saying anything about the insurance industry. There still seems to be a gap to be closed. This volume is unique in at least three ways. First, it clearly distinguishes
39、between the demand for insurance by individuals who lack other alternatives of risk diversication and by those who also have diversication possibilities through the capital market. Accordingly, the reader is made familiar not only with the conventional theory pioneered by Arrow and Borch but with th
40、e Capital Asset Pricing and the Option Pricing models developed by Doherty as well. Second, the supply of insurance is given due attention. Analysis of the decision-making problems facing the management of an insurance company are of importance not only to students of Business Administration but als
41、o to policy makers inside and outside government who are confronted with initiatives of deregulation and re-regulation and wish to predict the likely consequences of these initiatives. And third, the book devotes an entire chapter to social insurance, whose importance exceeds that of private insuran
42、ce by far, at least in industrial countries. To this ixx Preface topic, economic analysis is brought to bear and tested against empirical evidence in precisely the same way as in the remainder of the book. This text is designed for advanced MBA, MSc Fin, and MSc Econ and beginning PhD students. It c
43、an be taught as a two-semester course, with the rst term devoted to Chaps. 14. Chapters 59 are recommended for the second term. Chapter 10 (on future challenges confronting insurance) provides not only “food for thought” but also many linkages with the body of the book. The transition from the origi
44、nal to the present English version called for many modications, hopefully also resulting in improvements. It required the continuous and concentrated effort of Philippe Widmer, our project coordinator. Without him, the book would not be in existence! We also owe a great deal to Susan Danuser, who tr
45、ansformed hours of voice recording into a raw text. At that point, our two formatting specialists took over. For weeks and months, Christian Elsasser and Alexander Ziegenbein homogenized text, drew graphs, and perfected the layout of tables. Finally, George Elias, Maurus Rischatsch, Johannes Schoder
46、, Michle Sennhauser, Maria Trottmann, Philippe Widmer, and Alexander Ziegenbein read parts of the manuscript. They went far beyond pointing out typos, suggesting many clarications in exposition. To all of them, we would like to express our gratitude. Last but not least, there are several generations
47、 of students who were exposed to the original German and precursors of the present English text. We are very thankful for their queries and comments. And now we hope that a few more generations of readers will be stimulated by the arguments and insights of the pages that follow. At a minimum, they s
48、hould not be bored; better still, they may at times even nd pleasure reading! Zurich and Munich Peter Zweifel Roland EisenContents 1 Introduction: Insurance and Its Economic Role 1 1.1 Basics and Denitions . 1 1.2 Risks and Their Development Over Time 3 1.3 Macroeconomic Importance of Insurance. 6 1
49、.4 Functions of Insurance 11 1.5 Major Determinants of the Demand for Insurance . 15 1.5.1 The Effects of Wealth and Income. 15 1.5.2 The Effect of Price 18 1.6 System Analysis and Organization of the Book 21 1.E Exercises 23 2 Risk: Measurement, Perception, and Management 25 2.1 Denition and Measurement of Risk 26 2.1.1 Denition of Risk. 26 2.1.2 Measurement of Risk. 27 2.2 Subjective Perception of Risk, Risk Aversion, and the Risk Utility Function 32 2.2.1
