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Correlated Risks: A Conflict of Interest Between Insurers and Consumers and Its Resolution


Eugster, Patrick; Zweifel, Peter (2006). Correlated Risks: A Conflict of Interest Between Insurers and Consumers and Its Resolution. Working paper series / Socioeconomic Institute No. 604, University of Zurich.

Abstract

This contribution starts out by noting a conflict of interest between consumers and insurers. Consumers face positive correlation in their assets (health, wealth, wisdom, i.e. skills), causing them to demand a great deal of insurance coverage. Insurers on the other hand eschew positively correlated risks. It can be shown that insurance contributes to a reduction of their asset volatility only if unexpected deviations of payments from expected value correlate negatively across lines of insurance. Analyzing deviations from trend in aggregate insurance payments, one finds the following for the United States and Switzerland. Private U.S. but not Swiss insurance has a hedging effect for consumers, while both social insurance schemes expose consumers to excess asset volatility. In the insurance systems of both countries, the private component fails to offset deviations in the social component (and vice versa). As to the supply of insurance, cointegration analysis indicates the absence of common trends. Therefore, insurance companies could offer combined policies to the benefit of consumers, hedging their underwriting risks both domestically and internationally.

Abstract

This contribution starts out by noting a conflict of interest between consumers and insurers. Consumers face positive correlation in their assets (health, wealth, wisdom, i.e. skills), causing them to demand a great deal of insurance coverage. Insurers on the other hand eschew positively correlated risks. It can be shown that insurance contributes to a reduction of their asset volatility only if unexpected deviations of payments from expected value correlate negatively across lines of insurance. Analyzing deviations from trend in aggregate insurance payments, one finds the following for the United States and Switzerland. Private U.S. but not Swiss insurance has a hedging effect for consumers, while both social insurance schemes expose consumers to excess asset volatility. In the insurance systems of both countries, the private component fails to offset deviations in the social component (and vice versa). As to the supply of insurance, cointegration analysis indicates the absence of common trends. Therefore, insurance companies could offer combined policies to the benefit of consumers, hedging their underwriting risks both domestically and internationally.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Socioeconomic Institute (former)
Dewey Decimal Classification:330 Economics
JEL Classification:G22, G15, G11, D14, C22
Language:English
Date:April 2006
Deposited On:29 Nov 2011 22:47
Last Modified:21 Nov 2017 15:37
Series Name:Working paper series / Socioeconomic Institute
Official URL:http://www.econ.uzh.ch/wp.html

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