nep-ias New Economics Papers
on Insurance Economics
Issue of 2006‒02‒12
twelve papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. The Purpose and Limits of Social Health Insurance By Peter Zweifel
  2. Deductible or Co-Insurance: Which is the Better Insurance Contract under Adverse Selection? By Michael Breuer
  3. Optimal Insurance Contracts without the Non-Negativity Constraint on Indemnities Revisited By Michael Breuer
  4. Consumer Resistance Against Regulation: The Case of Health Care By Peter Zweifel; Harry Telser; Stephan Vaterlaus
  5. Cost Sharing in Health Insurance: An Instrument for Risk Selection? By Karolin Becker; Peter Zweifel
  6. Competition in markets for life insurance. By Marc Pomp; M. Bijlsma; Machiel van Dijk; Michiel van Leuvensteijn; C. Zonderland
  7. The Income Distributive Implications of Recent Private Health Insurance Policies in Australia By Jongsay Yong; Alfons Palangkaraya; Elizabeth Webster; Peter Dawkins
  8. (UBS Pensions series 034) The Efficiency of Bundling Long-Term Care Insurance and Annuities By David C Webb
  9. Age and Choice in Health Insurance: Evidence from Switzerland By Karolin Becker; Peter Zweifel
  10. The Quality of Insurance Intermediary Services - An Analysis of Conduct and Performance in the German Market of Insurance Intermediation By Martina Eckardt
  11. Switch on the competition; causes, consequences and policy implications of consumer switching costs. By Marc Pomp; Victoria Shestalova; L. Rangel
  12. Validity and Reliability of Willingness-to-Pay Estimates: Evidence from Two Overlapping Discrete-Choice Experiments By Harry Telser; Karolin Becker; Peter Zweifel

  1. By: Peter Zweifel (Socioeconomic Institute, University of Zurich)
    Abstract: This contribution seeks to answer two related questions. First, what is the purpose of social health insurance? Or put in slightly different terms, what are the reasons for social (or public) health insurance to exist, even to dominate private health insurance in most developed countries? And second, what are the limits of social health insurance? Can one say that there is "too much" social health insurance in the following two senses: Should the balance be shifted towards the private alternative? And is the degree of coverage excessive?
    Keywords: social health insurance, private health insurance, insurance coverage
    JEL: I11 I18
    Date: 2005–09
  2. By: Michael Breuer (Socioeconomic Institute, University of Zurich)
    Abstract: The standard solution to adverse selection is the separating equilibrium introduced by Rothschild and Stiglitz. Usually, the Rothschild-Stiglitz argument is developed in a model that allows for two states of the world only. In this paper adverse selection is dis-cussed for continuous loss distributions. This gives rise to the new problem of finding the proper form of an insurance contract to impose partial insurance of the low risks. This paper contributes to the discussion on optimal insurance. It analyzes two basic forms of insurance contracts: A contract with a deductible and a contract imposing a positive co-insurance rate. Since high risks can always self-reveal themselves as high risks and buy the optimal insurance contract at high risks’ premiums the Pareto-superior insurance contract is the one that leaves the low risks with higher expected utility while deterring high risks from joining the contract that is designed for low risks. The deductible contract turns out to be superior if premiums contain a sufficiently high loading.
    Keywords: Insurance, Adverse Selection, Deductible, Co-Insurance
    JEL: D81 D82 D62
    Date: 2004–01
  3. By: Michael Breuer (Socioeconomic Institute, University of Zurich)
    Abstract: In the literature on optimal indemnity schedules, indemnities are usually restricted to be non-negative. Gollier (1987) shows that this constraint might well bind: insured could get higher expected utility if insurance contracts would allow payments from the insured to the insurer at some losses. However, due to the insurers’ cost function Gollier supposes, the optimal insurance contract he derives underestimates the relevance of the non-negativity constraint on indemnities. This paper extends Gollier’s findings by allowing for negative indemnity payments for a broader class of insurers’ cost functions.
