ETD Collection

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2011 - 20122

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    A regulatory capture explanation of South Africa's private health insurance legislation
    (2012-01-25) Hutcheson, Hugh-David
    Private healthcare financing in South Africa has undergone several regulatory reforms, the most recent of which saw the enactment of the Medical Schemes Act No. 131 of 1998. The stated reforms, most especially open enrolment and community rating, were touted by the government as necessary to address the undesirable effects of adverse selection. However, it was never questioned whether in fact adverse selection is a feature of the South African medical schemes landscape. Adverse selection is found to be absent. Thus, government’s supposition that adverse selection, as a consequence of the deregulation that took place during the late 1980s and early 1990s, is responsible for the deterioration in medical scheme coverage for the elderly, unhealthy or poor is fallacious. Since the ostensible reason for the current legislation does not stand up to scrutiny, regulatory capture is offered as the plausible alternative explanation for the promulgation of the current legislation governing medical schemes business.
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    Reconceptualising the capital adequacy requirement of short-term insurance companies within the call option framework
    (2011-12-08) Britten, James Howard Christopher
    Conventional wisdom decrees that in order for insurers to provide cover, they require capital. One of the many methods of calculating capital requirements of short-term insurers is the insolvency put option framework. This technique was originally introduced by Merton (1977). The general argument is that bankruptcy occurs when shareholders exercise a valuable put option. Indeed, the corporation was introduced to protect shareholders from, mainly contractual, liabilities of persons who trade with the corporation. The corporation thus introduced the idea of limited liability of shareholders or as is often called the corporate veil. However, if a company defaults on its debt then equity holders have decided to allow an embedded call option to expire unexercised. As a result shareholders will behave as if they in fact hold a call option, which creates a different incentive than that suggested by the insolvency put idea. This study examines the role of capital and the influence of the insolvency put option within a short-term insurer. Specifically, it is argued that capital is not the cornerstone of a short-term insurer. Moreover, using Brownian motion and Itō calculus as well as continuous time financial models a more complete mathematical description of an insurance company is articulated by explicitly taking the embedded equity call option into account.