nep-ias New Economics Papers
on Insurance Economics
Issue of 2005‒12‒14
eleven papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Crop Insurance in Karnataka By Vijay Kalavakonda; Olivier Mahul
  2. Does Health Insurance Impede Trade in Health Care Services? By Aaditya Mattoo; Randeep Rathindran
  3. Can Insurance Increase Financial Risk ? The Curious Case of Health Insurance in China By Magnus Lindelow; Adam Wagstaff
  4. Measuring Risk: Political Risk Insurance Premiums and Domestic Political Institutions. By Nathan M Jensen
  5. Health Shocks in China : Are the Poor and Uninsured Less Protected? By Magnus Lindelow; Adam Wagstaff
  6. Insurance Health Impacts on Health and Non-Medical Consumption in a Developing Country By Adam Wagstaff; Menno Pradhan
  7. Efficiency of Competition in Insurance Markets with Adverse Selection By Giuseppe, DE FEO; Jean, HINDRIKS
  8. Insurance and Liquidity : Panel Evidence By Rashmi Shankar
  9. Deposit Insurance around the World : A Comprehensive Database By Asli Demirgüç-Kunt; Baybars Karacaovali; Luc Laeven
  10. Loss Analysis of a Life Insurance Company Applying Discrete-time Risk-minimizing Hedging Strategies By An Chen
  11. Falling up the stairs. An exploration of the effects of "bracket creep" on household incomes By Immervoll H

  1. By: Vijay Kalavakonda (The World Bank); Olivier Mahul (The World Bank)
    Abstract: The authors examine the performance of the crop insurance scheme in Karnataka, a southern state of India and the second driest state in the country. Their analysis highlights weaknesses in product design, implementation challenges, and operational problems. The authors' finding is that the crop insurance scheme in its current form does not achieve its objectives, either explicit (risk management) or implicit (safety net and containment of both the central and state governments' contingent liability). The crop insurance scheme performs poorly both in terms of coverage (number of hectares insured and number of farmers purchasing insurance) and financial performance. The authors provide a framework for designing a crop insurance scheme based on the premise that insurance is a cost effective risk management techniques. They also provide some new ideas and thinking toward both improving the existing crop insurance scheme and exploring alternatives to the current product, based on an area-yield approach.
    Keywords: Agriculture, Rural development
    Date: 2005–07–01
  2. By: Aaditya Mattoo (The World Bank); Randeep Rathindran (The World Bank)
    Abstract: There is limited trade in health services despite big differences in the price of health care across countries. Whether patients travel abroad for health care depends on the coverage of treatments by their health insurance plan. Under existing health insurance contracts, the gains from trade are not fully internalized by the consumer. The result is a strong "local-market bias" in the consumption of health care. A simple modification of existing insurance products can create sufficient incentives for consumers to travel. For just 15 highly tradable, low-risk treatments, the annual savings to the United States would be $1.4 billion even if only one in 10 patients who need these treatments went abroad. Half of these annual savings would accrue to the Medicare program alone. The authors examine how measures by destination countries to improve and credibly signal the quality of health care can enhance the scope for trade.
    Keywords: International economics, Health and population
    Date: 2005–07–01
  3. By: Magnus Lindelow (The World Bank); Adam Wagstaff (The World Bank)
    Abstract: The most basic argument for insurance is that it reduces financial risk. But since insurance opens up new opportunities for consuming expensive high-technology care which permits health improvements that are valued by the insured, and because in many settings the provider is able and has an incentive to exploit the informational advantage he has over the patient, it is not immediately obvious that insurance will in practice reduce financial risk. The authors analyze the effect of insurance on the probability of an individual incurring "high" annual health expenses using data from three household surveys-one a cross-section survey, the other two panel surveys. All come from China, a country where providers have until recently largely been paid fee-for-service (often according to a schedule that encourages the overprovision of high-technology care and the underprovision of basic care) and who are only lightly regulated. The authors define annual spending as "high" if it exceeds 5 percent of average income in the sample and as "catastrophic" if it exceeds 10 percent of the household's own per capita income. The estimates of the effect of insurance on financial risk allow for the possible endogeneity of health insurance in the panel datasets by allowing for a time-invariant fixed effect capturing unobserved risk that may be correlated with insurance status, and in the cross-section dataset by using instrumental variables, where availability of and eligibility for health insurance are used as instruments. The results suggest that during the 1990s China's government and labor insurance schemes increased financial risk associated with household health care spending, but that the rural cooperative medical scheme significantly reduced financial risk in some areas but increased it in others (though not significantly). From the results, it appears that China's new health insurance schemes (private schemes, including coverage of schoolchildren) have also increased the risk of high levels of out-of-pocket spending on health. Where the authors find evidence of health insurance increasing the risk of "high" out-of-pocket expenses, the marginal effect is of the order of 15-20 percent; in the case of "catastrophic" expenses, it is even larger.
