Economic theory and financial issues in insurance markets

The first chapter of this dissertation is a theoretical model of insured and insurer post-loss bargaining. I look at how insured and insurer settlement offers are affected by punitive damages. I obtain the optimal offers that the parties make to each other in the event of a loss. I examine two different punitive damage “regimes.” First, I look at “asymmetric systems” where only the insurer can have punitive damages levied against him. The second is a “symmetric system,” where both the insurer and the insurer can have awards levied against them. I also examine different court cost allocating structures and I look at how the offers and settlement likelihoods differ between systems. The second chapter seeks to determine how the punitive damage awards affect the pricing, and demand for insurance. Using a background risk model, the insured is posited to encounter insolvency risk from an insurer as well as the “risk” that he is over-indemnified in the case of punitive damages. This background risk model shows that insureds reduce their demand for insurance in the face of punitive damages, and prefer zero levels of punitive damages. The second and third model considers the problem from various “social planner” perspectives. The final model utilizes the optimal offers derived in the first chapter, and incorporates them into a demand model. The third chapter is an empirical study on how insurer company efficiency is affected by foreign ownership. I estimated efficiency scores for a sample of life insurers and regressed these scores on a number of independent variables. The results do show that insurers owned by foreign parents are generally more cost efficient (and sometimes more allocatively efficient) than their domestic counterparts. To estimate this relationship, I utilized several different methodologies (OLS, Tobit, fixed effects, and random effects). It is determined that the fixed effects models are the most appropriate for the study