This section contains information about articles under review and waiting for publication in next issues of the journal.

Moral hazard, insurers' non-performance and the captive alternative

Sonja Huber, Consulter in the field of risk management in London, UK
Monika Gruber, Finance and information coordinator in an international NPO in Innsbruck, Austria
Matthias Bank, Professor, Department of Banking and Finance, University of Innsbruck, Austria

Abstract. Our paper examines the influence of legal costs on the decision of insurers to either effect or refuse claims payments to their insureds. This may lead to inefficiency in the insurance market. In order to overcome this problem an industrial company could alternatively form a single-parent captive instead of insuring with a traditional insurance company.
For our two sequential complete information game theoretical model we assume the following two cases: Firstly, an insurance contract is considered between an insurer and an industrial company, secondly, between a single-parent captive and its parent company (industrial company). The two szenarios differ in the way that the parent company receives dividends from its captive insurer. In addition, the parent is also given the means to influence the captive's decisions by imposing discipline. We demonstrate that both, the insurer as well as the captive will show moral hazard behavior. However - albeit legal costs and dividend payments introduce a principal-agent conflict also in the case of a captive insurer, the parent company's power to give binding instructions and impose disciplines on the captive and its managers appears to be an effective means to resolve such inefficiencies and moral hazard problems. 

Optimal reinsurance programs for a portfolio of life annuities

Paolo De Angelis, University of Rome "La Sapienza", Italy
Nicolino E. D'Ortona, University of Sannio, Italy
Gabriella Marcarelli, University of Sannio, Italy

Abstract. The objective of this paper is to analyze - in a Risk-Based Capital framework - the equilibrium conditions between the Insurer (Cedant) and the Reinsurer with respect to linear and non-linear reinsurance strategies or appropriate combinations thereof. The analysis is conducted through a stochastic simulation of the management model of an insurance company managing a portfolio of life annuities.

Development of a Medical Productivity Index for health insurance beneficiaries

Stephen T. Parente, Ph.D., University of Minnesota and Health Systems Innovation, LLC, USA

Abstract. In this paper, a Medical Productivity Index (MPI) is proposed as such a metric to capture the value of care received by patients from medical providers. For the health sector, such a metric could address the growing concern that medical care expenditures are sapping the economic vitality of a nation if these outlays show a productivity gain. The two primary components of the MPI are a measure of health outcomes and a measure of medical care effort. The MPI is applied to a national sample of Medicare 2007-2009 claims data. Application of the MPI shows both a cyclical and long term trend in medical care productivity. There are substantial regional variations in MPI as well. Extensions of the MPI could provide disease and insurance contract specific sub-sector component comparisons in future applications. The use of MPI to retrospective claims and contemporary claims data provides a technology to track changes in medical productivity to gauge the impact of future health reform and medical technologies as well as an aging society to patients and the health care industry. 

Market value of insurance liability and life insurance securitization in a CDO framework

Shamita Dutta Gupta, Ph.D., Professor of Mathematics, Department of Mathematics, Pace University, New York, USA

Abstract. In this work, we will study the market value of insurance liability and life insurance securitization in a collateralized debt obligation (CDO) framework. The key concept of CDO technology is the tranching of the liabilities. The senior tranches has the priority over the junior tranches. If we consider the policyholder as senior tranche and the insurance company as the junior tranche, we could study the life insurance company's operation in a CDO framework. Specifically, we derive a market value of insurance liability formula, study the benefit of life insurance securitization. An example is given to illustrate the concept. To simplify, we assume the tax rate is zero. 

Effective factors in corporate demand for insurance: empirical evidence from Iran

Saied Sehhat, Ph.D. of Business Management, Assistance Professor, Allameh Tabatabae'i University, Iran
Vahid Najafi Kalyani, MA of Business, Insurance Management, Allameh Tabatabae'i University, Iran

Abstract. Corporations and individuals purchase insurance with different motivation. Risk aversion is individuals' main incentive in the purchase of insurance policy, while corporations' motivation for insurance policy purchasing is influenced by a variety of factors. Researchers have proposed several theories on corporate incentives for purchasing insurance policies. Among reasons for corporation's insurance demand, transaction costs, expected bankruptcy costs, tax optimization, firm size, share ownership, debt to asset ratio (leverage), underinvestment and type of industry can be referred to. Since it is difficult to get access to information about corporate insurance purchase, few empirical studies have been done in this subject. In this study, critical factors in demand for property insurance by the listed companies on Tehran Stock Exchange during 2008-2009 have been investigated. Research's results, in accordance to our hypothesis, show that large companies with higher bankruptcy costs and operational risk compared to other companies demand more property insurance. In addition, type of industry has a significant effect on the amount of insurance purchase by corporate. Companies operating in service industry demand more property insurance relative to other companies. Contrary to our expectations, tax incentives, majority shareholders ratio and underinvestment were not found as determinants of property insurance purchase by the listed companies in the stock exchange. 

Embedded option in pension funds: the case of conditional indexation policy

Rosa Cocozza, Professor of Financial Risk Management, Department of Management, Faculty of Economics, The University of Napoli "Federico II", Italy
Angela Gallo, Researcher of Financial Institution Management, Department of Management, Faculty of Economics, The University of Salerno, Italy
Giuseppe Xella, Ph.D., Course in Mathematics for Economics and Finance, Department of Mathematics and Statistics, Faculty of Economics, The University of Napoli "Federico II", Italy

Abstract. In the last decade the financial crises have led many pension funds to adopt different management approach to overcome the arising difficulties to maintain a solid financial status. Among these, the adoption of an indexation policy, which is now conditional on the solvability of the fund, have been widely adopted. Pension funds recognizing conditional inflation indexation targets are obliged to pay an additional payoff that is linked to the inflation rate through some specific rule. The additional payoff normally takes the form of a contingent claim conditional to a "measure" of sustainability of the payoff itself; in most cases, the measure is linked to an asset and liability ratio able to capture and guarantee the solvability of the fund itself. Therefore, a full valuation of the obligation towards fund's participants and the definition of an optimal investment strategy cannot exclude the proper appraisal of this additional option. The option payoff is conditional to a measurement asset that is different from the reference-underlying asset. This structure recalls a barrier option with different measurement and payoff asset. The paper investigates the opportunity to apply barrier option scheme to the case of a pension fund, whose indexation target is conditional to a specific value of the funding ratio. Results derive from a simulation procedure applied to an exemplar case by means of scenario-based analysis. Numerical results give the opportunity to state the absolute value of the "inflation option" and the relative value with respect to the fund's liabilities. An adequate valuation of this embedded option is important for fund managers to properly adopt hedging strategy of pension fund risks; it can help the corporate sponsors to assess the claim the pension funds has on its balance sheet; the beneficiaries to assess the impact on their pension value of change in policies; finally, it can support the regulator to monitor the solvability of the funds, whereas the embedded options value is substantial relative to the size of the liabili ties.