Findings on Insurance Economics Reported by Investigators at University of Texas (The choice of trigger in an insurance linked security: The…

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Findings on Insurance Economics Reported by Investigators at University of Texas (The choice of trigger in an insurance linked security: The mortality risk case)

By a News Reporter-Staff News Editor at Insurance Weekly News -- A new study on Economics - Insurance Economics is now available. According to news reporting originating from Austin, Texas, by VerticalNews correspondents, research stated, "In 2003, Swiss Re introduced a mortality-based security designed to hedge excessive mortality changes for its life book of business. The concern was mortality risk, i.e., the risk of premature death."

Our news editors obtained a quote from the research from the University of Texas, "The mortality risk due to a pandemic is similar to the property risk associated with catastrophic events such as earthquakes and hurricanes and the security used to hedge the risk is similar to a CAT bond. This work looks at the incentives associated with insurance linked securities. It considers the trade-offs an insurer or reinsurer faces in selecting a hedging strategy. We compare index and indemnity-based hedging as alternative design choices and ask which is capable of creating the greater value for stakeholders. Additionally, we model an insurer or reinsurer that is subject to insolvency risk, which creates an incentive problem known as the judgment proof problem. The corporate manager is assumed to act in the interests of shareholders and so the judgment proof problem yields a conflict of interest between shareholders and other stakeholders. Given the fact that hedging may improve the situation, the analysis addresses what type of hedging tool would be best. We show that an indemnity-based security tends to worsen the situation, as it introduces an additional incentive problem. Index-based hedging, on the other hand, under certain conditions turns out to be beneficial and therefore dominates indemnity-based strategies."

According to the news editors, the research concluded: "This result is further supported by showing that for the same sufficiently small strike price the current shareholder value is greater with the index-based security than the indemnity-based security."

For more information on this research see: The choice of trigger in an insurance linked security: The mortality risk case. Insurance Mathematics & Economics, 2018;78():174-182. Insurance Mathematics & Economics can be contacted at: Elsevier Science Bv, PO Box 211, 1000 Ae Amsterdam, Netherlands.

The news editors report that additional information may be obtained by contacting R. MacMinn, Univ Texas Austin, Austin, TX 78712, United States.

The direct object identifier (DOI) for that additional information is: https://doi.org/10.1016/j.insmatheco.2017.09.018. This DOI is a link to an online electronic document that is either free or for purchase, and can be your direct source for a journal article and its citation.

Keywords for this news article include: Austin, Texas, United States, North and Central America, Insurance Economics, Economics, Risk and Prevention, Legal Issues, University of Texas.