    Keywords: Poverty, Health and population
    Date: 2005–10–01
  4. By: Nathan M Jensen (Washington University)
    Abstract: There is a renewed interest in political science on how political risk affects multinational corporations operating in emerging markets. Most existing studies suffer from data problems where researchers can only offer indirect evidence of the relationship between political institutions and political risk. In this paper I utilize a new data resource to explore how domestic institutions affect political risks for multinationals. Utilizing price data from political risk insurance agencies I test how domestic political institutions affect the premiums multinationals pay for coverage against 1) expropriations and contract disputes and 2) government restrictions on capital transactions. I find that constraints on politicians lead to marginally lower expropriation and transfer risks. Democracy, on the other hand, greatly reduces expropriation risk but has no impact on transfer risk.
    Keywords: FDI, political risk, expropriation, insurance
    JEL: F3 F4
    Date: 2005–12–09
  5. By: Magnus Lindelow (The World Bank); Adam Wagstaff (The World Bank)
    Abstract: Health shocks have been shown to have important economic consequences in industrial countries. Less is known about how health shocks affect income, consumption, labor market outcomes, and medical expenditures in middle- and low-income countries. The authors explore these issues in China. In addition to providing new evidence on the general impact of health shocks, they also extend previous work by assessing the extent of risk protection afforded by formal health insurance, and by examining differences in the impact of health shocks between the rich and poor. The authors find that health shocks are associated with a substantial and significant reduction in income and labor supply. There are indications that the impact on income is less important for the insured, possibly because health insurance coverage is also associated with limited sickness insurance, but the effect is not significant. They also find evidence that negative health shocks are associated with an increase in unearned income for the poor but not the non-poor. This effect is however not strong enough to offset the impact on overall income. The loss in income is a consequence of a reduction in labor supply for the head of household, and the authors do not find evidence that other household members compensate by increasing their labor supply. Finally, negative health shocks are associated with a significant increase in out-of-pocket health care expenditures. More surprisingly, there is some evidence that the increase is greater for the insured than the uninsured. The findings suggest that households are exposed to considerable health-related shocks to disposable income, both through loss of income and health expenditures, and that health insurance offers very limited protection.
    Keywords: Poverty, Health and population
    Date: 2005–10–01
  6. By: Adam Wagstaff (The World Bank); Menno Pradhan (The World Bank)
    Abstract: The authors examine the effects of the introduction of Vietnam's health insurance (VHI) program on health outcomes, health care utilization, and non-medical household consumption. The use of panel data collected before and after the insurance program's introduction allows them to eliminate any confounding effects due to selection on time-invariant un-observables, and their coupling of propensity score matching with a double-difference estimator allows them to reduce the risk of biases due to inappropriate specification of the outcome regression model. The authors' results suggest that Vietnam's health insurance program impacted favorably on height-for-age and weight-for-age of young school children, and on body mass index among adults. Their results suggest that among young children, VHI increases use of primary care facilities and leads to a substitution away from the use of pharmacists as a source of advice and non-prescribed medicines toward the use of them as a supplier of medicines prescribed by a health professional. Among older children and adults, VHI results in a marked increase in the use of hospital inpatient and outpatient departments. The results also suggest that VHI causes a reduction in annual out-of-pocket expenditures on health and an increase in non-medical household consumption, including food consumption, but mostly nonfood consumption. The authors' estimate of the VHI-induced reduction in out-of-pocket health spending is considerably smaller than their estimate of the VHI-induced increase in non-medical consumption, which is consistent with the idea that households hold back their consumption considerably if, through lack of health insurance, they are exposed to the risk of large out-of-pocket expenditures. This is especially plausible in a country where at the time (1993), a single visit to a public hospital cost on average the equivalent of 20 percent of a person's annual nonfood consumption.
