Are We Heading Toward a Reinsurance Bubble?

As a topic, "shadow insurance" may have a certain MEGO quality -- that's "My Eyes Glaze Over" -- but a new paper called "Shadow Insurance" (abstract; PDF) by Ralph S.J. Koijen and Motohiro Yogo is well worth a look:

Life insurance and annuity liabilities of U.S. life insurers were $4,068 billion in 2012, which is substantial even when compared to $6,979 billion in savings deposits for U.S. depository institutions (Board of Governors of the Federal Reserve System 2013). However, there is little research on life insurer liabilities, especially in comparison to the large banking literature. The reason, perhaps, is the traditional view that life insurer liabilities are safe (and boring) because they are more predictable, longer maturity, and less vulnerable to runs. Hence, all of the interesting action is on the asset side, where life insurers take on some investment risk. This paper shows that developments in the life insurance industry over the last decade shatters this traditional view. As a consequence of changes in regulation, life insurers are now using reinsurance to move liabilities from operating companies that sell policies to less regulated and unrated shadow reinsurers. These shadow reinsurers are captives or special purpose vehicles in U.S. states (e.g., South Carolina and Vermont) or offshore domiciles (e.g., Bermuda, Barbados, and the Cayman Islands) with more favorable capital regulation or tax laws. In contrast to traditional reinsurance with third-party reinsurers, there is no risk transfer in these transactions because the liabilities stay within the same holding company.

Healthcare Needs Insurance Companies Like a Fish Needs a Bicycle

My reveries about toasts landing butter side down — the subject of an upcoming blog entry — were pleasantly broken by the discussion on this blog of Ezekiel Emanuel’s analysis of healthcare spending, in which Emanuel goes to town on Left and Right policy ideas for cutting spending. Among his criticisms of Left ideas:

[I]t turns out that the combined profits of the country’s five largest for-profit health insurance companies — United, WellPoint, Aetna, Humana and Cigna — were $11.7 billion, only 0.5 percent of total health-care spending. Even confiscating every penny of those profits would add up to less than half of the cost-saving threshold.

I liked how he quoted the savings as a dimensionless number (the percentage of total healthcare spending).

Are Bad Storms Good Long-Term News for Insurance Companies?

According to the National Weather Service's Storm Prediction Center in Norman, Okla., there have been 1,151 tornadoes reported (though not confirmed) so far this year. By comparison, there were 1,282 tornadoes during all of last year, and a total of 1,156 in 2009. This is resulting in billions of dollars in damage claims across much of the South and Midwest. According to EQECAT, which provides disaster and risk models to insurance firms, weather-related losses could cost insurers upwards of $10 billion in the U.S. this year, up from an average of between $2 and $4 billion per year.

But while the short-term impact will obviously be difficult as insurance companies cover record losses, the recent rise in weather-related disasters could end up being good for their stock prices.

The Bad Man's View: Home Robbery as Opportunity

One of the occupational hazards of teaching law is that I often take what Oliver Wendell Holmes called a “bad man’s view” of human motivation (my beloved spouse just told me this is the understatement of the century). Holmes, in his paradigm shifting “The Paths of the Law,” said :

If you want to know the law and nothing else, you must look at it as a bad man, who cares only for the material consequences which such knowledge enables him to predict, not as a good one, who finds his reasons for conduct, whether inside the law or outside of it, in the vaguer sanctions of conscience.

I find that this cynical tool for legal prediction – which parallels a presumption of narrow economic self-interest – often guides the way I interpret actions and events.

Michigan's Big Industry

My Michigan-dwelling grandson will be 15 soon and will start learning to drive. He can't get a full license until he's 17, though, as the state wants to limit times and amounts of teen driving, presumably for safety reasons. That's sensible - teen drivers are more likely to get into accidents. Despite this, the state prevents insurance companies from requiring people to purchase additional coverage for the teenager, even though between ages 16 and 17 the boy will be driving on his own.

Do You Need "Disgrace Insurance"?

Celebrity endorsements are all well and good ... until the celebrity starts misbehaving. That's where the insurance companies come in.

Ticketfree Responds

I received the following email from Kyle Tower, one of the lead members of the Ticketfree team, responding to my earlier post on speeding insurance.

Never Pay a Speeding Ticket Again?

A couple weeks ago, Ian Ayres became briefly fascinated and somewhat appalled by the appearance of a new Internet business that offered a sort of insurance against speeding tickets. In return for an annual fee of $169, ticketfree.org promised to reimburse you for the costs of up to $500 in moving violations. Then, the site suddenly disappeared. Why?

Getting Fat? Maybe It's Your Health Insurance

A new N.B.E.R. working paper finds a link between health insurance and obesity, and suggests that the better insured you are, the fatter you're likely to be. We already knew that people with health insurance consume more healthcare resources than the uninsured; it appears they're consuming more calories, too.

Freakonomics in the Times Magazine: Not-So-Free Ride

Dubner and Levitt have written a column for the Times Magazine‘s inaugural “green” issue of Sun., April 20. The subject: how auto travel produces a variety of negative externalities — pollution, carbon emissions, congestion, accidents — and how one new strategy may be able to help: pay-as-you-drive (P.A.Y.D.) auto insurance. The strange truth is that […]