Macro Risk Management: An Insurance Perspective
44 Pages Posted: 13 Aug 2020 Last revised: 29 Oct 2020
Date Written: August 10, 2020
This paper introduces a new insurance paradigm, called insurance-by-credit (hence IBC), that is based on the idea of running insurance on deficit. We believe that IBC can better cope with the macro-level risks such as the COVID-19 outbreak, compared with the standard insurances. As we will discuss, the standard insurance approach towards risk is an ex-ante approach, meaning that by primarily setting the premiums at the present, it is planning to compensate for the uncertain or contingent losses in the future. The new risk management paradigm is motivated by the state policies such as the fiscal and monetary policies, to introduce an ex-post risk management tool. This means that risk management is happening after the damage is observed or started to be observed. This will give rise to a new concept, contingent premium, and introduces a new risk to the insurance industry, the credit risk.
We compare an IBC product with a standard insurance product in a simple risk management framework to cover the risk of income loss. For the comparison, we use five quantitative indicators including three economic and two decision-making indicators, in addition to one qualitative indicator, which is the moral hazard risk.
As we will discuss, due to fact that an insurance market with systemic risk coverage is an example of the market failure, for any insurance covering systemic risk, the government must be the entity that offers such products. For insurance covering systemic risk, IBC outperforms a standard insurance contract in the indicators that have more priority for the government.
Keywords: Insurance-by-credit, fiscal and monetary policy, insurance, systemic risk, macro risk, credit risk, COVID-19
JEL Classification: G22
Suggested Citation: Suggested Citation