    Keywords: Poverty, Health and population
    Date: 2005–04–01
  7. By: Giuseppe, DE FEO; Jean, HINDRIKS (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)
    Abstract: There is a general presumption that competition is a good thing. In this paper we show that competition in the insurance markets can be bad when there is adverse selection; Using the dual theory of choice under risk, we are able to fully characterize both the competitive and the monopoly market outcomes. When they are two types of risk, the monopoly dominates competition if and only if competition leads to market unravelling. When there are a continuum of types the efficiency of competition is less trivial. In effect monopoly is shown to provide better insurance but at the cost of driving out some agents from the market. Performing simulation for differnt distributions of risk, we find that monopoly in general performs (much) better than competition in terms of the realization of the gains from trade across all traders in equilibrium. The reason is that the monopolist can exploit its market power to relax the incentive constraints
    Keywords: monopoly; competition; non-expected utility; insurance; adverse selection
    JEL: G22
    Date: 2005–07–15
  8. By: Rashmi Shankar (Brandeis International Business School)
    Abstract: The author presents evidence that balance sheet effects are critical determinants of both the likelihood of a crisis and of income losses following a crisis. She tests the validity of "insurance" and "liquidity" models of currency crisis. Both models predict that the occurrence of a balance of payments crisis is conditional on the health of the nation's accounts in relation to the rest of the world. Problems in the balance sheet either cause a financial crisis that develops into a run on the central bank, or generate a run on the central bank once contingent liabilities exceed reserves and the yield differential moves against domestic assets. Estimations of crisis likelihoods based on several specifications of single and simultaneous equation probit models confirm that output losses following the crisis are persistent and conditional on the balance sheet indicator, that is, the ratio of the stock of gross external liabilities to assets. Measures of contingent liabilities, capital flight, and financial depth perform well as crisis predictors, and the marginal effects on the probability of a crisis are of the expected sign. The panel data set covers the time period 1973 through 2003 for 90 countries.
    Keywords: International economics, Macroeconomics and growth
    Date: 2005–06–01
  9. By: Asli Demirgüç-Kunt (The World Bank); Baybars Karacaovali (University of Maryland); Luc Laeven (The World Bank and CEPR)
    Abstract: This paper updates the Demirguç-Kunt and Sobaci (2001) cross-country deposit insurance database and extends it in several important dimensions. This new data set identifies both recent adopters and the ones that were not covered earlier due to a lack of data. Moreover, for the first time, it provides historical time series for several variables and adds new ones. The data were collected by surveying deposit insurance institutions and related agencies as well as through the use of various other country sources.
    Keywords: Domestic finance
    Date: 2005–06–01
  10. By: An Chen
    Abstract: In this paper, we consider the net loss of a life insurance company issuing identical equity-linked pure endowment contracts in the case of periodic premiums. Under this construction, financial risks as well as the mortality risk are included. Based on Møller (1998), we particularly investigate the situation where the company applies a time-discretized risk-minimizing hedging strategy, i.e., a trading restriction is imposed on a continuous-time risk-minimizing strategy. Therefore, the considered model is incomplete where the incompleteness results not only from the mortality risk but also from the trading restrictions. Through an illustrative example, it is observed from the simulations that a substantial reduction in the ruin probability is achieved by using the time-discretized risk-minimizing strategy. However, as the hedging frequency is set higher, this advantage almost disappears, because a higher frequency leads to more hedging errors which constitute a vital part of the hedger’s net loss. In order to improve the simulated results, another type of discrete-time risk-minimizing strategy is taken into consideration. It is obtained by discretizing the hedging model instead of the hedging strategy. For this purpose, Møller’s (2001) discrete-time (binomial) risk-minimizing strategy is adopted. For both strategies, a number of sensitivity analyses are carried out, e.g. how the ruin probability changes with the fair combination of the minimum interest rate guarantee and the participation rate.
    Keywords: Net Loss, Discrete-time Risk-minimizing Hedging Strategies, Pure Endowment Equity-linked Life Insurance
    JEL: G10 G13 G22
    Date: 2005–08
  11. By: Immervoll H
    Abstract: This paper analyses how inflation-induced erosions of nominally defined amounts built into relevant tax rules ("bracket creep") alter distributional and revenue-generating properties of income taxes and social insurance contributions. Using a multi-country tax-benefit model, it provides quantitative estimates for Germany, the Netherlands and the UK. In the absence of automatic inflation adjustment mechanisms, effects on individual tax burdens can be substantial even with low inflation. Bracket creep is found to reduce tax progressivity. At the same time, overall tax revenues increase. This second effect more than compensates for the decline in progressivity and leads to an overall increase of relevant redistribution measures. Existing adjustment regimes used in the Netherlands and the UK are successful at preventing large tax burdens changes resulting from inflation-induced nominal income changes.
    Keywords: Inflation; Fiscal Drag; Income Tax; Social Insurance Contributions; Income Distribution; European Union; Microsimulation
    JEL: C81 H24 D31
    Date: 2004–07

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