nep-ias New Economics Papers
on Insurance Economics
Issue of 2004‒12‒12
seven papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. A Theory of Housing Collateral, Consumption Insurance and Risk Premia By Hanno Lustig; Stijn Van Nieuwerburgh
  2. Informal Insurance in Social Networks By Francis Bloch (GREQAM and Universite de la Mediterranee), Garance Genicot (Georgetown University, and Debraj Ray (New York University and Instituto de Analisis Economico (CSIC))
  3. Estimating the impact of experience rating on the inflow into disability insurance in the Netherlands By Pierre Koning
  4. Estimating Post-tax Social Insurance Benefits: Validity Problems in Comparative Analyses of Net Income Components from Household Income Data By Ferrarini, Tommy; Nelson, Kenneth
  5. Adverse Selection with individual- and joint-life annuities By Susanne Pech
  6. Adaptive Premiums for Evolutionary Claims in Non-Life Insurance By Roger Gay
  7. Relationship Banking, Deposit Insurance and Bank Portfolio Choice By David Besanko; Anjan V. Thakor

  1. By: Hanno Lustig; Stijn Van Nieuwerburgh
    Abstract: In a model with housing collateral, a decrease in house prices reduces the collateral value of housing, increases household exposure to idiosyncratic risk, and increases the conditional market price of risk. This collateral mechanism can quantitatively replicate the conditional and the cross-sectional variation in risk premia on stocks for reasonable parameter values. The increase of the conditional equity premium and Sharpe ratio when collateral is scarce in the model matches the increase observed in US data. The model also generates a return spread of value firms over growth firms of the magnitude observed in the data, because the term structure of consumption strip risk premia is downward sloping.
    JEL: G0
    Date: 2004–12
  2. By: Francis Bloch (GREQAM and Universite de la Mediterranee), Garance Genicot (Georgetown University, and Debraj Ray (New York University and Instituto de Analisis Economico (CSIC)) (Department of Economics, Georgetown University)
    Abstract: This paper studies informal insurance across networks of individuals. Two characteristics are fundamental to the model developed here: First, informal insurance is a bilateral activity, and rarely involves explicit arrangements across several people. Second, insurance is a social activity, and transfers are often based on norms. In the model studied here, only directly linked agents make transfers to each other, although they are aware of the (aggregate) transfers each makes to third parties. An insurance scheme for the network as a whole is an equilibrium of several interacting bilateral arrangements. This model serves as a starting point for investigating stable insurance networks, in which all agents actually have private incentives to abide by the ongoing insurance arrangement. The resulting analysis shows that network links have two distinct and possibly conflicting roles to play. First, they act as conduits for transfers, and in this way this make better insurance possible. Second, they act as conduits for information, and in this sense they affect the severity of punishments for noncompliance with the scheme. A principal task of this paper is to describe how these two forces interact, and in the process characterize stable networks. The concept of "sparse" networks, in which the removal of certain links increases the number of network components, is crucial in this characterization. As corollaries, we found that both "thickly connected" networks(such as the complete graph) and "thinly connected" networks (such as trees) are likely to be stable, whereas intermediate degrees of connectedness jeopardize stability. Finally, we study in more detail the notion of networks as conduits for transfers, by simply assuming a punishment structure (such as autarky) that is independent of the precise architecture of the tree. This allows us to isolate a bottleneck effect: the presence of certain key agents who act as bridges for several transfers. Bottlenecks are captured well in a feature of trees that we call decomposability, and we show that all decomposable networks have the same stability properties and that these are the least likely to be stable. Classification-JEL Codes: D85, D80, 012, Z13
    Keywords: social networks, informal insurance
  3. By: Pierre Koning
    Abstract: This paper examines the effects of experience rating on the inflow into disability insurance (DI) in the Netherlands, using unique longitudinal administrative data from the Dutch social benefit administration for the years 2000-2002. We follow a difference-in-differences approach to identify the impact of changes in DI premiums. In particular, due to unawareness of the experience rating system, employers seem to have been triggered to increase preventative activities, once they have experienced increases in DI premium ('ex post incentives'). <P> We find the impact of experience rating to be substantial, amounting to a 15% reduction of the inflow into DI. This finding is robust with respect to various alternative specification alternatives. <P> We conclude that the decision of employers to increase preventative activities seems mainly an issue of being aware of the experience rating incentive.
