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Be as safe as possible: A behavioral approach to the optimal corporate risk strategy of insurers

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  • Zimmer, Anja
  • Gründl, Helmut
  • Schade, Christian
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    Abstract

    This paper empirically studies the impact of consumer reaction to default risk on an insurer's optimal solvency level. Using experimentally obtained data, we derive a price-default risk-demand-curve that serves as an input variable for the insurer's risk strategy. We show that an insurer should choose to be default-free rather than having even a very small default probability. This risk strategy is also optimal when assuming substantial transaction costs for risk management activities undertaken to achieve the maximum solvency level. --

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    Bibliographic Info

    Paper provided by International Center for Insurance Regulation (ICIR), Goethe University Frankfurt in its series ICIR Working Paper Series with number 06/11.

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    Date of creation: 2012
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    Handle: RePEc:zbw:icirwp:0611

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    Keywords: Behavioral Insurance; Risk Management of Insurance Companies;

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    6. Zimmer, Anja & Schade, Christian & Gründl, Helmut, 2009. "Is default risk acceptable when purchasing insurance? Experimental evidence for different probability representations, reasons for default, and framings," Journal of Economic Psychology, Elsevier, vol. 30(1), pages 11-23, February.
    7. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
    8. Ross, Stephen A, 1978. "A Simple Approach to the Valuation of Risky Streams," The Journal of Business, University of Chicago Press, vol. 51(3), pages 453-75, July.
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    13. Hanemann, W Michael, 1991. "Willingness to Pay and Willingness to Accept: How Much Can They Differ?," American Economic Review, American Economic Association, vol. 81(3), pages 635-47, June.
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    17. Robin Cubitt & Chris Starmer & Robert Sugden, 1998. "On the Validity of the Random Lottery Incentive System," Experimental Economics, Springer, vol. 1(2), pages 115-131, September.
    18. Charles A. Holt & Susan K. Laury, 2005. "Risk Aversion and Incentive Effects: New Data without Order Effects," American Economic Review, American Economic Association, vol. 95(3), pages 902-912, June.
    19. Albrecht, Peter & Maurer, Raimond, 1999. "Zur Bedeutung einer Ausfallbedrohtheit von Versicherungskontrakten - ein Beitrag zur Behavioral Insurance," Sonderforschungsbereich 504 Publications 99-76, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim.
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    21. Epermanis, Karen & Harrington, Scott E., 2006. "Market Discipline in Property/Casualty Insurance: Evidence from Premium Growth Surrounding Changes in Financial Strength Ratings," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(6), pages 1515-1544, September.
    22. Helmut Gründl & Thomas Post & Roman N. Schulze, 2006. "To Hedge or Not to Hedge: Managing Demographic Risk in Life Insurance Companies," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 73(1), pages 19-41.
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