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The Meaning of Risk? Insights from The Geneva Risk and Insurance Review

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Abstract

The Geneva Association and European Group of Risk and Insurance Economists, through publications like The Geneva Risk and Insurance Review, serve as a catalyst for progress in the understanding of risk and insurance matters. The purpose of this paper is to review and summarise some of the papers published in 2012 and 2013 that could help us to understand what risk is and the implications for the insurance industry. Although the idea of risk may be difficult to conceptualise, risk is of considerable importance for the functioning of all economies and economic agents. Risk aversion, adverse selection, asymmetric information and the performance of insurance markets are important issues that are regularly discussed in the review. These issues are of particular relevance for insurers and the proper functioning of insurance markets.

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Notes

  1. See, for example, Outreville (1998, Chap. 1).

  2. Bulletin of the Commission of Insurance Terminology of the American Risk and Insurance Association, Vol. 2, No. 1, March 1966.

  3. See Outreville (2010).

  4. Outreville (2011).

  5. Willett (1901).

  6. Mangold (1868, p. 184).

  7. Hardy (1923, pp. 2–3).

  8. Mowbray and Blanchard (1930).

  9. Emery (1900, p. 104).

  10. Kulp (1956, pp. 3–4).

  11. Doherty (2013).

  12. Ericson and Doyle (2004).

  13. Thomann et al. (2012).

  14. Outreville (2014).

  15. Eeckhoudt (2012).

  16. Bertrand and Prigent (2010).

  17. Eeckhoudt and Gollier (2005).

  18. Chui (2012).

  19. Chui (2000).

  20. In mathematical terms, the variance of the wealth distribution remains the same. If the price paid for reducing the loss probability is fair and hence the mean of the wealth distribution is kept the same, the effect of self-protection is in fact a downside risk increase provided the overall variance is also kept the same.

  21. Schroyen (2013).

  22. Background risk can also influence the performance of insurance markets that must deal with adverse selection when applicants are risk-vulnerable, since they are more averse to bearing the insurable risk as a result of their exposures to background risk (Crocker and Snow, 2008).

  23. Eeckhoudt et al. (1996).

  24. Ligon and Thistle (2013).

  25. Knight (1921, p. 47).

  26. Le Roy and Singell (1987).

  27. Dumm et al. (2013).

  28. There are various reasons why a coverage-risk correlation may not be found in some markets or pools of insurance policies. Cohen and Siegelman (2010) review the literature on adverse selection in insurance markets.

  29. Chiappori and Salanié (2000).

  30. Wang et al. (2009).

  31. Akerlof (1970).

  32. Rothschild and Stiglitz (1976).

  33. For a more comprehensive review of the theory of risk classification conditional to the existence of a Nash equilibrium or not, see Crocker and Snow (2013).

  34. Riahi et al. (2013).

  35. Huang et al. (2012).

  36. The literature on the optimal insurance contract is based on the assumption that the insured’s psychological emotion does not play any role in the decision under uncertainty. Disappointment theory was first introduced by Bell (1985) and Loomes and Sugden (1986).

  37. Bourlès and Henriet (2012).

  38. Cummins and Weiss (2000) provide a statistical analysis of the economic impact of the role of the reinsurance market on the primary market capacity and efficiency.

  39. If reinsurance is available at a reasonable price, insurers would use it as a buffer for adverse changes in insurance loss distributions (Meier and Outreville, 2010).

  40. Tan and Weng (2012).

  41. See Sherris (2006)

  42. See Weiss and Chung (2004) or Outreville (2012).

  43. Hardelin and Lemoyne de Forges (2012).

  44. Froot and O’Connell (2008) have given evidence of the impact of the cost of capital on the pricing of risks in the reinsurance industry.

  45. Reinsurance is a substitute to capital holding except that it does not modify firms’ cost of risk but risk itself (see Meier and Outreville, 2010).

  46. Picard and Pinquet (2013).

  47. Hardelin and Lemoyne de Forges (2012).

  48. See Harrington et al. (2013) for a recent point of view.

  49. Meier and Outreville (2006).

  50. Manikowski and Weiss (2013).

  51. See Outreville (2013) for a comprehensive survey. When reviewing this literature, one finds no clear distinction between development and growth. Almost all papers consider GDP per capita rather than GDP growth and insurance premiums levels rather than insurance growth. Only a few recent papers consider how insurance and economic growth may be related.

  52. Chang and Lee (2012).

  53. Carter and Dickinson (1992).

  54. Enz (2000).

  55. Chui and Kwok (2008, 2009).

  56. Park and Lemaire (2012).

  57. See Outreville (2013).

  58. See Kaufmann et al. (2009). The six indicators are voice and accountability, political stability and absence of violence, government effectiveness, regulatory quality, rule of law and control of corruption. A higher score represents a sounder institutional environment.

  59. These findings complement the paper by Outreville (2007), who finds that good governance environments exert a strong impact on the choice of countries to operate by the world finance and insurance groups.

  60. Eling and Schmit (2012).

  61. Epermanis and Harrington (2006).

  62. The findings are also consistent with Epermanis and Harrington (2006) for the U.S. market.

  63. Cutler and Zeckhauser (2004) discuss selected kinds of anomalies related to insurance.

  64. The term “bounded rationality” is used to designate rational choice that takes into account the cognitive limitations of the decision-maker, limitations of both knowledge and computational capacity.

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Acknowledgements

The author was visiting the University of Turin with financial support from ICER while he was writing this paper.

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    Jean-François Outreville

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Outreville, JF. The Meaning of Risk? Insights from The Geneva Risk and Insurance Review. Geneva Pap Risk Insur Issues Pract 39, 768–781 (2014). https://doi.org/10.1057/gpp.2014.31

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