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Book part
Publication date: 20 March 2007

Joseph Heath

Few issues in business ethics are as polarizing as the practice of risk classification and underwriting in the insurance industry. Theorists who approach the issue from a…

Abstract

Few issues in business ethics are as polarizing as the practice of risk classification and underwriting in the insurance industry. Theorists who approach the issue from a background in economics often start from the assumption that policy-holders should be charged a rate that reflects the expected loss that they bring to the insurance scheme. Yet theorists who approach the question from a background in philosophy or civil rights law often begin with a presumption against so-called “actuarially fair” premiums and in favor of “community rating,” in which everyone is charged the same price. This paper begins by examining and rejecting the three primary arguments that have been given to show that actuarially fair premiums are unjust. It then considers the two primary arguments that have been offered by those who wish to defend the practice of risk classification. These arguments overshoot their target, by requiring a “freedom to underwrite” that is much greater than the level of freedom enjoyed in most other commercial transactions. The paper concludes by presenting a defense of a more limited right to underwrite, one that grants the legitimacy of the central principle of risk classification, but permits specific deviations from that ideal when other important social goods are at stake.

Details

Insurance Ethics for a More Ethical World
Type: Book
ISBN: 978-1-84950-431-7

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Book part
Publication date: 20 March 2007

Daniel E. Palmer

The practice of insuring essentially involves the determination and assignment of risk to individuals. Such determinations are made almost exclusively on the basis of…

Abstract

The practice of insuring essentially involves the determination and assignment of risk to individuals. Such determinations are made almost exclusively on the basis of statistical models. As such, the determination of an individual's risk in relation to a particular form of insurance, and thus ultimately to the determination of the cost and availability of that insurance for the individual, is made in relation to her inclusion in certain statistical groups. However, a number of questions, both practical and philosophical, can be raised about the way in which an individual is assessed upon the basis of such statistical modeling. In this paper, I explore some of these issues in relation to questions of fairness. I begin by examining the basic structure of statistical risk assessment for insurance purposes. I argue that the underlying ethical concern involved with such cases involves the manner in which the attributes of the statistical groups used for insurance purposes can be said to fairly represent the individual qua individual. As such, I go on to explore the general philosophical issues involved in applying statistical models to individuals and the fairness of using such applications to make determinations about individuals for insurance purposes.

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Insurance Ethics for a More Ethical World
Type: Book
ISBN: 978-1-84950-431-7

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Book part
Publication date: 1 September 2004

Silke Uebelmesser

Abstract

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Unfunded Pension Systems: Ageing and Variance
Type: Book
ISBN: 978-0-44451-732-6

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Article
Publication date: 15 August 2019

Aleksandre Maisashvili, Henry Bryant, George Knapek and James Marc Raulston

The purpose of this paper is to develop methods for inferring if crop insurance premiums imply yield distributions that are valid according to standard laws of probability…

Abstract

Purpose

The purpose of this paper is to develop methods for inferring if crop insurance premiums imply yield distributions that are valid according to standard laws of probability and broadly consistent with observed empirical evidence. The authors also survey current premium-implied distributions both before and after conditioning on the producer’s choice of coverage level.

Design/methodology/approach

Under an assumption of actuarial fairness, the authors derive expressions for upper and lower bounds for premium-implied yield cumulative distribution functions (CDFs) at loss thresholds for each coverage level. When observed premiums imply a CDF that exceeds one or is not non-decreasing, the authors conclude that premiums cannot be actuarially fair. The authors additionally specify very weak conditions for premium-implied yield CDFs to be consistent with two possible reasonable parametric distributions.

Findings

The authors evaluate premiums for the year 2018 for 19,104 county-crop-type-practice combinations, both before and after conditioning on producer’s choice of coverage level. The authors find problems in roughly one-third of cases. Problems are exhibited for all crops evaluated, and are strongly associated with areas with lower expected yields and higher yield variability. At least 40m acres are currently insured under premium schedules that cannot possibly be consistent with valid probability distributions.

Originality/value

The authors make two primary contributions. First, the premium-implied yield CDF bounds the authors derive requires fewer assumptions than previous similar work, while simultaneously placing more stringent conditions on premiums to be consistent with actuarial fairness. Second, the authors show that current US crop insurance premiums cannot possibly be actuarially fair for many cases, reflecting tens of millions of insured acres, which implies sub-optimal producer risk mitigation and inequitable expenditures for producers and taxpayers.

Details

Agricultural Finance Review, vol. 79 no. 4
Type: Research Article
ISSN: 0002-1466

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Book part
Publication date: 1 September 2004

Silke Uebelmesser

Abstract

Details

Unfunded Pension Systems: Ageing and Variance
Type: Book
ISBN: 978-0-44451-732-6

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Article
Publication date: 1 November 2002

Bingfan Ke and H. Holly Wang

Due to the low crop insurance participation by grain growers in the Pacific Northwest, the performance of insurance programs and the futures market is assessed in this…

Abstract

Due to the low crop insurance participation by grain growers in the Pacific Northwest, the performance of insurance programs and the futures market is assessed in this area. Revenue insurance, combined with the futures and government programs, is identified as the optimal risk management portfolio. Although yield risk level, decision maker’s risk preference, and actuarial fairness of premiums can all affect farmers’ choices, the current subsidy policy is most influential. The varying subsidy levels induce farmers’ subsidy‐seeking incentive and suppress the risk‐reducing incentive. There is little diversification effect from growing two crops in the rotation instead of one.

