nep-ias New Economics Papers
on Insurance Economics
Issue of 2006‒01‒24
twenty papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Health Insurance Take-up by the Near Elderly By Thomas C. Buchmueller; Sabina Ohri
  2. Pay-at-the-Pump Auto Insurance By Khazzoom, J. Daniel
  3. Separating Selection and Incentive Effects in Health Insurance By Gardiol, Lucien; Geoffard, Pierre-Yves; Grandchamp, Chantal
  4. Fiscal Federalism, discipline and selection adverse in the EU : Lessons from a theoretical model By Amélie Barbier-Gauchard
  5. From regulation to free market: the experience of the European motor insurance market By Domenico SCALERA; Alberto ZAZZARO
  6. Liability, insurance and defensive medicine: new evidence By Paul Fenn; Alastair Gray; Neil Rickman
  7. Comparing Alternative Policies to Reduce Traffic Accidents By Parry, Ian
  8. Pay-at-the-Pump (PATP) Auto Insurance: Criticisms and Proposed Modifications By Khazzoom, J. Daniel
  9. What We Know About Uninsured Motorists and How Well We Know What We Know By Khazzoom, J. Daniel
  10. Voting over informal risk-sharing rules By Ambec, S.
  11. On the Efficiency of Public and Private Health Care Systems: An Application to Alternative Health Policies in the United Kingdom By Parry, Ian
  12. The Long-Term Effects of a Generous Income Support Program: Unemployment Insurance in New Brunswick and Maine, 1940-1991 By Peter Kuhn; Chris Riddell
  13. Risk Diversification by European Financial Conglomerates By Jan Frederik Slijkerman; Dirk Schoenmaker; Casper de Vries
  14. Financial Responsibility for Environmental Obligations: Are Bonding and Assurance Rules Fulfilling Their Promise? By Boyd, James
  15. The Long-Term Effects of a Generous Income Support Program: Unemployment Insurance in New Brunswick and Maine, 1940-1991 By Peter Kuhn; Chris Riddell
  16. Courts of Law and Unforeseen Contingencies By Luca Anderlini; Leonardo Felli; Andrew Postlewaite
  17. Is Pay-As-You-Drive Insurance a Better Way to Reduce Gasoline than Gasoline Taxes? By Parry, Ian
  18. Labour Protection in China: Challenges Facing Labour Offices and Social Insurance By Anders Reutersward
  19. Torts and the Protection of "Legally Recognized" Interests By Hoffmann, Sandra; Hanemann, W. Michael
  20. Willingness to Pay for Mortality Risk Reductions: Does Latency Matter? By Krupnick, Alan; Alberini, Anna; Simon, Nathalie; Cooper, Maureen

  1. By: Thomas C. Buchmueller; Sabina Ohri
    Abstract: This study examines the effect of price on the demand for health insurance by early retirees between the ages of 55 and 64. The analysis is based on administrative data from a medium sized employer and takes advantage of a natural experiment created by the firm's health insurance contribution policy. The amount the firm contributes toward retiree health insurance coverage depends on when a person retired and her years of service at that date. As a result of this policy, there is considerable variation in out-of-pocket premiums faced by individuals in the data, but this variation is independent of the non-price attributes of the health insurance plans offered, and plausibly exogenous to individual characteristics that are likely to affect the demand for insurance. We find that price has a statistically significant but small effect on the decision to take up coverage. The implied elasticities are very similar to results found in previous studies using very different data.
    JEL: D12 H51 I11 J26 J32
    Date: 2006–01
  2. By: Khazzoom, J. Daniel
    Abstract: PAY-AT-THE-PUMP is a proposal to replace the current insurance system of lump sum payments for automobile insurance by a mechanism whereby motorists pay for their insurance as they buy fuel for their vehicles. PAY-AT-THE-PUMP has several advantages. It reduces insurance cost and cross subsidies and enhances equity. It also benefits the environment, safety, balance of payments, and security. In this paper we study limited but very important issues in the theory and implementation of PAY-AT-THE-PUMP insurance. We address issues of efficiency, subsidy, equity, externalities, safety, insurance cost and cost of insuring the uninsured motorist under a PAY-AT-THE-PUMP regime. We use the insurance industry’s criticisms of mandatory auto insurance as a lens through which we view PAY-AT-THE-PUMP insurance and ask how PAY-AT-THE-PUMP fares by comparison. Finally we address one aspect of insurance that has been neglected in the current debate -- the human dimension of the problem of uninsured motorist and the contribution PAY-AT-THE-PUMP can make to solve this problem.
