In this course, we introduce students to the concept of risk, insurance as a risk management tool for individuals and businesses, and insurance as an industry. The course will consist of three main parts. The first part will focus on understanding and measuring risk, and will describe insurance, its different forms and parties involved (consumers, firms, insurers, and policymakers). The second part will focus on the demand side. This part will address risk management in insurance decisions as represented in rational models and contrast ideal and real worlds of insurance. We discuss puzzles in insurance and consider several biases and concepts from behavioral economics to increase our understanding of consumer behavior. The last part will focus on the supply side. This part will provide an overview of insurance companies’ risk management in order to create value as financial institutions. We focus on today’s challenges in rapidly changing insurance markets. Throughout the course we will talk about real-world examples, cases from businesses and policy implications.
A non-exhaustive list of topics includes:
- Expected utility models of insurance and prevention.
- Anomalies on the demand side (insured) and the supply side (insurer).
- Methods and instruments that help to deal with insurance-related anomalies.
- Low-probability high consequence (LPHC) events such as natural disasters and climate change.
- Moral hazard and adverse selection.
- Incomplete information and asymmetric information.
- Valuation, reinsurance, insurance linked securities (ILS).
- Guest lectures from the insurance sector.