87498 - The Economics of Insurance Contracts

Academic Year 2019/2020

  • Teaching Mode: Traditional lectures
  • Campus: Bologna
  • Corso: Second cycle degree programme (LM) in Law and Economics (cod. 9221)

Learning outcomes

At the conclusion of this course, students will be able to describe the economic characteristics of risk mitigation and insurance. They will have developed an understanding of risk management as well as of agency theory and market failure due to information asymmetry, as well as the economic rationale for regulatory intervention to improve market efficiency. They will also examine case studies in the insurance market which regulatory failure has arisen and be able to propose regulatory and market solutions that are based on economic theory (as well as practical and legal considerations).

Course contents

1. Introduction to Insurance

2. The Welfare Economics of Insurance

3. The Anatomy of Market Failure

4. Asymmetric Information in Insurance Contracts

5. Adverse Selection and Moral Hazard in Insurance Markets

6. The “Judgement Proof” and Other Regulatory Problems and Solutions

7. Insurance Market Regulation: Problems of Market and Government Failure

8. Case Studies in Risk Management, Insurance and Financial

Readings/Bibliography

Essential Reading

Journal papers and book chapters, to be advised, but include the following:

Books

Cullis J and Jones P (2009) Public Finance and Public Choice, 2ndedn, Oxford University Press: Oxford, Chapter 1.

Zweifel P and Eisen R (2012) Insurance Economics, Springer: Heidelberg, Chapters 1 & 2.

Articles

Akerlof GA (1970) The Market for “Lemons”: Quality Uncertainty and the Market Mechanism, Quarterly Journal of Economics, 84: 488-500.

Bator FM (1958) The Anatomy of Market Failure, The Quarterly Journal of Economics, 72: 351-79.

Connelly LB and Brown HS III (2010) Private Health Insurance in Australia: Community Rating, But at What Price(s)? The Journal of Health Care Finance, Vol. 36 No.4, Summer, pp.80-92.

Rowell D and Connelly LB (2012) A History of The Term ‘Moral Hazard’, Journal of Risk and Insurance, 79: 1051-1075.

Shavell S (1986) The Judgement Proof Problem, International Review of Law and Economics, 6: 45-58.


Further/Recommended Reading

Books

TBA.

Articles

TBA, but includes:

Rowell D, Nghiem HS and Connelly LB (2017) Two Tests for Ex Ante Moral Hazard in a Market for Automobile Insurance, Journal of Risk and Insurance, 84: 1103-1126.

Manning, W.G., Newhouse, J.P., Duan, N. et al. (1987) "Health Insurance and the Demand for Medical Care: Evidence from a Randomised Experiment", The American Economic Review, 77: pp.251-77.

Pauly, M.V., Kunreuther, H. and Hirth, R. (1995) Guaranteed Renewability in Insurance. Journal of Risk and Uncertainty, 10: 143-56.

Rothschild, M. and Stiglitz, J. (1976) Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information, The Quarterly Journal of Economics, 90: 629-649.


Teaching methods

The teaching methods include

  • Traditional lectures
  • Student-Faculty Discussions (including “journal club”, debate, and discussion of relevant contemporary regulatory/market issues)

Lectures

The course includes traditional lectures, and the essential readings (marked with an asterisk (*), above) which are used to introduce the key concepts and evidence. These will also be supplemented by further reading and online resources, which will be available on the course’s teaching page.

“Journal Club”

In addition to traditional lectures and readings, student participation is a central part of the course design and learning methods. Between one-third-to-one-half of most classroom sessions (apart from the introductory class) will involve the direct participation in discussion and debate. Tasks will include discussions in a “journal club” format: one or more class members will be asked to lead a discussion of a nominated paper; and typically at least one more student will be asked to be the “secondary” discussant of the paper. The role of the nominees is not to provide a presentation of the paper, but to lead the class discussion by preparing questions and comments about the paper. All class members will be expected to have read the paper and to contribute to discussion. The purpose of this approach is primarily to encourage students to bring the course materials to bear on the selected topics (together with their own knowledge and experience, where relevant) to encourage a critical discussion of the course contents and their relevance to contemporary issues.

Debate

Discussions and debate will be encouraged through the “journal club” approach and may also involve the nomination of a contemporary topic for debate. For instance, students may be allocated to “Affirmative” and “Negative” teams and asked to debate a nominated topic using the concepts from the course and their own critical review of the literature. (For instance, a suitable topic for debate may be the assertion that “Market Failure Caused the Global Financial Crisis”. The Affirmative team(s) would make the case in the affirmative, and the Negative team would put the opposing position.)


Assessment methods

There are three elements of assessment:

  1. Contributions to Classroom Discussion/Debate (10%)
  2. Group Debate: Essay and Presentation (30%)
  3. Final examination (60%)

Contributions to Classroom Discussion/Debate (10%)

Contributions to the classroom discussions and debate are worth 10% of the final grade for this course. Contributions to debate obviously involve participation in debate, but the contribution to a debate depends on how much the participant influences a discussion by asking meaningful questions or making thought-provoking points. (This distinction will be discussed briefly in the first lecture.)

Group Debate: Essay and Presentation (30%)

This item of assessment will be conducted in groups. Groups will be allocated by Professor Connelly (the size and number of groups to be partly determined by total enrolment in the course). The groups will be required to produce an essay arguing in the Affirmative or the Negative on a topic nominated by the Professor. The essay grade will comprise half of the total for this assessment item (i.e., will be graded out of a maximum of 15 marks). The Debate will require each group member to present part of the argument (e.g., opening, middle, closing), with alternating presentations by the opposing team (e.g., Team 1 Group Member 1 speaks first, followed by Team 2 Group Member 2, and so on) in the form of a debate. (Members of the same team will be allowed to collude during the course of the debate—except during the presentation of a team member who “has the floor”—if they want to do so.) The presentation/debate component of this assessment item is also worth 15 marks.

Note: as a rule, both the essay and presentation marks will be awarded as group marks. In the event of wide disparities in the performance of team members, though, individual marks for the oral part of this assessment item may be invoked.

Final Examination (60%)

The final essay examination will be of 2 hours duration with 10 minutes’ perusal time. Students will choose two (2) essays from four (4) options, with each essay response to be afforded equal weight for this item. Students will be permitted to bring one double-sided sheet of A4 paper of notes to the examination and to rely upon it during the exam. Calculators and other electronic devices, including phones, are neither required nor permitted to be used during the examination.

Teaching tools

Slides and reading materials will be made available before each class.

Please consult Professor Connelly's teaching site for this course to download supporting materials.

Links to further information

https://iol.unibo.it/course/view.php?id=23747

Office hours

See the website of Luke Brian Connelly