  3. By: Gardiol, Lucien; Geoffard, Pierre-Yves; Grandchamp, Chantal
    Abstract: This paper provides an analysis of the health insurance and health care consumption. A structural microeconomic model of joint demand for health insurance and health care is developed and estimated using full maximum likelihood method using Swiss insurance claims data for over 60,000 adult individuals. The estimation strategy relies on the institutional features of the Swiss system, in which each individual chooses among the same menu of contracts, ranked by the size of their deductible. The empirical analysis shows strong and robust evidence of selection effects. Nevertheless, once selection effects are controlled for, an important incentive effect ('ex-post moral hazard') remains. A decrease in the co-payment rate from 100% to 10% increases the marginal demand for health care by about 90% and from 100% to 0% by about 150%. The correlation between insurance coverage and health care expenditures may be decomposed into the two effects: 75% may be attributed to selection, and 25 % to incentive effects.
    Keywords: adverse selection; demand for health care; full maximum likelihood estimation; health insurance; moral hazard
    JEL: C51 D82 I11
    Date: 2005–12
  4. By: Amélie Barbier-Gauchard (LEO - Laboratoire d'économie d'Orleans - - CNRS : FRE2783 - Université d'Orléans)
    Abstract: What is the optimal wat to stabilize shocks and to take care of fiscal discipline in a fiscal union ? Among the various possible ways, this paper focuses on an inter-countries insurance scheme conditioned by the national preference for the fiscal discipline of each government. We will show that the insurance scheme improves significantly the union\'s social welfare because it enables to cover deviations of the output gap and correct national preferences.
    Keywords: Inter-countries insurance ; stabilization ; fiscal discipline ; EU ; fiscal federalism ; selection adverse
    Date: 2006–01–13
  5. By: Domenico SCALERA; Alberto ZAZZARO (Universita' Politecnica delle Marche, Dipartimento di Economia)
    Abstract: Increasing premiums, increasing claims and decreasing profits are three striking facts associated in some European countries to motor insurance liberalization of 1990's. In this paper, we argue that these phenomena may be considered not a consequence of collusion or other misapplications of deregulation but rather an effect of the impact of liberalization on the companies’ optimal choices. In particular, by extending the Salop-Economides model, we show that price deregulation involves decreasing investments in monitoring and increasing compensation costs. Therefore, the transition from regulation to competition can yield prices and profits moving in either direction and possibly opposite directions.
    Keywords: motor insurance, regulation, spatial models
    JEL: G22 L11 L50
    Date: 2004–03
  6. By: Paul Fenn (Nottingham University Business School); Alastair Gray (Health Economics Research Centre, University of Oxford); Neil Rickman (University of Surrey & CEPR)
    Abstract: For the first time, we test for effects of liability on hospital care using measures of current perceptions of litigation risk at hospital level; in particular, the risk-sharing arrangements agreed between hospitals and their insurers. GMM and ML estimators are used to allow for possible endogeneity of risksharing arrangements. Our findings are consistent with the exercise of liabilityinduced discretion by hospitals, especially regarding use of costly diagnostic imaging. Hospitals facing higher expected litigation costs also use these tests more frequently, after controlling for activity levels, casemix and treatment outcome; the latter indicating that defensive medicine may be present. We also find evidence of fewer new claims against these hospitals, given adverse events, which may indicate the increased use of claims management processes by hospital managers concerned at the expected cost of litigation.
    Keywords: Medical malpractice, defensive care, insurance, litigation
    JEL: I18 K13
    Date: 2004–07
  7. By: Parry, Ian (Resources For the Future)
    Abstract: This paper derives and implements formulas for the welfare effects of differentiated and uniform mileage taxes, gasoline taxes, and per mile insurance premiums, for reducing the external costs of passenger vehicle accidents. The model distinguishes three driver groups and five vehicle groups, and we obtain estimates of external accident costs per mile for each group from crash data. The (average) external accident cost is estimated at 2.2-6.6 cents per mile. Accidents costs differ substantially across drivers of different ages, but only moderately across different vehicles groups. Annual welfare gains from a mileage tax differentiated across drivers and vehicles according to marginal external costs are $9.4 billion in the benchmark case. The uniform mileage tax and per-mile insurance reform can achieve 76% and 65% of this welfare gain, respectively, while the gasoline tax can achieve only 28% of the welfare gain. Unlike other policies, the gasoline tax induces costly improvements in average fleet fuel economy that have little effect on reducing external costs.
