Date of Award

Summer 8-11-2015

Degree Type


Degree Name

Doctor of Philosophy (PhD)


Risk Management and Insurance

First Advisor

Ajay Subramanian

Second Advisor

Daniel Bauer

Third Advisor

Richard Phillips

Fourth Advisor

Baozhong Yang


This dissertation thesis address how aggregate shocks affect insurance firms' risk management and asset investment decisions as well as the impact of these decisions on insurance prices and regulation. The first chapter develops a signaling model to examine how insurance firms choose among retention, reinsurance and securitization especially for catastrophe risks. The second chapter examines the determination of insurance prices in an integrated equilibrium framework where insurers' assets may be subject to both idiosyncratic and aggregate shocks. The third chapter presents an empirical analysis of the hypothesized impacts of internal capital and asset risk on insurance prices as predicted by the results of the second chapter. The last chapter investigates the optimal design of insurance regulation to achieve the Pareto optimal asset and liquidity management by insurers as well as risk sharing between insurers and insurees.

Chapter 1 provides a novel explanation for the predominance of retention and reinsurance relative to securitization in catastrophe risk transfer using a signaling model. An insurer's risk transfer choice trades off the lower signaling costs of reinsurance against the additional costs of reinsurance stemming from sources such as their market power, higher cost of capital relative to capital markets, and compensation for their monitoring costs. In equilibrium, the lowest risk insurers choose reinsurance, while intermediate and high risk insurance choose partial and full securitization, respectively. An increase in the loss size increases the average risk of insurers who choose securitization. Consequently, catastrophe risks, which are characterized by low frequency-high severity losses, are only securitized by very high risk insurers. Chapter 2 develops a unified equilibrium model of competitive insurance markets where insurers' assets may be exposed to idiosyncratic and aggregate shocks. We endogenize the relationship between insurance prices and insurers internal capital that potentially reconcile the conflicting predictions of previous theories that investigate the relation using partial equilibrium frameworks. Equilibrium effects lead to a non-monotonic U-shaped relation between insurance price and internal capital. Specifically, the equilibrium insurance price first decreases with a positive shock to the internal capital when it is below certain threshold level, and then increases with a positive shock the internal capital when it is above the threshold level. Further, we also derive another testable implication that an increase in the asset default risk increases the insurance price and decrease the insurance coverage. Chapter 3 studies the property and casualty insurance industry in periods from 1992 to 2012 based on the aggregate level of NAIC data. We show that the insurance price decreases with an increase in the surplus of insurance firms at the end of the previous year when the surplus is lower than 8.5 billion, and then increase when the surplus is higher than 8.5 billion. Our results provide support for the hypothesis of a U-shaped relationship between internal capital and insurance price. Our results also provide evidence for the positive relationship between asset portfolio risk and insurance price. Chapter 4 studies the effects of aggregate risk on the Pareto optimal asset and liquidity management by insurers as well as risk-sharing between insurers and insurers. When aggregate risk is low, both insurers and insurers hold no liquidity reserves, insurees are fully insured, and insurers bear all aggregate risk. When aggregate risk takes intermediate values, both insurees and insurers still hold no liquidity reserves, but insurers partially share aggregate risk with insurers. When aggregate risk is high, however, it is optimal to hold nonzero liquidity reserves, and insurees partially share aggregate risk with insurers. The efficient asset and liquidity management policies as well as the aggregate risk allocation can be implemented through a regulatory intervention policy that combines a minimum liquidity requirement when aggregate risk is high, "ex post" contingent on the aggregate state, comprehensive insurance policies, and reinsurance.