nep-ias New Economics Papers
on Insurance Economics
Issue of 2005‒10‒22
thirteen papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Insurance Value of International Reserves: An Option Pricing Approach By Jaewoo Lee
  2. Country Insurance By Tito Cordella; Eduardo Levy Yeyati
  3. A (New) Country Insurance Facility By Tito Cordella; Eduardo Levy Yeyati
  4. Quantifying the Inefficiency of the US Social Insurance System By Mark Huggett (Georgetown University) and Juan Carlos Parra (Georgetown University)
  5. Managing Systemic Liquidity Risk in Financially Dollarized Economies By Miguel A. Kiguel; Alain Ize; Eduardo Levy Yeyati
  6. Insurance Companies in Emerging Markets By Janet Kong; Manmohan Singh
  7. Work Absence in Europe By Lusine Lusinyan; Leo Bonato
  8. An Empirical Assessment of a Consumption CAPM with a Reference Level under Incomplete Consumption Insurance By Andrei Semenov
  9. How Big Are The Benefits of Economic Diversification?: Evidence from Earthquakes By Rodney Ramcharan
  10. Disability Risk and Miraculous Recoveries in Russia By Becker, Charles M.; Merkuryeva, Irina S.
  11. High-Order Consumption Moments and Asset Pricing By Andrei Semenov
  12. Deposit Insurance Regulatory Forbearance and Economic Growth: Implications for the Japanese Banking Crisis By Robert Dekle; Kenneth Kletzer
  13. Can The Private Annuity Market Provide Secure Retirement Income? By Allison Schrager; G. A. Mackenzie

  1. By: Jaewoo Lee
    Abstract: A quantitative framework is developed to bring forward the insurance motive of holding international reserves. The insurance value of reserves is quantified as the market price of an equivalent option that provides the same insurance coverage as the reserves. This quantitative framework is applied to calculating the cost of a regional insurance arrangement (e.g., an Asian Monetary Fund) and to analyzing one leg of an optimal reserve-holding decision.
    Keywords: Insurance , Reserves , Prices ,
    Date: 2004–09–28
  2. By: Tito Cordella; Eduardo Levy Yeyati
    Abstract: In this paper, we examine how the presence of country insurance schemes affects policymakers' incentives to undertake reforms. Such schemes (especially when made contingent on negative external shocks) are more likely to foster than to delay reform in crisis-prone volatile economies. The consequences of country insurance, however, hinge on the nature of the reforms being considered: "buffering" reforms, aimed at mitigating the cost of crises, could be partially substituted for, and ultimately discouraged by, insurance. By contrast, "enhancing" reforms that pay off more generously in the absence of a crisis are likely to be promoted.
    Keywords: Insurance , Fiscal reforms , Economic models ,
    Date: 2004–08–24
  3. By: Tito Cordella; Eduardo Levy Yeyati
    Abstract: To cope with the self-fulfilling liquidity runs that triggered many recent financial crises, we propose the creation of a country insurance facility. The facility, which we envisage as complementary to the existing multilateral lending facilities, would provide eligible countries with automatic access to a credit line at a predetermined interest rate. Eligibility criteria should be easily verifiable, focus on debt sustainability, and take into account the currency and maturity composition of the debt. Other critical design issues considered here include the size of the facility, its duration and charges, and the exit costs for a country that loses eligibility.
    Keywords: Insurance , Liquidity , Financial crisis , International financial system , International Capital Markets ,
    Date: 2005–02–11
  4. By: Mark Huggett (Georgetown University) and Juan Carlos Parra (Georgetown University) (Department of Economics, Georgetown University)
    Abstract: How far is the US social insurance system from an efficient system? We answer this question within a model where agents receive idiosyncratic, labor-productivity shocks that are privately observed. When social security and income taxation comprise the social insurance system, the maximum possible efficiency gain is equivalent to a 10.5 percent increase in consumption. This occurs when labor productivity differences are set to the permanent differences estimated in US data. Classification-JEL Codes: D80, D90, E21
    Keywords: Social Security, Idiosyncratic Shocks, Efficient Allocations, Private Information
  5. By: Miguel A. Kiguel; Alain Ize; Eduardo Levy Yeyati
    Abstract: This paper evaluates ways to protect highly dollarized banking systems from systemic liquidity runs (such as the ones that took place recently in Argentina, Uruguay, and Paraguay). In view of the limitations of available (private or official) insurance schemes, and the distortions introduced by central bank lending of last resort (LOLR), the authors favor decentralized liquid foreign asset requirements on dollar deposits, supplemented by a scheme of "circuit breakers." The latter combines the use of limited dollar liquidity to ensure the convertibility of transactional deposits with a mechanism that automatically limits the convertibility of dollar term deposits once triggered by a predetermined decline in banks' liquidity.
    Keywords: Dollarization , Liquidity , Financial crisis , Bank soundness , Banking systems ,
    Date: 2005–09–30
  6. By: Janet Kong; Manmohan Singh
    Abstract: This paper focuses on asset allocation decisions of life insurance companies in emerging markets. Mature market insurers allocate only a small fraction of their assets to emerging markets because of regulatory constraints, rating pressures, and currency risk. However, global insurers invest directly in emerging markets by setting up subsidiaries rather than through portfolio investment, and this trend is increasing. Local insurers largely remain captive investors of local instruments and provide stability to the domestic securities market. The regulatory regime and the liquidity and depth of local markets play an important role in asset allocation decisions of insurers. Insurance companies are increasingly adopting asset liability management and risk control measures. However, insufficiently developed local markets and regulatory interventions on the liabilities side often limit optimal asset allocation.