    Keywords: traffic accidents; external costs; pricing policies; insurance reform
    JEL: R48 H22 H23
  8. By: Khazzoom, J. Daniel
    Abstract: In 1998 the U.S. Environmental Protection Agency sponsored an effort to examine the criticisms and concerns expressed about Pay-at-the-Pump (PATP) auto insurance and explore the reformulation of PATP, taking into account these concerns. This paper provides a brief exposition of PATP and its main advantages followed by a review of its criticisms and concerns. We outline a reconstituted PATP proposal emerging from the review of these criticisms- a hybrid system that merges the best features from PATP and the existing insurance system. It retains what is consistent with the free market operation and market incentive in the existing system. At the same time it restores the price signal, the sine qua non for economic efficiency, where it has been extinguished in the existing insurance system. The reconstituted proposal capitalizes on the pricing efficiency feature that characterizes PATP, which in turn leads to a reduction in insurance cost, enhanced safety, elimination of resource misallocation, enhanced equity and reduction (possibly elimination) of accident-cost externalities. In addition, it benefits society at large with improved environment, improved balance of payments, enhanced U.S. security, and a redress to the human dimension of the uninsured motorist problem.
  9. By: Khazzoom, J. Daniel
    Abstract: The problem posed by the uninsured motorist is of concern to the general public, policyholders, insurance companies, insurance regulators, and legislators. What is striking, however, is the fragmentary nature of the information that is available and the fact that it is scattered over so many sources. Even more striking is the fact that those sources often provide conflicting estimates, and the methods used in deriving those estimates are either never spelled out or, if they are, their reliability is unknown. In view of the general concern with the problem of uninsured motorists, this paper attempts to present an overview of what we know about the uninsured motorists and how well we know what we know through the following measures- clarifying the subtleties of the definition of an uninsured motorist; discussing the more prominent methods used to estimate the number of uninsured motorists and the properties of the estimates generated by these methods; illustrating what is known about the profiles of uninsured motorists; and pointing briefly to factors that account for the existence of uninsured motorists.
  10. By: Ambec, S.
    Abstract: People vote over risk-sharing rules to cope with random revenues. Risk-sharing rules are enforced through peer pressure : those who comply exert a negative externality on those who do not. People are differently affected by this externality. The author determines the elected risk-sharing rules and the level of compliance. It turns out that full risk-sharing is achieved only if everybody complies. Partial risk-sharing is more often achieved with, sometime, some level of non-compliance. In many cases, a majority of people votes over and complies with the risk-sharing rule that maximizes their own expected payoff.
    JEL: H21 O15 O17
    Date: 2005
  11. By: Parry, Ian (Resources For the Future)
    Abstract: Health policy will be a major issue in Britain’s next general election. The Labour government is committed to a substantial increase in funds for the National Health Service (NHS) and has eliminated tax relief for private health insurance. The Conservative Opposition party favors subsidizing private health insurance, though it has pledged to match the government’s funding increases for the NHS. This paper develops and implements a methodology for estimating the welfare effects of increasing public and private health care in the United Kingdom, when these policies are financed either by distortionary taxes or by user fees for the NHS. User fees are currently minimal, and the national health market “clears” by creating waiting costs. In the private sector we assume that prices approximately reflect marginal supply costs, and there are no waiting lists. We find that the welfare change from increasing NHS output could easily be negative, particularly when extra spending is financed by distortionary taxes. In contrast, expanding private health care is always efficiency-improving in our simulations. In our central estimates, increasing private health care by a pound’s worth of output produces an efficiency gain of 55 pence, but increasing national health output produces a net efficiency loss of 32 pence per pound! One reason for these results is that increasing the output of rationed health care has ambiguous effects on the total deadweight losses from waiting costs, but these costs unambiguously fall when the private health sector expands. Financing policies by user fees avoids the efficiency costs of raising distortionary taxes, and it also produces efficiency gains by reducing waiting lists. In fact, increasing national health care output produces an overall efficiency gain in most of our simulations, rather than an efficiency loss, when the policy is financed by higher user fees rather than by distortionary taxes. Still, the policy is generally less efficient than a user fee–financed increase in private health care.
