Introduction�� Insurance and Its Economic Role 1.1 Basics and Definitions 1.2 Risks and Their Development Over Time 1.3 Macroeconomic Importance of Insurance 1.4 Functions of Insurance 1.5 Major Determinants of the Demand for Insurance 1.5.1 The Effects of Wealth and Income 1.5.2 The Effect of Price 1.6 System Analysis and Organization of the Book 1.E Exercises Risk�� Measurement Perception��and Management 2.1 Definition and Measurement of Risk 2.1.1 Definition of Risk 2.1.2 Measurement of Risk 2.2 Subjective Perception of Risk��Risk Aversion��and the Risk Utility Function 2.2.1 Risk Perception as a Subjective and Cultural Phenomenon 2.2.2 Risk Aversion and the Risk Utility Function 2.3 Willingness to Pay for Certainty��Risk Aversion��and Prudence 2.3.1 Willingness to Pay for Certainty��Certainty Equivalent��and Risk Premium 2.3.2 Risk Premium and Coefficients of Risk Aversion 2.3.3 Prudence and Higher-Order Derivatives of the Risk Utility Function 2.4 Estimates of Risk Aversion 2.4.1 Microeconoraie Evidence 2.4.2 Macroeconomic Evidence 2.5 Instruments of Risk Management 2.6 Effectiveness of Risk Management and Risk Policy Measures 2.A Appendix�� Stochastic Dominance 2.A.1 First-Degree Stochastic Dominance 2.A.2 Second-Degree Stochastic Dominance 2.E Exercises 3 Insurance Demand I�� Decisions Under Risk Without Diversification Possibilities 3.1 The Expected Utility Maximization Hypothesis 3.2 Theory of Insurance Demand 3.2.1 The Basic Model 3.2.2 Insurance Demand in the Presence of Irreplaceable Assets 3.3 Demand for Insurance Without Fair Premiums 3.3.1 Optimal Degree of Coverage Without Fair Premiums. 3.3.2 Risk Aversion as a Determinant of Insurance Demand 3.3.3 Premium Rate and Wealth as Determinants of Insurance Demand 3.3.4 Pareto-Optimal Insurance Contracts 3.4 Demand for Insurance with Multiple Risks 3.5 Relation Between Insurance Demand and Prevention 3.6 Critique of the Expected Utility Hypothesis and Alternatives 3.6.1 Anomalies of Expected Utility Theory 3.6.2 Alternatives to Expected Utility Theory 3.E Exercises 4 Insurance Demand �� Decisions Under Risk with Diversification Possibilities 4.1 Risk Management and Diversification 4.1.1 Risk Management and Internal Diversification 4.1.2 Risk Diversification Through the Capital Market 4.1.3 The Capital Asset Pricing Model��CAPM�� 4.1.4 Arbitrage Pricing Theory��APT�� 4.2 Risk Management��F(xi��n)orward Contracts��F(xi��n)utures��and Options 4.2.1 Hedging Through Forward Contracts and Options 4.2.2 Hedging Through Stock Options 4.3 Corporate Demand for Insurance 4.3.1 Demand for Insurance in the Light of Capital Market Theory 4.3.2 Empirical Studies of Corporate Demand for Insurance 4.3.3 Reasons for Corporate Demand for Insurance Not Related to the Capital Market 4.E Exercises 5 The Insurance Company and Its Insurance Technology 5.1 Financial Statements of an Insurance Company 5.1.1 The Balance Sheet 5.1.2 Operational Statement 5.2 Objectives of the IC 5.2.1 Theoretical Considerations 5.2.2 Empirical Evidence Concerning the Importance of IC Objectives 5.3 Survey of Insurance Technology of an IC 5.3.1 What is the Output of an IC�� 5.3.2 Instruments of Insurance Technology 5.4 Choice of Distribution Channel 5.4.1 Main Distribution Channels for Insurance Products 5.4.2 The Principal-Agent Relationship as the Underlying Problem 5.4.3 A Comparison of Cost of Distribution Channels Using U.S.Data 5.4.4 A Study Relating Performance to Incentives 5.5 Underwriting Policy 5.5.1 Instruments of Underwriting Policy 5.5.2 A Simple Model of Risk Selection 5.6 Controlling Moral Hazard Effects 5.7 Reinsurance 5.7.1 Functions of Reinsurance 5.7.2 Types of Reinsurance 5.7.3 A Model of Demand for Reinsurance Based on Option Pricing Theory 5.7.4 Empirical Testing of the Model 5.8 Capital Investment Policy 5.E Exercises 6 The Supply of Insurance 6.1 Traditional Premium Calculation 