    Keywords: Insurance, Indemnity, Deductible, Co-Insurance
    JEL: D80 D81 D89
    Date: 2004–04
  4. By: Peter Zweifel (Socioeconomic Institute, University of Zurich); Harry Telser (Socioeconomic Institute, University of Zurich); Stephan Vaterlaus (Plaut Economics, Regensdorf)
    Abstract: Regulation fostering Managed Care alternatives in health insurance is spreading. This work reports on an experiment designed to measure the amounts of compensation asked by the Swiss population (in terms of reduced premiums) for Managed-Care type restrictions in the provision of health care. It finds that restrictions on the freedom of physician choice would require an average compensation of more than one-third of the premium, while generic substitution even meets with a small willingness to pay. Marked preference heterogeneity is an argument against regulation imposing uniformity of contract in Swiss social health insurance.
    Keywords: health insurance, health care, regulation, preference measurement, discrete choice experiments
    JEL: L51 D61 C93 I11 I18
    Date: 2005–02
  5. By: Karolin Becker (Socioeconomic Institute, University of Zurich); Peter Zweifel (Socioeconomic Institute, University of Zurich)
    Abstract: Health insurance is potentially subject to risk selection, i.e. adverse selection on the part of consumers and cream skimming on the part of insurers. Adverse selection models predict that competitive health insurers can eschew high-risk individuals by o¤ering contracts with low deductibles or co-payment rates, while attracting low-risk individuals with higher copayments, resulting in a separating equilibrium. This contribution seeks to determine whether in competitive Swiss social health insurance policies with deductibles in excess of the legal minimum do indeed serve as an instrument of risk selection. In a discrete choice experiment, e¤ected in 2003, some 1,000 individuals were given the hypothetical choice of alternative insurance contracts that differed both in terms of deductibles and copayments and in bene.ts covered. Results suggest that healthy individuals, i.e. those not having consulted medical services during the past six months, were more likely to select a policy with a high deductible. Compensation demanded for voluntarily accepting an increase in the annual deductible also varies with socioeconomic characteristics and increases with the current level of deductible, as predicted by theory and constituting evidence in favor of the risk selection hypothesis. The experiment allows to compute necessary premium reductions and provides guidance for the pricing policy of insurers when o¤ering di¤erentiated products.
    Keywords: health insurance, deductible, copayment, willingness-to-pay, ad- verse selection
    JEL: C35 C93 D61 I11 I18
    Date: 2005–11
  6. By: Marc Pomp; M. Bijlsma; Machiel van Dijk; Michiel van Leuvensteijn; C. Zonderland
    Abstract: This report presents an empirical analysis of competition in the market for life insurance. In this market, financial advisors play a large role. Therefore, the report devotes considerable attention to the functioning of the market for financial advice. The main findings are as follows. Empirical indicators of competition find only weak competition in the market for life insurance. There are substantial economies of scale, large X-inefficiencies, and limited competition as measured by the Boone-indicator compared to other services sectors. Also, the higher profitability of Dutch life insurers compared to their foreign peers suggests weak competition, although it should be pointed out that this indicator mainly reflects the situation in the past. Better functioning of financial advisors offers a key towards improving competition. Consumers who purchased annuities through advisors are found to achieve lower pay-outs than consumers who purchased directly from life insurers. This finding underlines the importance of more transparency of life insurance products and of independent advice.
    Keywords: competition; life insurance; financial advice
    JEL: L13 D14
    Date: 2005–09
  7. By: Jongsay Yong (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne); Alfons Palangkaraya (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne); Elizabeth Webster (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne); Peter Dawkins (Victorian Department of Treasury and Finance)
    Abstract: The Australian government implemented a series of new private health insurance policies between 1997 and 2000. As a result, the proportion of the population with private health insurance coverage increased by more than 35%. However, this paper finds significant evidence that the policy reform disproportionately favours high income earners. In particular, the 30 per cent premium subsidy represents a windfall gain for households which would have purchased private health insurance even without the rebate. The amount of the gain is approximately $900 million per year, a large proportion of which would go to higher income households.