    Keywords: experience rating; disability; disability insurance; panel data
    JEL: H22 I12 C23
    Date: 2004–08
  4. By: Ferrarini, Tommy (Swedish Institute for Social Research, Stockholm University); Nelson, Kenneth (Swedish Institute for Social Research, Stockholm University)
    Abstract: Comparative household micro income databases do not report the level of social transfers after taxation. Consequently, disaggregated redistributive analyses of the welfare state are based on gross income components. In most countries, however, social insurance benefits are subject to taxation. In such instances, the level and equalising effect of social insurance to income inequality are overestimated, both in absolute terms and in relation to nontaxable benefits. One way to avoid this problem is to estimate the level of net social insurance by the use of a so-called proportional tax estimation technique. This technique, however, causes a misspecification of the level of net social insurance in cases where taxation is established at the individual level. In this paper we therefore apply the proportional tax estimation technique for validity analyses on household income data. The question is to what extent this estimation of taxes misspecifies the level of net social insurance. It is found that the proportional tax estimation is viable when separating social and fiscal policies in comparative analyses on household micro income data. The underestimation of the level of net social insurance which is due to the application of the proportional tax estimation technique is negligible compared with the overestimation occurring from not taking taxes into account.
    Keywords: Welfare state; Social policy; social insurance; income taxation; inequality; redistribution; comparative.
    Date: 2002–11–01
  5. By: Susanne Pech (Department of Economics, Johannes Kepler University Linz, Austria)
    Abstract: This paper includes couples on the demand side and analyses their implications on the problem of adverse selection in the annuity market. First, we examine the pooling equilibrium for individual-life annuities and show that in the presence of couples the rate of return on individuallife annuities is lower in case that couples do not have the advantage of joint consumption of "family public goods" as well as in case of a logarithmic utility function. Second, we examine the market for joint-life annuities. Due to their higher chance that only one partner survives to the retirement, couples with short-lived partners put more weight on the survivor benefit than couples with at least one longer-lived partner. This fact is used by annuity companies to separate couples according to their partners' life-expectancies. Hence, we find that only a separating equilibrium may exist. These results are obtained in a framework where couples are mandated to buy joint-life annuities and only single persons buy individual-life annuities. When relaxing this assumption by allowing couples to choose between individual- and joint-life annuities, we find that in equilibrium couples with long-lived partners buy individual-life annuities, while couples with short-lived partners buy joint-life annuities. However, couples with one long-lived and one short-lived partner may decide for either type of annuities, depending on the exogenous parameters. Accordingly, we identify two different types of equilibria.
    Keywords: annuity market; uncertain lifetime; adverse selection; equilibrium
    JEL: D13 D82 D91 G22
    Date: 2004–11
  6. By: Roger Gay
    Abstract: Rapid growth in heavy-tailed claim severity in commercial liability insurance requires insurer response by way of flexible mechanisms to update premiums. To this end in this paper a new premium principle is established for heavy-tailed claims, and its properties investigated. Risk-neutral premiums for heavy-tailed claims are consistently and unbiasedly estimated by the ratio of the first two extremes of the claims distribution. That is, the heavy-tailed risk-neutral premium has a Pareto distribution with the same tail-index as the claims distribution. Insurers must predicate premiums on larger tail-index values, if solvency is to be maintained. Additionally, the structure of heavy-tailed premiums is shown to lead to a natural model for tail-index imprecision (demonstrably inescapable in the sample sizes with which we deal). Premiums which compensate for tail-index uncertainty preserve the ratio structure of risk-neutral premiums, but make a 'prudent' adjustment which reflects the insurer's risk-profile. An example using Swiss Re's (1999) major disaster data is used to illustrate application of the methodology to the largest claims in any insurance class.
    Keywords: Insurance Claims, Premiums, Tail-Index, Extreme Values
    Date: 2004–12
  7. By: David Besanko (Indiana University); Anjan V. Thakor (Washington University in St. Louis)
    Abstract: The purpose of this paper is to examine the consequences of interbank competition and bank-capital market competition on the portfolio choices of banks and the welfare of borrowers in a regulatory environment of (de facto) complete deposit insurance. Our focus is on an industry characterized by 'relationship banking', i.e. a setting involving repeated, bilateral credit transactions between banks and borrowers. A key feature of relationship banking is the intertemporal accumulation of proprietary borrower-specific information in the hands of the bank, and the consequent creation of informational rents. To the extent that these rents are shared by the bank and the borrower, both parties see a value in continuing their relationship. The desire to protect such relationships affects the bank's asset portfolio choice.
    JEL: G
    Date: 2004–11–30

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