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Risk-Based Premiums for Insurance Guaranty Funds

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  • Cummins, J David
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    Abstract

    Insurance guaranty funds have been adopted in all states to compensate policyholders for losses resulting from insurance company insolvencies. The guaranty funds charge flat premium rates, usually a percentage of premiums. Flat premiums can induce insurers to adopt h igh-risk strategies, a problem that could be avoided through the use of risk-based premiums. This article develops risk-based premium form ulae for three cases: (1) an ongoing insurer with stochastic assets a nd liabilities; (2) an ongoing insurer also subject to jumps in liabi lities (catastrophes); and (3) a policy cohort, where claims eventual ly run off to zero. Premium estimates are provided and compared with actual guaranty fund assessment rates. Copyright 1988 by American Finance Association.

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    Bibliographic Info

    Article provided by American Finance Association in its journal Journal of Finance.

    Volume (Year): 43 (1988)
    Issue (Month): 4 (September)
    Pages: 823-39

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    Handle: RePEc:bla:jfinan:v:43:y:1988:i:4:p:823-39

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    Cited by:
    1. Soon-Ja Lee & Michael L. Smith, . "Property-Casualty Insurance Guaranty Funds and Insurer Vulnerability to Misfortune," Research in Financial Economics 9506, Ohio State University.
    2. Chan, Yuk-Shee & Greenbaum, Stuart I & Thakor, Anjan V, 1992. " Is Fairly Priced Deposit Insurance Possible?," Journal of Finance, American Finance Association, vol. 47(1), pages 227-45, March.
    3. Soon-Jae Lee & Michael L. Smith, . "Property-Casualty Insurance Guaranty Funds And Insurer Vulnerability To Misfortune," Research in Financial Economics 9616, Ohio State University.
    4. Chen, An & Uzelac, Filip, 2014. "A risk-based premium: What does it mean for DB plan sponsors?," Insurance: Mathematics and Economics, Elsevier, vol. 54(C), pages 1-11.
    5. Lo, Chien-Ling & Lee, Jin-Ping & Yu, Min-Teh, 2013. "Valuation of insurers’ contingent capital with counterparty risk and price endogeneity," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5025-5035.
    6. Richard D. Phillips & J. David Cummins & Franklin Allen, 1996. "Financial Pricing of Insurance in the Multiple Line Insurance Company," Center for Financial Institutions Working Papers 96-09, Wharton School Center for Financial Institutions, University of Pennsylvania.
    7. Biener, Christian & Eling, Martin & Schmit, Joan T., 2013. "Regulation in Microinsurance Markets: Principles, Practice, and Directions for Future Development," Working Papers on Finance 1305, University of St. Gallen, School of Finance.
    8. James G. Bohn & Brian J. Hall, 1997. "The Moral Hazard of Insuring the Insurers," NBER Working Papers 5911, National Bureau of Economic Research, Inc.
    9. Episcopos, Athanasios, 2004. "The implied reserves of the Bank Insurance Fund," Journal of Banking & Finance, Elsevier, vol. 28(7), pages 1617-1635, July.
    10. Jiang Cheng & Elyas Elyasiani & Jingyi (Jane) Jia, 2011. "Institutional Ownership Stability and Risk Taking: Evidence from the Life-Health Insurance Industry," NFI Working Papers 2011-WP-14, Indiana State University, Scott College of Business, Networks Financial Institute.
    11. Chia-Chien Chang & Wei-Yi Huang & So-De Shyu, 2012. "Pricing Mortgage Insurance with Asymmetric Jump Risk and Default Risk: Evidence in the U.S. Housing Market," The Journal of Real Estate Finance and Economics, Springer, vol. 45(4), pages 846-868, November.
    12. P. Picard, 2000. "Les nouveaux enjeux de la régulation des marchés d'assurance," THEMA Working Papers 2000-53, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    13. Charpentier, Arthur & Le Maux, Benoît, 2014. "Natural catastrophe insurance: How should the government intervene?," Journal of Public Economics, Elsevier, vol. 115(C), pages 1-17.
    14. Pasiouras, Fotios & Gaganis, Chrysovalantis, 2013. "Regulations and soundness of insurance firms: International evidence," Journal of Business Research, Elsevier, vol. 66(5), pages 632-642.
    15. Elijah Brewer III & Thomas H. Mondschean & Philip Strahan, 1996. "The Role of Monitoring in Reducing the Moral Hazard Problem Associated with Government Guarantees: Evidence from the Life Insurance Industry," Center for Financial Institutions Working Papers 96-15, Wharton School Center for Financial Institutions, University of Pennsylvania.
    16. Richard W. Kopcke, 2000. "Deposit insurance, capital requirements, and financial stability," Working Papers 00-3, Federal Reserve Bank of Boston.
    17. J. David Cummins & Scott E. Harrington & Robert Klein, 1995. "nsolvency Experience, Risk-Based Capital, and Prompt Corrective Action in Property-Liability Insurance," Center for Financial Institutions Working Papers 95-06, Wharton School Center for Financial Institutions, University of Pennsylvania.
    18. Guo, Feng & Huang, Ying Sophie, 2013. "Identifying permanent and transitory risks in the Chinese property insurance market," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 689-704.

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