nep-ias New Economics Papers
on Insurance Economics
Issue of 2005‒11‒19
five papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Insurance Policies for Monetary Policy in the Euro Area By Volker Wieland; Keith Kuester
  2. Risikoselektion und Risikoausgleich am Beispiel der gesetzlichen Krankenkassen in Deutschland By Dieterich, Felix
  3. Trends and cycles in the Euro Area: how much heterogeneity and should we worry about it? By Domenico Giannone; Lucrezia Reichlin
  4. The Behavior of Banks under the Deposit Insurance and Capital Requirements By Xiaozhong Liang
  5. Optimal Unemployment Insurance in a Search Model with Variable Human Capital By Andreas Pollak

  1. By: Volker Wieland; Keith Kuester
    Abstract: In this paper, we examine the cost of insurance against model uncertainty for the Euro area considering four alternative reference models, all of which are used for policy-analysis at the ECB. We find that maximal insurance across this model range in terms of a Minimax policy comes at moderate costs in terms of lower expected performance. We extract priors that would rationalize the Minimax policy from a Bayesian perspective. These priors indicate that full insurance is strongly oriented towards the model with highest baseline losses. Furthermore, this policy is not as tolerant towards small perturbations of policy parameters as the Bayesian policy rule. We propose to strike a compromise and use preferences for policy design that allow for intermediate degrees of ambiguity-aversion. These preferences allow the specification of priors but also give extra weight to the worst uncertain outcomes in a given context
    Keywords: model uncertainty, robustness, monetary policy rules, minimax, euro area
    JEL: E52 E58 E61
    Date: 2005–11–11
  2. By: Dieterich, Felix
    Abstract: This paper deals with the phenomenon of risk-selection and its appearance in the german compulsory health insurance market since the adoption of the so-called "Gesundheitsstrukturgesetz" of 1992. Further, the "Risikostrukturausgleich" as well as other measures are discussed as instruments of artificially spreading risks in this very market before recommendations for adequate policies are given.
    JEL: I11
    Date: 2005–10
  3. By: Domenico Giannone (Universite' Libre de Bruxelles, ECARES); Lucrezia Reichlin (European Central Bank, CEPR)
    Abstract: Not so much and we should not, at least not yet.
    Keywords: International Business Cycles, Euro Area, Risk Sharing, European Integration, Income Insurance.
    JEL: E32 C33 C53 F2 F43
    Date: 2005–11–15
  4. By: Xiaozhong Liang (Economics University of Connecticut)
    Abstract: Deposit insurance and capital requirements are two focuses in banking literature. Many researchers criticize these two important schemes using moral hazard theory: Under the protection of the deposit insurance, banks have incentive to take deposits as much as they can for some debt-favor reasons such as tax deduction on interest payment, and let the FDIC pay for the deposits if it turns out banks do not have enough capital to pay the deposits back. One the other hand, banks also have incentive to take riskier investment in hope of having higher returns. When capital requirements are imposed, insured banks may shift priced risks to unpriced risks. Therefore, capital requirements actually will lead banks to take more risks, and hence lead to higher probability of bank failure. However, this criticism does not consider the implicit costs of bankruptcy. If a bank is bankrupt, it will lose the benefit of deposit insurance. Moreover, it will lose the possible future earnings. In this paper, I take into account the implicit costs of bankruptcy, and investigate how banks react to the fixed and risk-based capital requirements under deposit insurance. In my basic model, I adopt one factor option pricing model and find a closed-form solution for bank equity in terms of asset-to-debt ratio. In my extension model, I relax the assumption of constant interest rate in the basic model. Thus, the uncertainty of bank equity comes from two sources: capital ratio and interest rate. I adopt a general form of term structure and find the numerical solution for the bank equity value as a function of both asset-to-debt ratio and interest rate. Through the stochastic term structure, interest rate risk is also involved. The results show that banks actually prefer to use more capital even there are no capital requirements. Moreover, banks tend to take lower risk instead of high risk no matter there are capital requirements or not, if they are solvent. However, for insolvent banks, they may take riskier investment. Under the risk-based capital requirements, banks would prefer lower capital requirements by taking lower risk. Lastly, capital requirements only have impact on banks with low capital. For those well capitalized banks, capital requirements will not affect their behavior too much.
    Keywords: numerical analysis, capital ratio, risk-taking, interest rate risk, deposit insurance, capital requirements
    JEL: G21
    Date: 2005–11–11
  5. By: Andreas Pollak
    Abstract: The framework of a general equilibrium heterogeneous agents model is used to study the optimal design of an unemployment insurance scheme and the voting behaviour on unemployment policy reforms. Agents, who have a limited lifetime and participate in the labour market until they reach the retirement age, can either be employed or unemployed in each period of their working life. Unemployed agents receive job offers of different (match) qualities. Moreover, unemployed agents suffer a decline of their individual productivity during unemployment, whereas the productivity of employed agents increases over time. Any form of unemployment insurance must take into account an important trade-off. On the one hand, generous benefits are desirable as they provide good insurance of the risk-averse agents against unforeseen income fluctuations (caused by layoffs and the randomness of individual job offers). On the other hand, high benefits induce a moral-hazard problem, as certain groups of agents choose to decline job offers that, while not being as attractive as the unemployment benefit from an individual point of view, a central planner would make them accept. An optimal unemployment insurance scheme is one that maximizes the expected lifetime utility of a newly born agent. Two types of unemployment insurance are considered, one with defined benefits and one with defined replacement ratios. A numerical version of the model is calibrated to the West German economy and simulated at ½-monthly frequency, resulting in an agent’s life-span of 1440 periods. The welfare maximising unemployment insurance scheme is determined in simulations. Under this optimal system, no payments are made to short-term unemployed agents. Long-term unemployed receive rather low (social assistance level) benefits, the optimal level of which depends on the assumed degree of risk aversion. Defined benefit systems provide a higher welfare than defined replacement ratios. I then address the question whether the majority of population would support the optimal system given the status quo. It turns out that older or unemployed agents tend vote in favour of the status quo, whereas young employed agents would approve the reform. If voters can choose between keeping their current unemployment system and jumping to the equilibrium associated with the optimal policy, there is a slight majority of just above 50% for the optimal policy. Finally, a more realistic case is considered, in which voters do not choose between the long-rung equilibria associated with policy changes, but take into account the transition process to the new equilibrium. The adjustment process of the macro environment after the policy reform is computed for a time span of sixty years. As some of the relevant variables adjust very slowly to their new long-run equilibrium values, the effect of the transition process on voting behaviour cannot be neglected
    JEL: C61 J64 J65
    Date: 2005–11–11

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