    Keywords: Insurance , Emerging markets , Liquidity , Financial crisis , Investment , Asset prices ,
    Date: 2005–05–13
  7. By: Lusine Lusinyan; Leo Bonato
    Abstract: Work absence is an important part of the individual decision on actual working hours. This paper focuses on sickness absence in Europe and develops a stylized model where absence is part of the labor-leisure decision made by workers and the production decision made by profit-maximizing firms, with insurance provisions and labor market institutions affecting the costs of absence. The results from a panel of 18 European countries indicate that absence is increased by generous insurance schemes where employers bear little responsibility for their costs. Shorter working hours reduce absence, but flexible working arrangements are preferable if labor supply erosion is a concern.
    Keywords: Sick leave , Europe , Insurance , Labor supply , Data analysis , Data collection , Economic models ,
    Date: 2004–10–21
  8. By: Andrei Semenov (Department of Economics, York University)
    Abstract: We study asset pricing implications of the preference specification in which an agent derives utility from both the ratio of his consumption to some reference level and this level itself under incomplete consumption insurance and limited asset market participation. Assuming that the reference level responds gradually to changes in aggregate consumption per capita, we show that when asymmetry in individual consumption is taken into account, the obtained estimate of the elasticity of intertemporal substitution is in the conventional range and significantly different from the inverse of the relative risk aversion (RRA) coefficient as the definition of assetholders is tightened. Both the power utility model and the ratio preference specification are rejected statistically.
    Keywords: incomplete consumption insurance, intertemporal substitution, limited asset market participation, risk aversion
    JEL: G12
    Date: 2003–12
  9. By: Rodney Ramcharan
    Abstract: Economic activity is risky. Returns across economic sectors can be highly variable, potentially causing costly adjustments to consumption. However, when returns are imperfectly correlated across sectors and insurance is unavailable, diversification can reduce the economic impact of shocks. Therefore, despite the well-known efficiency benefits from specialization, the risks of too little diversification have long been acknowledged. But how big are the benefits of diversification? This paper exploits the exogeneity and randomness of earthquakes to address this question. There is robust evidence that more specialized economies experience larger declines in consumption when earthquakes occur, and consistent with the insurance channel, the cost of specialization is smaller in more financially developed economies.
    Keywords: Consumption , Exchange risk , Credit , Risk premium , Export diversification ,
    Date: 2005–03–15
  10. By: Becker, Charles M.; Merkuryeva, Irina S.
    Abstract: This paper examines determinants of being disabled in Russia, along with the probability of moving from one disability status to another, using data from 1994 through 2002 from the Russian Longitudinal Monitoring Survey. Disability risk rises with age, declines with income and self-reported good health, and is lower for women. On the other hand, neither smoking nor drinking alcohol increase either the risk of being or becoming disabled.
    JEL: J10 J15 P36
    Date: 2005
  11. By: Andrei Semenov (Department of Economics, York University)
    Abstract: This paper develops an approximate equilibrium factor model for asset returns. In this model, the pricing factors are the cross-moments of return with the cross-sectional moments of individual consumption and the signs of the risk factor coefficients are driven by preference assumptions. Using household-level quarterly consumption data from the U.S. Consumer Expenditure Survey, we find that this model explains the observed equity premium with an economically realistic value of risk aversion when the stochastic discount factor is expressed in terms of the cross-sectional skewness and kurtosis, in addition to the mean and variance, of individual consumption.
    Keywords: asset pricing, equity premium, Euler equation, heterogeneous consumers, incomplete consumption insurance.
    JEL: G12
    Date: 2003–12
  12. By: Robert Dekle; Kenneth Kletzer
    Abstract: An endogenous growth model with financial intermediation demonstrates how deposit insurance and prudential regulatory forbearance lead to banking crises and growth declines. The model assumptions are based on features of the Japanese financial system and regulation. The model demonstrates how banking and growth crises can evolve under perfect foresight. The dynamics for economic aggregates and asset prices predicted by the model are shown to be generally consistent with the experience of the Japanese economy and financial system through the 1990s. We also test our maintained hypothesis of rational expectations using asset price data for Japan over the 1980s and 1990s.
    Keywords: Economic growth , Japan , Financial crisis ,
    Date: 2005–09–08
  13. By: Allison Schrager; G. A. Mackenzie
    Abstract: Annuity premiums are often assumed to be constant, although they can be expected to vary with the yield curve. Variations in premiums will become an important public policy issue as defined-contribution (DC) pension plans play an increasingly prominent role in providing retirement income. As DC plan holders retire, many will annuitize at least a part of their account balances. In the absence of current data on annuity prices, the paper relies on U.S. Treasury interest rate data to simulate the impact of interest rate variation on annuity premiums. For a spectrum of feasible interest rates, the variation in retirement income is not negligible.
    Keywords: Pensions , Accounts ,
    Date: 2004–12–28

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