  12. By: Peter Kuhn (University of California, Santa Barbara, NBER and IZA Bonn); Chris Riddell (Queen’s University)
    Abstract: Using data spanning a half century for adjacent jurisdictions in the U.S. and Canada, we study the long-term effects of a very generous unemployment insurance (UI) program on weeks worked. We find large effects. For example, in 1990, about 6 percent of employed men in Maine's northernmost counties worked fewer than 26 weeks per year; just across the border in New Brunswick that figure was over 20 percent. According to our estimates, New Brunswick's much more generous UI system accounts for about two thirds of this differential. Even greater effects are found among women and less-educated men. We argue that our longer-run, cross-national perspective generates more substantial estimates of program effects because it captures workers' abilities to make a wider variety of adjustments to programs they expect to be permanent.
    Keywords: unemployment insurance, labor supply, Canada, income support
    JEL: J22 J64
    Date: 2006–01
  13. By: Jan Frederik Slijkerman (Faculty of Economics, Erasmus Universiteit Rotterdam); Dirk Schoenmaker (Vrije Universiteit Amsterdam, and Ministry of Finance, The Hague); Casper de Vries (Faculty of Economics, Erasmus Universiteit Rotterdam)
    Abstract: We study the dependence between the downside risk of European banks and insurers. Since the downside risk of banks and insurers differs, an interesting question from a supervisory point of view is the risk reduction that derives from diversification within large banks and financial conglomerates. We discuss the limited value of the normal distribution based correlation concept, and propose an alternative measure which better captures the downside dependence given the fat tail property of the risk distribution. This measure is estimated and indicates better diversification benefits for conglomerates versus large banks.
    Keywords: Financial conglomerates; Banking; Insurance; Diversification; Extreme Value Theory
    JEL: G21 G22 G28 C49
  14. By: Boyd, James (Resources For the Future)
    Abstract: Financal assurance rules, also known as financial responsibility or bonding requirements, foster cost internalization by requiring potential polluters to demonstrate the financial resources necessary to compensate for environmental damage that may arise in the future. Accordingly, assurance is an important complement to liability rules, restoration obligations, and other regulatory compliance requirements. The paper reviews the need for assurance, given the prevalence of abandoned environmental obligations, and assesses the implementation of assurance rules in the United States. From the standpoint of both legal effectiveness and economic efficiency, assurance rules can be improved. On the whole, however, cost recovery, deterrence, and enforcement are significantly improved by the presence of existing assurance regulations.
    Keywords: financial assurance, financial responsibility, bonding, environmental insurance
    JEL: K13 K32 Q38
  15. By: Peter Kuhn; Chris Riddell
    Abstract: Using data spanning a half century for adjacent jurisdictions in the U.S. and Canada, we study the long-term effects of a very generous unemployment insurance (UI)program on weeks worked. We find large effects. For example, in 1990, about 6 percent of employed men in Maine's northernmost counties worked fewer than 26 weeks per year; just across the border in New Brunswick that figure was over 20 percent. According to our estimates, New Brunswick's much more generous UI system accounts for about two thirds of this differential. Even greater effects are found among women and less-educated men. We argue that our longer-run, crossnational perspective generates more substantial estimates of program effects because it captures workers' abilities to make a wider variety of adjustments to programs they expect to be permanent.
    JEL: J22 J64
    Date: 2006–01
  16. By: Luca Anderlini (Department of Economics, Georgetown University); Leonardo Felli (Department of Economics, London School of Economics); Andrew Postlewaite (Department of Economics, University of Pennsylvania)
    Abstract: We study a contracting model with unforeseen contingencies in which the court is an active player. Ex-ante, the contracting parties cannot include the risky unforeseen contingencies in the contract they draw up. Ex-post the court observes whether an unforeseen contingency occurred, and decides whether to void or uphold the contract. If the contract is voided by the court, the parties can renegotiate a new agreement ex-post. There are two effects of a court that voids more contracts. The parties’ incentives to undertake relationship-specific investment are reduced, while the parties enjoy greater insurance against the unforeseen contingencies which the ex-ante contract cannot take into account. In this context, we are able to characterize fully the optimal decision rule for the court. The behavior of the optimal court is determined by the tradeoff between the need for incentives and the gains from insurance that voiding in some circumstances offers to the agents.
