Report Modifies Classical CAPM
Recent financial literature offers up theories that incorporate disaster components into the capital asset pricing model (CAPM) in order to reflect economic downturns and other company-specific issues. These theories could be extended for use in property-casualty insurance companies, such as demonstrating the differences between short- and long-tailed lines of business and the effect of natural disasters on company reinsurance programs.
Intrigued by these theories, the Theory of Risk Committee (COTOR) wanted to learn how modifications could reflect the impact of disasters on CAPM performance. So, in 2015 COTOR issued an RFP on modifying the capital asset pricing model (CAPM) to use in insurance pricing.
Two researchers, Ed Furman and Ricardas Zitikis, developed and wrote the report “An Adaptation of the Classical CAPM to Insurance: The Weighted Insurance Pricing Model,” published in the Spring 2017 E-Forum. Furman and Zitikis present and discuss an insurance version of the classical CAPM that offers economic pricing and risk capital allocation rules for a large class of risks, including those that are nonsymmetric and heavy-tailed. The report illustrates a number of examples and suggests convenient computational formulas.
Furman and Zitikis presented the report at the 2016 CAS Annual Meeting in Orlando, Florida, and have submitted a version of this report to The ASTIN Bulletin.
Risk Assessment Database Update
The Risk Assessment Database (RAD) represents an extensive analysis of the theory and empirics of risk assessment in property-casualty insurance. Formerly known as The Risk Premium Project II (RPP II), RAD was initiated by COTOR in 2000 with RPP I, a review of the actuarial and finance research done to that date. RPP II was undertaken in 2010 by Martin Eling and Hato Schmeiser, faculty at Switzerland’s University of St. Gallen, to extend the findings from RPP I with research done in the last decade and to identify challenges for future research.
Eling submitted the 2016 update in May 2017, adding 106 new qualified papers that came from literature searches conducted by University of St. Gallen researchers and from recommendations by CAS and COTOR members.
In the report, Eling notes: “The growth of literature in other emerging risk, insurance risk, and reinsurance and alternative risk transfer is disproportionally strong. This distribution can be partly explained by the fact that the journal Insurance: Mathematics and Economics is contributing the most articles to our review, [which] tends to emphasizes those subcategories.”
Visit the CAS website for more in-depth information on the current update and to access the RAD database.
ACA and Auto Claims Connected
Released in June 2017, “The Effect of Health Insurance Coverage Expansions on Auto Liability Claims and Costs” is the last of two reports from the RAND Corporation that the CAS has commissioned. Written by Srikanth Kadiyala of RAND and Paul Heaton of the University of Pennsylvania, the report addresses the question of how the Affordable Care Act’s insurance coverage expansions will affect payment for medical care provided through liability insurance such as auto insurance.
The authors particularly focused on the impact caused by the 2010 ACA dependent coverage expansion. Prior to 2010, individuals 19 and older were excluded from health insurance coverage under their parental health insurance plan. In September 2010, individuals were allowed under ACA to continue health insurance coverage until age 26. The authors used this policy change and claims data from insurers representing approximately 60 percent of the automobile passenger market to evaluate the effects of expanding health insurance coverage on auto liability claim payments.
Using a difference-in-difference research design, the authors found an approximate 10 percent reduction in the total bodily injury claim count in the policy-affected 19-25 ages when compared to the control group of individuals aged 26-34. Conditional on filing a claim, they also found an approximate nine percent reduction in the mean total auto insurance paid amount in the ages 19-25 compared to ages 26-34.
The report will be available in the last quarter of 2017 on the RAND website.