    Date: 2006–02
  8. By: David C Webb
    Abstract: This paper presents a unified treatment of the links between preventative actions, long-termcare insurance coverage and annuity purchase. Using an asymmetric information model with preventative actions, we predict that high risk aversion individuals have a higher than average incentive to take long-term care insurance but also take more preventative actions and so have lower than average utilisation of tong-term care insurance. These individuals also demand more annuities. The introduction of transactions costs in providing insurance, yields predictions consistent with the empirical findings of Finkelstein and Poterba (2003, 2004) and Finkelstein and McGarry (2003). However, we show that under the assumptions of the model bundled contracts are more efficient. The puzzle is to explain why these contracts are not more prevalent, so compounding the annuities puzzle.Please note that this DP replaces the previous version 'Mortality Insurance, Health Care and Bequests'.
    Date: 2005–03
  9. By: Karolin Becker (Socioeconomic Institute, University of Zurich); Peter Zweifel (Socioeconomic Institute, University of Zurich)
    Abstract: Elements of regulation inherent in most social health insurance systems are a uniform package of benefits and uniform cost sharing. Both elements risk to burden the population with a welfare loss if preferences differ. This suggests introducing more contracted choice; however, it is widely believed that this would not benefit the aged. This study examines the relationship between age and willingness-to-pay (WTP) for additional options in Swiss social health insurance. Through discrete choice experiments, a marked diversity of preferences can be established. The .ndings suggest that the aged require less rather than more compensation for all cutbacks considered, pointing to potential for contracts that induce self-rationing, in return for lower premiums.
    Keywords: willingness-to-pay, health insurance, age, rationing
    JEL: C35 C93 D61 I11 I18
    Date: 2004–08
  10. By: Martina Eckardt (Herdecke University Witten)
    Abstract: Based on a sample of 946 German insurance intermediaries, the factors that affect the quality of the information services provided by them are studied using OLS-estimations. Applying a search theoretical approach, we analyze the impact of supply and demand side variables on service quality. Besides, the working of signaling devices (like reputation, advertising or certificates) to reduce asymmetric information with respect to the service quality of insurance intermediaries is examined. The results obtained support the main hypotheses derived from industrial organization theories as to the poor working of quality competition under incomplete and asymmetric information on the side of consumers. Thus, public policy should concentrate on increasing transparency about intermediaries' (in-)dependence from insurance companies and improve consumers' financial literacy to raise the overall quality of the information services provided by insurance intermediaries.
    Keywords: Performance of Insurance Distribution Systems, Information Quality
    JEL: D83 G22 L15
    Date: 2006
  11. By: Marc Pomp; Victoria Shestalova; L. Rangel
    Abstract: The success or failure of reforms aimed at liberalising markets depends to an important degree on consumer behaviour. If consumers do not base their choices on differences in prices and quality, competition between firms may be weak and the benefits of liberalisation to consumers may be small. One possible reason why consumers may respond only weakly to differences in price and quality is high costs of switching to another firm. This report presents a framework for analysing markets with switching costs and applies the framework in two empirical case studies. The first case study analyses the residential energy market, the second focuses on the market for social health insurance. In both markets, there are indications that switching costs are substantial. The report discusses policy options for reducing switching costs and for alleviating the consequences of switching costs.
    Keywords: Switching costs; consumer behaviour; competition; energy markets; health insurance
    JEL: L13 D12
    Date: 2005–09
  12. By: Harry Telser (Socioeconomic Institute, University of Zurich); Karolin Becker (Socioeconomic Institute, University of Zurich); Peter Zweifel (Socioeconomic Institute, University of Zurich)
    Abstract: Discrete-choice experiments, while becoming increasingly popular, have rarely been tested for validity and reliability. This contribution purports to provide some evidence of a rather unique type. Two surveys designed to measure willingness-to-accept (WTA) for reform op-tions in Swiss health care and health insurance are used to provide independent information with regard to two elements of reform. The issue to be addressed is whether WTA values converge although the three overlapping attributes (a more restrictive drug benefit, a delayed access to medical innovation, and a change in the monthly insurance premium) are embedded in widely differing choice sets. Experiment A contains rather radical health system reform options, while experiment B concentrates on more familiar elements such as copayment and the benefit catalogue. While mean WTA values differ between experiments, they tend to vary in similar ways, suggesting at least theoretical validity and reliability.
    Keywords: willingness-to-pay, discrete choice experiments, validity, reliability, framing effects
    JEL: C35 C93 I11
    Date: 2004–09

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