Bermuda Insurance Development Council, evaluation of the Bermuda insurance and reinsurance markets, 2006-present; American Insurance Association, analysis of broker compensation including an economic evaluation of contingent commissions, 2005; Massachusetts Property Insurance Underwriting Association, evaluation of cost of capital and fair rate of return for property insurance, 2005-present; Estimation of cost of capital for property-liability insurance companies – Liberty Mutual Insurance Company, 1989-1995, Metropolitan Property-Casualty Insurance Company, 2003-present, Allstate Insurance Group, 2004-2005
Career and Recent Professional Awards; Teaching Awards
(5) Alpha Kappa Psi Spangler Awards, best article, Journal of Risk and Insurance; (4) Robert I. Mehr best article awards, American Risk and Insurance Association; (8) Best feature article awards, Journal of Risk and Insurance; Journal of Financial Intermediation best article of year 2000 award; (2) Casualty Acturial Society prizes for best article in Journal of Risk and Insurance; Brian Hey Prize for best financial paper, Institute of Actuaries; First Prize, Best Financial Paper, Centennial Meeting of the International Acturial Association
Abstract: Capitalization levels in the property-liability insurance industry have increased dramatically in recent years-the capital-to-assets ratio rose from 25% in 1989 to 35% by 1999. This paper investigates the use of capital by insurers to provide evidence on whether the capital increase represents a legitimate response to changing market conditions or a true inefficiency that leads to performance penalties for insurers. We estimate “best practice” technical, cost, and revenue frontiers for a sample of insurers over the period 1993-1998, using data envelopment analysis, a non-parametric technique. The results indicate that most insurers significantly over-utilized equity capital during the sample period. Regression analysis provides evidence that capital over-utilization primarily represents an inefficiency for which insurers incur significant revenue penalties.
Abstract: This paper develops a model of price determination in insurance markets. Insurance is provided by firms that are subject to default risk. Demand for insurance is inversely related to insurer default risk and is imperfectly price elastic because of information asymmetries and private information in insurance markets. The model predicts that the price of insurance, measured by the ratio of premiums to discounted losses, is inversely related to insurer default risk and that insurers have optimal capital structures. Price may increase or decrease following a loss shock that depletes the insurer's capital, depending on factors such as the effect of the shock on the price elasticity of demand. Empirical tests using firm-level data support the hypothesis that the price of insurance is inversely related to insurer default risk and provide evidence that prices declined in response to the loss shocks of the mid-1980s.