Risk and Decision Analysis

Risk and Decision Analysis

Decision-making is an everyday activity. When it comes to insurance and finance, complication raises due to the involvement of risk and uncertainty. To add more complexity, different decision makers have different goals. Specifically, individual insurance buyers look for insurance products to best protect their positions; insurance providers focus on designing products so as to make profit and/or increasing market shares subject to their risk management needs and regulatory requirements. On the other hand, the goal of regulators/policymakers is at the macro level: make policies and implement regulations so as to protect the interest of insurance buyers as a whole and meanwhile maintain the sustainability of the market.

In this research theme, we employ the tool of risk and decision analysis to uncover the science behind decision-making processes from multiple perspectives. With a better understanding of decision-making, we anticipate to establish mechanisms to encourage insurance providers’ design of socially responsible products, to incentivize insurance buyers’ choice on these products, and ultimately to enhance the overall social welfare in various insurance markets.

Insurance markets currently under our investigations include annuity market and health insurance market. In annuity market, we study how policyholders and insurers are incentivized in participating insurance contracts with economic and financial models, and find empirical evidence to support our hypotheses. On the product level, we investigate optimal behavior and consumer surplus from the policyholder’s perspective; we explore product design and pricing strategies from the insurer’s perspective; and we study the effectiveness of current regulations in the market from the policymaker’s perspective. In health insurance market, a long existing issue is moral hazard and overtreatment/ overutilization. While practitioners and researchers are actively exploring strategies to mitigate moral hazard, most studies are qualitative. Through decision analysis, we aim to develop models to quantify moral hazard and recategorize policyholders according to moral hazard index. Based on the recategorization, we further develop moral hazard mitigation strategies with better precision and efficiency.