Irina Gemmo: Catalogue data in Spring Semester 2021

Name Dr. Irina Gemmo
DepartmentManagement, Technology, and Economics

363-1017-00LRisk and Insurance Economics3 credits2GI. Gemmo
AbstractThe course covers the economics of risk and insurance, in particular the following topics will be discussed:
2) individual decision making under risk
3) fundamentals of insurance
4) information asymmetries in insurance markets
5) the macroeconomic role of insurers
ObjectiveThe goal is to introduce students to basic concepts of risk, risk management and economics of insurance.
Content“The ability to define what may happen in the future and to choose among alternatives lies at the heart of contemporary societies. Risk management guides us over a vast range of decision-making from allocation of wealth to safeguarding public health, from waging war to planning a family, from paying insurance premiums to wearing a seatbelt, from planting corn to marketing cornflakes.” (Peter L. Bernstein)

Every member of society faces various decisions under uncertainty on a daily basis. Many individuals apply measures to manage these risks without even thinking about it; many are subject to behavioral biases when making these decisions. In the first part of this lecture, we discuss normative decision concepts, such as Expected Utility Theory, and contrast them with empirically observed behavior.

Students learn about the rationale for individuals to purchase insurance as part of a risk management strategy. In a theoretical framework, we then derive the optimal level of insurance demand and discuss how this result depends on the underlying assumptions. After learning the basics for understanding the specifications, particularities, and mechanisms of insurance markets, we discuss the consequences of information asymmetries in these markets.

Insurance companies do not only provide individuals with a way to decrease uncertainty of wealth, they also play a vital role for businesses that want to manage business risk, for the real economy by providing funds and pooling risks, and for the financial market by being important counterparties in numerous financial transactions. In the last part of this lecture, we shed light on these different roles of insurance companies. We compare the implications for different stakeholders and (insurance) markets in general.

Finally, course participants familiarize themselves with selected research papers that analyze individuals’ decision-making under risk or examine specific details about the different roles of insurance companies.
LiteratureMain literature:

- Eeckhoudt, L., Gollier, C., & Schlesinger, H. (2005). Economic and Financial Decisions under Risk. Princeton University Press.
- Zweifel, P., & Eisen, R. (2012). Insurance Economics. Springer.

Further readings:

- Dionne, G. (Ed.). (2013). Handbook of Insurance (2nd ed.). Springer.
- Hufeld, F., Koijen, R. S., & Thimann, C. (Eds.). (2017). The Economics, Regulation, and Systemic Risk of Insurance Markets. Oxford University Press.
- Niehaus, H., & Harrington, S. (2003). Risk Management and Insurance (2nd ed.). McGraw Hill.
- Rees, R., & Wambach, A. (2008). The Microeconomics of Insurance, Foundations and Trends® in Microeconomics, 4(1–2), 1-163.