Insurance Markets
Actuarial pricing, combined-ratio economics, adverse-selection dynamics, Bühlmann credibility, VaR/TVaR/SCR, and reinsurance layer pricing — every calculation live and editable.
Determinants of insurance demand
| Symbol | Determinant | Sign | Data source | Rationale |
|---|---|---|---|---|
| $\gamma$ | Coefficient of relative risk aversion | + | Barsky et al. 1997; Chetty 2006 | More risk aversion ⇒ willingness to pay above actuarially fair premium. |
| $L$ | Potential loss size | + | Claim histories; AAA reports | Larger tail losses raise demand for coverage (convex utility loss). |
| $\pi_L$ | Perceived loss probability | + | Survey (SCE); catastrophe models | Higher perceived p shifts demand up; salience bias inflates cat coverage. |
| $W$ | Wealth | ± | SCF | Above self-insurance threshold demand falls; below, credit-constrained households under-insure. |
| $P$ | Premium loading factor | − | SNL; NAIC filings | Rothschild-Stiglitz: high loadings drive low-risks out first. |
| $\tau$ | Tax subsidy (esp. employer health) | + | IRS §106; ACA §36B | Exclusion from taxable income lowers effective premium. |
| $M$ | Mandate / penalty | + | IRA; state mandates | Individual mandates raise take-up especially among low-risk pool. |
| $Fin$ | Financial literacy | + | S&P Global FinLit | Determines correct expected-utility valuation of insurance. |
| $R$ | Regulatory guarantees / rating | + | AM Best; S&P | Counterparty credit risk depresses demand at low ratings. |
| $\rho_{cor}$ | Correlation of loss with wealth shocks | + | Portfolio return series | Hedging demand rises when loss and wealth are positively correlated. |
Determinants of insurance supply
| Symbol | Determinant | Sign | Data source | Rationale |
|---|---|---|---|---|
| $\mathbb{E}[L]$ | Expected claims (pure premium) | + | Loss triangles; chain-ladder | Floor of any premium; pass-through to price is near unit. |
| $\sigma_L$ | Loss volatility | + | Cat model / experience | Determines risk margin and Solvency II SCR. |
| $r_f$ | Risk-free rate | − | Treasury curve | Higher r_f raises float income; competitive markets pass some back as lower premium. |
| $K$ | Statutory capital / solvency capacity | + | NAIC; SNL | Slack capital lowers required risk margin; binding constraint raises price. |
| $Re$ | Reinsurance price / capacity | − | Guy Carpenter RoL indices | Cheap reinsurance shifts primary supply right. |
| $\tau_p$ | Premium & surplus taxes | − | State DOI filings | Direct wedge on marginal premium. |
| $e$ | Expense ratio (acquisition + admin) | + | NAIC Blue Books | Combined-ratio loading; ~25–30% for personal lines. |
| $F$ | Fraud rate / severity | + | CAIF; NICB | Raises pure premium and required reserving. |
| $Reg$ | Rate regulation (prior-approval states) | ± | NAIC RRD | Suppresses cross-subsidies; can create shortages in high-risk zones. |
| $IT$ | Underwriting technology / telematics | − | Vendor reports | Reduces asymmetric information, lowers loading needed for cross-subsidy. |