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on Insurance Economics |
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Issue of 2005‒02‒13
six papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Bussiness Management |
| By: | Rochet, Jean Charles; Villeneuve, Stéphane |
| Abstract: | We analyse the demand for hedging and insurance by a firm that faces liquidity risk. The firm's optimal liquidity management policy consists of accumulating reserves up to a threshold and distributing dividends to its shareholders whenever its reserves exceed this threshold. We study how this liquidity management policy interacts with two types of risk: a Brownian risk that can be hedged through a financial derivative, and a Poisson risk that can be insured by an insurance contract. We find that the patterns of insurance and hedging decisions as a function of liquidity are poles apart: cash-poor firms should hedge but not insure, whereas the opposite is true for cash-rich firms. We also find non-monotonic effects of profitability and leverage. This may explain the mixed findings of empirical studies on corporate demand for hedging and insurance. |
| Keywords: | corporate hedging; liquidity risk; risk management |
| Date: | 2004–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4755&r=ias |
| By: | Babcock, Bruce A.; Hart, Chad E. |
| Abstract: | The Agricultural Risk Protection Act (ARPA) has largely met its objectives of inducing farmers to increase their use of the crop insurance program. Both insured acreage and coverage levels have increased dramatically in response to ARPA’s large increase in premium subsidies. An unintended consequence of the larger subsidies is a dramatic increase in the incentive for farmers to insure their crops under optional units, that is, insurance at the field level rather than at the farm or crop level. The expected rate of return to farmers who choose to invest additional premium dollars to move to optional unit coverage ranges from a low of 61 percent at the 85 percent coverage level to 144 percent at the 65 percent coverage level. This explains why the majority of farmers choose optional unit coverage even though the alternative unit structures provide identical insurance guarantees at a substantially lower cost. We consider two policy options to eliminate the unintended consequences of ARPA subsidies. |
| Date: | 2005–02–08 |
| URL: | http://d.repec.org/n?u=RePEc:isu:genres:12248&r=ias |
| By: | Timothy Waidman (Urban Institute); John Bound (University of Michigan and NBER); Austin Nichols (University of Michigan) |
| Abstract: | The Social Security Disability Insurance (SSDI) system is designed to provide income security to workers in the event that health problems prevent them from working. In order to qualify for benefits, applicants must pass a medical screening that is intended to verify that the individual is truly incapable of work. Past research has shown, however, that the screening procedures used do not function without error. If screening were error-free, it has can be demonstrated that it is socially optimal to distinguish the disabled non-worker from the non-disabled, providing benefits to the disabled. In this paper we first demonstrate that if the errors in the medical screening are too large, it will not be optimal to distinguish the disabled from the non-disabled. Then, we use data on the actual quality of screening to determine first, if segmenting the non-working population is desirable, and second whether the current SSDI system relies too heavily on screening than is justified. Our preliminary conclusion is that while screening is good enough to justify some distinction in benefits, it may not be good enough to justify the size of the benefit offered. |
| Date: | 2003–04 |
| URL: | http://d.repec.org/n?u=RePEc:mrr:papers:wp042&r=ias |
| By: | Ivica Dus (University of Frankfurt); Raimond Maurer (University of Frankfurt); Olivia S. Mitchell (University of Pennsylvania) |
| Abstract: | How might retirees consider deploying the retirement assets accumulated in a defined contribution pension plan? One possibility would be to purchase an immediate annuity. Another approach, called the “phased withdrawal” strategy in the literature, would have the retiree invest his funds and then withdraw some portion of the account annually. Using this second tactic, the withdrawal rate might be determined according to a fixed benefit level payable until the retiree dies or the funds run out, or it could be set using a variable formula, where the retiree withdraws funds according to a rule linked to life expectancy. Using a range of data consistent with the German experience, we evaluate several alternative designs for phased withdrawal strategies, allowing for endogenous asset allocation patterns, and also allowing the worker to make decisions both about when to retire and when to switch to an annuity. We show that one particular phased withdrawal rule is appealing since it offers relatively low expected shortfall risk, good expected payouts for the retiree during his life, and some bequest potential for the heirs. We also find that unisex mortality tables if used for annuity pricing can make women’s expected shortfalls higher, expected benefits higher, and bequests lower under a phased withdrawal program. Finally, we show that delayed annuitization can be appealing since it provides higher expected benefits with lower expected shortfalls, at the cost of somewhat lower anticipated bequests. |
| Date: | 2003–11 |
| URL: | http://d.repec.org/n?u=RePEc:mrr:papers:wp063&r=ias |
| By: | Kathleen McGarry (University of California, Los Angeles and NBER); Robert F. Schoeni (University of Michigan) |
| Abstract: | Several categories of medical expenditures are not covered by Medicare, including prescription drugs, most nursing home stays, and extended hospital visits. Out-of-pocket costs for these items can be substantial, and what’s more, they are likely to be concentrated at the end of life. At the same time, it is well documented that poverty is 3-4 times more common among widows than among similarly aged married women. This study examines the potential link between these two phenomena, asking the question: to what extent do out-of-pocket health care costs of a dying spouse affect the financial position of the survivor? We find that out-of-pocket medical spending increases substantially just prior to death, and that these expenditures are large relative to income for a large share of elderly couples. Simulations investigate the extent to which expansions in insurance coverage to include nursing home care or prescription drug coverage could improve the financial well-being of the surviving spouse. |
| Date: | 2003–12 |
| URL: | http://d.repec.org/n?u=RePEc:mrr:papers:wp065&r=ias |
| By: | Joseph J. Doyle Jr. |
| Abstract: | Previous studies find that the uninsured receive less health care than the insured, yet differences in health outcomes have rarely been studied. In addition, selection bias may partly explain the difference in care received. This paper focuses on an unexpected health shock -- severe automobile accidents where victims have little choice but to visit a hospital. Another innovation is the use of a comparison group that is similar to the uninsured: those who have private health insurance but do not have automobile insurance. The medically uninsured are found to receive twenty percent less care and have a substantially higher mortality rate. |
| JEL: | I11 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11099&r=ias |