Details

Agricultural Finance Review, vol. 62 no. 2
Type: Research Article
ISSN: 0002-1466

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Article
Publication date: 20 June 2016

Roger Lee Mendoza

Moral hazard is a concept that is central to risk and insurance management. It refers to change in economic behavior when individuals are protected or insured against…

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Abstract

Purpose

Moral hazard is a concept that is central to risk and insurance management. It refers to change in economic behavior when individuals are protected or insured against certain risks and losses whose costs are borne by another party. It asserts that the presence of an insurance contract increases the probability of a claim and the size of a claim. Through the US Affordable Care Act (ACA) of 2010, this study seeks to examine the validity and relevance of moral hazard in health care reform and determine how welfare losses or inefficiencies could be mitigated.

Design/methodology/approach

This study is divided into three sections. The first contrasts conventional moral hazard from an emerging or alternative theory. The second analyzes moral hazard in terms of the evolution, organization, management, and marketing of health insurance in the USA. The third explains why and how salient reform measures under the ACA might induce health care consumption and production in ways that could either promote or restrict personal health and safety as well as social welfare maximization.

Findings

Insurance generally induces health care (over) consumption. However, not every additional consumption, with or without adverse selection, can be considered wasteful or risky, even if it might cost insurers more in the short run. Moral hazard can generate welfare and equity gains. These gains might vary depending on which ACA provisions, insured population, covered illnesses, treatments, and services, as well as health outcomes are taken into account, and because of the relative ambiguities surrounding definitions of “health.” Actuarial risk models can nonetheless benefit from incorporating welfare and equity gains into their basic assumptions and estimations.

Originality/value

This is the first study which examines the ACA in the context of the new or alternative theory of moral hazard. It suggests that containing inefficient moral hazard, and encouraging its desirable counterpart, are prime challenges in any health care reform initiative, especially as it adapts to the changing demographic and socio-economic characteristics of the insured population and regulatory landscape of health insurance in the USA.

Details

Journal of Health Organization and Management, vol. 30 no. 4
Type: Research Article
ISSN: 1477-7266

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Book part
Publication date: 1 September 2004

Silke Uebelmesser

Abstract

Details

Unfunded Pension Systems: Ageing and Variance
Type: Book
ISBN: 978-0-44451-732-6

To view the access options for this content please click here
Article
Publication date: 25 October 2018

Timothy A. Delbridge and Robert P. King

The USDA’s Risk Management Agency (RMA) made several changes to the crop insurance products available to organic growers for the 2014 crop year. Most notably, a 5 percent…

Abstract

Purpose

The USDA’s Risk Management Agency (RMA) made several changes to the crop insurance products available to organic growers for the 2014 crop year. Most notably, a 5 percent premium surcharge was removed and organic-specific transitional yields (t-yields) were issued for the first time. The purpose of this paper is to use farm-level organic crop yield data to analyze the impact of these reforms on producer insurance outcomes and compare the insurance options for new organic growers.

Design/methodology/approach

This study uses a unique panel data set of organic corn and soybean yields to analyze the impact of organic crop insurance reforms. Actual Production History values and premium rates are calculated for each farm and crop yield sequence. Producer loss ratios and subsidized premium wedges are compared for yield, revenue and area-risk products before and after the instituted reforms.

Findings

Results indicate that RMA succeeded in improving the actuarial soundness of the organic insurance program, though further refinement of organic t-yields may be necessary to accurately reflect the yield potential of organic producers and avoid reductions in program participation.

Originality/value

This paper provides insight into the effectiveness of reforms intended to improve the actuarial soundness of organic crop insurance and demonstrates the effect that the reforms are likely to have on new and existing organic farms. Because this analysis uses data collected independently of RMA and includes farms that may or may not have purchased crop insurance, it avoids the self-selection problems that might affect analyses using crop insurance program data.

Details

Agricultural Finance Review, vol. 79 no. 2
Type: Research Article
ISSN: 0002-1466

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Article
Publication date: 16 May 2016

Hato Schmeiser and Joël Wagner

The purpose of this paper is to analyze what transaction costs are acceptable for customers in different investments. In this study, two life insurance contracts, a mutual…

Abstract

Purpose

The purpose of this paper is to analyze what transaction costs are acceptable for customers in different investments. In this study, two life insurance contracts, a mutual fund and a risk-free investment, as alternative investment forms are considered. The first two products under scrutiny are a life insurance investment with a point-to-point capital guarantee and a participating contract with an annual interest rate guarantee and participation in the insurer’s surplus. The policyholder assesses the various investment opportunities using different utility measures. For selected types of risk profiles, the utility position and the investor’s preference for the various investments are assessed. Based on this analysis, the authors study which cost levels can make all of the products equally rewarding for the investor.

Design/methodology/approach

The paper notes the risk-neutral valuation calibration using empirical data utility and performance measurement dynamics underlying: geometric Brownian motion numerical examples via Monte Carlo simulation.

Findings

In the first step, the financial performance of the various saving opportunities under different assumptions of the investor’s utility measurement is studied. In the second step, the authors calculate the level of transaction costs that are allowed in the various products to make all of the investment opportunities equally rewarding from the investor’s point of view. A comparison of these results with transaction costs that are common in the market shows that insurance companies must be careful with respect to the level of transaction costs that they pass on to their customers to provide attractive payoff distributions.

Originality/value

To the best of the authors’ knowledge, their research question – i.e. which transaction costs for life insurance products would be acceptable from the customer’s point of view – has not been studied in the above described context so far.

Details

The Journal of Risk Finance, vol. 17 no. 3
Type: Research Article
ISSN: 1526-5943

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