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"Powers, Michael R"
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A Criterion for Extending Continuous-Mixture Identifiability Results
Mixture distributions provide a versatile and widely used framework for modeling random phenomena, and are particularly well-suited to the analysis of geoscientific processes and their attendant risks to society. For continuous mixtures of random variables, we specify a simple criterion—generating-function accessibility—to extend previously known kernel-based identifiability (or unidentifiability) results to new kernel distributions. This criterion, based on functional relationships between the relevant kernels’ moment-generating functions or Laplace transforms, may be applied to continuous mixtures of both discrete and continuous random variables. To illustrate the proposed approach, we present results for several specific kernels, in each case briefly noting its relevance to research in the geosciences and/or related risk analysis.
Journal Article
The Political Economy of Chinese Finance
Volume 17 of International Finance Review focusses on a variety of issues relating to the political economy of Chinese finance.
eBook
Changes in Lung Clearance Index in Preschool-aged Patients with Cystic Fibrosis Treated with Ivacaftor (GOAL): A Clinical Trial
The lung clearance index (LCI) measured by multiple-breath washout has been shown to be a sensitive measure to capture lung function abnormalities in patients with CF and is feasible for use in preschool children because it requires minimal cooperation. LCI significantly improved from baseline at both 1 month (median change in LCI from baseline, - 23.6% [IQR, -34.2 to -20.2]; P < 0.001) and 6 months post-treatment (median change in LCI from baseline, - 24.6% [IQR, -31.4 to -20.4]; P < 0.001). [...]rapid and sustained improvements in LCI were demonstrated with ivacaftor therapy that exceeded the between-test reproducibility and thus the physiologically relevant change for quarterly LCI measurements in health, which we recently demonstrated to be 15% in preschool children (10). Lung clearance index as an outcome measure for clinical trials in young children with cystic fibrosis: a pilot study using inhaled hypertonic saline.
Journal Article
Acts of God and man
Much has been written about the ups and downs of financial markets, from the lure of prosperity to the despair of crises. Yet a more fundamental and pernicious source of uncertainty exists in today's world: the traditional \"insurance\" risks of earthquakes, storms, terrorist attacks, and other disasters. Insightfully exploring these \"acts of God and man,\" Michael R. Powers guides readers through the methods available for identifying and measuring such risks, financing their consequences, and forecasting their future behavior within the limits of science.
A distinctive characteristic of earthquakes, hurricanes, bombings, and other insurance risks is that they impact the values of stocks, bonds, commodities, and other market-based financial products, while remaining largely unaffected by or \"aloof\" from the behavior of markets. Quantifying such risks given limited data is difficult yet crucial for achieving the financing objectives of insurance. Powers begins with a discussion of how risk impacts our lives, health, and possessions and proceeds to introduce the statistical techniques necessary for analyzing these uncertainties. He then considers the experience of risk from the perspectives of both policyholders and insurance companies, and compares their respective responses.
The risks inherent in the private insurance industry lead naturally to a discussion of the government's role as both market regulator and potential \"insurer of last resort.\" Following a thoughtful and balanced analysis of these issues, Powers concludes with an interdisciplinary investigation into the nature of uncertainty, incorporating ideas from physics, philosophy, and game theory to assess science's limitations in predicting the ramifications of risk.
eBook
Decomposing Asymmetric Information in China's Automobile Insurance Market
Distinguishing between adverse selection and moral hazard is a difficult but important issue in insurance economics. In the present work, we model and evaluate the distinct roles of adverse selection, ex ante moral hazard, and ex post moral hazard in China's automobile insurance market. Our econometric analysis supports the following conclusions: (1) the effect of asymmetric information on the probability of claims is significant; (2) the effect of ex ante moral hazard on the probability of claims is not significant, establishing adverse selection as the underlying source of information asymmetry; (3) the effect of asymmetric information (including ex ante moral hazard) on the severity of claims is not significant; and (4) the impact of ex post moral hazard on claim severity is significant for a subset of lower-coverage policyholders. Consequently, it may be advisable for Chinese automobile insurance companies to allocate greater resources to both underwriting (i.e., selecting policyholders) and auditing claims.
Journal Article
Paradox-proof utility functions for heavy-tailed payoffs: Two instructive two-envelope problems
We identify restrictions on a decision maker's utility function that are both necessary and sufficient to preserve dominance reasoning in each of two versions of the Two-Envelope Paradox (TEP). For the classical TEP, the utility function must satisfy a certain recurrence inequality. For the St. Petersburg TEP, the utility function must be bounded above asymptotically by a power function, which can be tightened to a constant. By determining the weakest conditions for dominance reasoning to hold, the article settles an open question in the research literature. Remarkably, neither constant-bounded utility nor finite expected utility is necessary for resolving the classical TEP; instead, finite expected utility is both necessary and sufficient for resolving the St. Petersburg TEP.
Journal Article
Bounded, Sigmoid Utility for Insurance Applications
Applying a well-known argument of Karl Menger to an insurance version of the St. Petersburg Paradox (in which the decision maker is confronted with losses, rather than gains), one can assert that von Neumann-Morgenstern utility functions are necessarily concave upward and bounded below as decision-maker wealth tends to negative infinity. However, this argument is subject to two potential criticisms: (1) infinite-mean losses do not exist in the real world; and (2) the St. Petersburg Paradox derives its force from empirical observation (i. e., that actual decision makers would not agree to an arbitrarily large insurance bid price to transfer an infinite-mean loss), and thus does not impart logical necessity. In the present article, these two criticisms are addressed in turn. We first show that, although infinite-mean insurance losses technically do not exist, they do provide a reasonable model for certain large (i. e., excess and reinsurance) property-liability indemnities. We then employ the Two-Envelope Paradox to demonstrate the logical necessity of concave-upward, lower-bounded utility for arbitrarily small (i. e., negative) values of wealth. Finally, we note that recognizing the bounded, sigmoid nature of utility functions challenges certain fundamental understandings in the economics of insurance demand, and can lead to vastly different conclusions regarding the bid price for insurance.
Journal Article
The Relationship Between Regulatory Pressure and Insurer Risk Taking
The article examines the risk-taking behavior of property–liability insurers in the presence of risk-based capital regulation. An option pricing model is developed to evaluate the expected regulatory cost and predict a nonlinear relationship between regulatory pressure and insurers' risk taking. We then conduct an empirical test using the simultaneous threshold regression. The result shows that there is a threshold effect of regulatory pressure on insurer risk taking. Poorly capitalized insurers seem to be aware of their proximity to regulatory interventions but do not fully respond to the impending regulatory pressure. This implies either regulatory interventions are not costly enough or they are too late, or both.
Journal Article
Using Aumann-Shapley Values to Allocate Insurance Risk
The problem of allocating responsibility for risk among members of a portfolio arises in a variety of financial and risk-management contexts. Examples are particularly prominent in the insurance sector, where actuaries have long sought methods for distributing capital (net worth) across a number of distinct exposure units or accounts according to their relative contributions to the total \"risk\" of an insurer's portfolio. Although substantial work has been done on this problem, no satisfactory solution has yet been presented for the case of inhomogeneous loss distributions- that is, losses X ∼ F
X|
λ
such that F
X|t
λ
(X) ≠ F
tX|
λ
(X) for some t > 0. The purpose of this article is to show that the value-assignment method of nonatomic cooperative games proposed in 1974 by Aumann and Shapley may be used to solve risk-allocation problems involving losses of this type. This technique is illustrated by providing analytical solutions for a useful class of multivariatenormal loss distributions.
Journal Article