6.1.1 Claims Process and Loss Distribution 6.1.2 Basics of Probability Theory and Insurer's Risk 6.1.3 Premium Principles 6.2 Financial Models of Insurance Pricing 6.2.1 Portfolio Optimization by the IC 6.2.2 Pricing According to Insurance CAPM 6.2.3 Pricing According to Option Pricing Theory 6.2.4 Empirical Evidence on the Actual Behavior of IC 6.3 Economies of Scope 6.3.1 Economies of Scope and Properties of the Cost Function 6.3.2 Empirical Relevance of Economies of Scope 6.3.3 Stochastic Economies of Scope 6.4 Economies of Scale 6.4.1 Definitional Issues 6.4.2 Empirical Relevance of Economies of Scale in Life Insurance 6.4.3 Empirical Relevance of Economies of Scale in Non-life Insurance 6.4.4 Alternatives and Extensions 6.4.5 Scale Economies and Size of Market 6.E Exercises Insurance Markets and Asymmetric Information 7.1 Asymmetric Information and Its Consequences 7.2 Moral Hazard 7.2.1 Definition and Importance of Moral Hazard 7.2.2 Ex-Ante Moral Hazard 7.2.3 Market Equilibrium with Ex-Ante Moral Hazard 7.2.4 Empirical Evidence on Ex-Ante Moral Hazard 7.2.5 Ex-Post Moral Hazard in Short-Term Disability Insurance 7.3 Adverse Selection 7.3.1 Adverse Selection in a Single-Period Framework 7.3 ��2 Empirical Relevance of Adverse Selection 7.3.3 Adverse Selection in a Multi-Period Context 7.3.4 Empirical Evidence Regarding the Experience-Rating Model 7.4 Adverse Selection and Moral Hazard in Combination 7.E Exercises Regulation of Insuranee 8.I Objectives and Types of Insurance Regulation 8.1.1 Objectives of Insurance Regulation 8.1.2 Avoidance of Negative Externalities 8.1.3 Material Regulation 8.1.4 Regulation Limited to Formal Requirements 8.1.5 Historical Differences in Insurance Regulation Between Countries 8.2 Three Competing Theories of Regulation 8.2.1 Public Interest Theory 8.2.2 Capture Theory 8.2.3 Market for Regulation Theory 8.2.4 Empirically Testable Implications for Insurance 8.3 Effects of Insurance Regulation 8.3.1 Evidence from the United States 8.3.2 Risk-Based Capital as the U.S.Regulatory Response 8.3.3 Evidence from Europe 8.4 Recent Trends in Insurance Regulation 8.4.1 The Financial Crisis of 2007-2009 8.4.2 The Convergence of Banking and Insurance and Regulation 8.4.3 Systemic Risk in Insurance Markets�� 8.4.4 Characterization of Recent Regulatory Initiatives 8.E Exercises 9 Social Insurance 9.1 Importance of Social Insurance 9.2 Why Social Insurance�� 9.2.1 Social Insurance as an Efficiency-Enhancing Institution 9.2.2 Social Insurance as an Instrument Wielded by Political Decision Makers 9.3 Overview of the Branches of Social Insurance 9.3.1 Structural Characteristics of Social Insurance 9.3.2 Importance of Branches of Social Insurance 9.4 Requirements for Etficient Social Insurance 9.4.1 Comparing the Efficiency of Provision for Old Age 9.4.2 Efficiency Assessment from a Portfolio Theory Perspective 9.5 Macroeconomic Impacts of Social Insurance 9.5 ��1 Impacts of Provision for Old Age 9.5.2 Impacts of Social Health Insurance 9.5.3 Impacts of Unemployment Insurance 9.5.4 Optimal Amount of Social Insurance 9.E Exercises 10 Challenges Confronting Insurance 10.1 Globalization of International Economic Relations 10.1.1 Glohalizatioa and Corporate Insurance 10.1.2 Globalization and Individual Insurance 10.2 Changes in Science and Technology 10.2.1 Genetic Information 10.2.2 Advances in Information Technology 10.3 Changes in Legal Norms 10.3.1 Principal Elements of Insurance Contract Law 10.3.2 Consequences of Deregulation 10.4 Increased Frequency and Severity of Catastrophic Events 10.4.1 New Elements of Insurance Technology 10.4.2 Issues Linked to Reinsurance of Catastrophic Risks 10.4.3 Alternative Risk Transfer Through Capital Markets 10.5 Demographic Change 10.5.1 Aging of Population 10.5.2 Increasing Share of One-Person Households 10.6 Final Remarks References Author Index Subject Index