    Keywords: Courts of Law, Unforeseen Contingencies, Precedents, Incentives, Insurance
    JEL: C79 D74 D89 K40 L14
    Date: 2001–03–01
  17. By: Parry, Ian (Resources For the Future)
    Abstract: Gasoline taxes are widely perceived as the most efficient instrument for reducing gasoline consumption because they exploit all behavioral responses for reducing fuel use, including reduced driving and improved fuel economy. At present, however, higher fuel taxes are viewed as a political nonstarter. Pay-as-you-drive (PAYD) auto insurance, which involves replacing existing lump-sum premiums with premiums that vary in proportion to miles driven, should be more practical, since they do not raise driving costs for the average motorist. We show that when impacts on a broad range of motor vehicle externalities are considered, PAYD also induces significantly higher welfare gains than comparable gasoline tax increases, for fuel reductions below 9%. The reason is that under PAYD, all of the reduction in fuel use, rather than just a fraction, comes from reduced driving; this produces a substantial additional efficiency gain because mileage-related external costs (especially congestion and accidents) are relatively large in magnitude.
    Keywords: gasoline tax; pay-as-you-drive insurance; mileage tax; welfare effects; motor vehicle externality
    JEL: H21 H23 R48
  18. By: Anders Reutersward
    Abstract: One of the key institutional outcomes of China’s economic reforms has been to create a new role for employers that is separate from the state, and allows enterprises to concentrate on their business. To protect workers, the government has set up public institutions for many social and administrative functions that until recently pertained to work units (danwei), or did not exist. This paper focuses on three such functions for which the 1994 Labour Law makes the government responsible: employment services, labour inspection and social insurance. Un des résultats institutionnels clés des réformes économiques en Chine a été la promotion du nouveau rôle joué par les employeurs, en dehors de l’Etat, qui permet aux entreprises de gérer leurs propres affaires. Le gouvernement, pour protéger les travailleurs, a créé des institutions publiques couvrant de nombreuses fonctions sociales et administratives qui, jusqu’à une date récente, ne concernaient que les unités de travail (danwei) ou n’existaient pas. Ce document se concentre sur trois des fonctions que la Loi de 1994 sur le travail place sous la responsabilité du gouvernement : les services de l’emploi, l’inspection du travail et l’assurance sociale.
    JEL: J2 J42 J52 J6 J8
    Date: 2005–11–07
  19. By: Hoffmann, Sandra (Resources For the Future); Hanemann, W. Michael
    Abstract: The law of torts plays an important role in completing the legal property rights system by defining the extent to which property is protected from harm. It does this by defining the kinds of interests that will be recognized and protected from harm by the courts, the duty of care owed these recognized interests by others, and the manner in which they will be protected through monetary compensation, restitution, or injunction. Together, these three elements of torts define a right in the “bundle of rights” that constitute property. In this paper, we develop a systematic approach to formalizing the nature of the property rights protected by tort law. We use this approach to reexamine the literature on compensation for nonpecuniary damages. This reexamination demonstrates how recognizing tort’s role in defining property rights and having a way of formalizing these rights can provide deeper insight into old questions torts scholarship.
    Keywords: torts, property rights, liability, compensation, damages, insurance
    JEL: D31 D63 K0 K13
  20. By: Krupnick, Alan (Resources For the Future); Alberini, Anna; Simon, Nathalie; Cooper, Maureen
    Abstract: Using results from two contingent valuation surveys conducted in Canada and the United States, we explore the effect of a latency period on willingness to pay (WTP) for reduced mortality risk using both structural and reduced form approaches. We find that delaying the time at which the risk reduction occurs by 10 to 30 years significantly reduces WTP for respondents aged 40 to 60 years. Additionally, we estimate implicit discount rates equal to 8% for Canada and 4.5% for the United States—both well within the range established previously in the literature.
    Keywords: value of a statistical life, mortality risks, cost–benefit analysis
    JEL: Q51 Q58

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