nep-ias New Economics Papers
on Insurance Economics
Issue of 2006‒04‒08
twelve papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. A Model of Income Insurance and Social Norms By Assar Lindbeck; Mats Persson
  2. Screening Disability Insurance Applications By de Jong, Philip; Lindeboom, Maarten; van der Klaauw, Bas
  3. Job Security and Work Absence: Evidence from a Natural Experiment By Assar Lindbeck; Marten Palme; Mats Persson
  4. Optimal Taxation and Social Insurance in a Lifetime Perspective By Lans Bovenberg; Peter Birch Sørensen
  5. Testing for Adverse Selection with %u201CUnused Observables%u201D By Amy Finkelstein; James Poterba
  6. Is the Market Classification of Risk Always Efficient? - Evidence from German Third Party Motor Insurance By Reimund Schwarze; Thomas Wein
  7. Moving between Welfare Payments. The Case of Sickness Insurance for the Unemployed By Henningsen, Morten
  8. Insuring the Uninsurable: Brokers and Incomplete Insurance Contracts By Neil A. Doherty; Alexander Muermann
  9. Risk Selection in Natural Disaster Insurance – the Case of France By Mario Jametti; Thomas von Ungern-Sternberg
  10. The Unemployment Benefit System: a Redistributive or an Insurance Institution? By Daniel Cardona; Fernando Sánchez-Losada
  11. Credit Risk Transfer and Contagion By Franklin Allen; Elena Carletti
  12. ART Versus Reinsurance: The Disciplining Effect of Information Insensitivity By Silke Brandts; Christian Laux

  1. By: Assar Lindbeck; Mats Persson
    Abstract: A large literature on ex ante moral hazard in income insurance emphasizes that the individual can affect the probability of an income loss by choice of lifestyle and hence, the degree of risk-taking. The much smaller literature on moral hazard ex post mainly analyzes how a “moral hazard constraint” can make the individual abstain from fraud (“mimicking”). The present paper instead presents a model of moral hazard ex post without a moral hazard constraint; the individual's ability and willingness to work is represented by a continuous stochastic variable in the utility function, and the extent of moral hazard depends on the generosity of the insurance system. Our model is also well suited for analyzing social norms concerning work and benefit dependency.
    Keywords: moral hazard, sick pay insurance, labor supply, asymmetric information
    JEL: G22 H53 I38 J21
    Date: 2006
  2. By: de Jong, Philip; Lindeboom, Maarten; van der Klaauw, Bas
    Abstract: This paper investigates the effects of intensified screening of disability insurance benefit applications. A large-scale experiment was setup where in 2 of the 26 Dutch regions case workers of the disability insurance administration were instructed to screen applications more intense. The empirical results show that intense screening reduces long-term sickness absenteeism and disability insurance applications. This provides evidence both for direct effects of the more intensive screening on work resumption during sickness absenteeism and for self-screening by potential disability insurance applicants. We do not find any spillover effects to the inflow into unemployment insurance. A cost-benefit analysis shows that the costs of the intensified screening are only a small fraction of its benefits.
    Keywords: disability insurance; policy evaluation; self-screening; sickness absenteeism
    JEL: J28 J65
    Date: 2006–03
  3. By: Assar Lindbeck; Marten Palme; Mats Persson
    Abstract: We analyze the consequences for sickness absence of a selective softening of job security legislation for small firms in Sweden in 2001. According to our differences-in-difference estimates, aggregate absence in these firms fell by 0.2-0.3 days per year. This aggregate net figure hides important effects on different groups of employees. Workers remaining in the reform firms after the reform reduced their absence by about one day. People with a high absence record tended to leave reform firms, but these firms also became less reluctant to hire people with a record of high absence.
    Keywords: seniority rules, sick pay insurance, firing costs, moral hazard
    JEL: H53 I38 J22 J50 M51
    Date: 2006
  4. By: Lans Bovenberg; Peter Birch Sørensen
    Abstract: Advances in information technology have improved the administrative feasibility of redistribution based on lifetime earnings recorded at the time of retirement. We study optimal lifetime income taxation and social insurance in an economy in which redistributive taxation and social insurance serve to insure (ex ante against skill heterogeneity as well as disability risk. Optimal disability benefits rise with previous earnings so that public transfers depend not only on current earnings but also on earnings in the past. Hence, lifetime taxation rather than annual taxation is optimal. The optimal tax-transfer system does not provide full disability insurance. By offering imperfect insurance and structuring disability benefits so as to enable workers to insure against disability by working harder, social insurance is designed to offset the distortionary impact of the redistributive labor income tax on labor supply.
    Keywords: optimal lifetime income taxation, optimal social insurance
    JEL: H21 H55
    Date: 2006
  5. By: Amy Finkelstein; James Poterba
    Abstract: This paper proposes a new test for adverse selection in insurance markets based on observable characteristics of insurance buyers that are not used in setting insurance prices. The test rejects the null hypothesis of symmetric information when it is possible to find one or more such “unused observables” that are correlated both with the claims experience of the insured and with the quantity of insurance purchased. Unlike previous tests for asymmetric information, this test is not confounded by heterogeneity in individual preference parameters, such as risk aversion, that affect insurance demand. Moreover, it can potentially identify the presence of adverse selection, while most alternative tests cannot distinguish adverse selection from moral hazard. We apply this test to a new data set on annuity purchases in the United Kingdom, focusing on the annuitant’s place of residence as an “unused observable.” We show that the socio-economic status of the annuitant’s place of residence is correlated both with annuity purchases and with the annuitant’s prospective mortality. Annuity buyers in different communities therefore face different effective insurance prices, and they make different choices accordingly. This is consistent with the presence of adverse selection. Our findings also raise questions about how insurance companies select the set of buyer attributes that they use in setting policy prices. We suggest that political economy concerns may figure prominently in decisions to forego the use of some information that could improve the risk classification of insurance buyers.
    JEL: D82 G22
    Date: 2006–03
  6. By: Reimund Schwarze (Department of Energy, Transportation, Environment, German Institute for Economic Research (DIW) Berlin); Thomas Wein (Institute of Economics, University of Lüneburg)
    Abstract: The efficiency of market-determined risk classification in automobile insurance is a lasting matter of controversy. It can be traced back to the 1950s (Muir, 1957) and received broad economic attention in the 1980s when spiralling car insurance premiums in the US were blamed on tariff regulations prohibiting the use of sex, age and location as risk characteristics (Blackmon/ Zeckhauser 1991, Cummins/ Tennyson 1992, Harrington/ Doerpinghaus 1993). In a mirroring move the EU saw a heated political and legal debate on the use of special tariffs for foreigners, in the 1980s, which resulted in a legal ban of ‘discriminatory’ tariffs for mandatory insurance schemes in many European countries. The latest blow against risk classification in car insurance comes with the EU Employment and Social Affairs’ draft directive on gender equality which proposes to prohibit gender specific calculation of all private insurance products, including non-mandatory branches such as life, private health or comprehensive car insurance.
    Date: 2005–03
  7. By: Henningsen, Morten (The Ragnar Frisch Centre for Economic Research)
    Abstract: This study describes the probability of transition from unemployment with unemployment insurance (UI) to sickness with sickness insurance (SI), using a grouped proportional hazard duration model and 9 years of monthly panel data. The combination of duration-limited UI and the fact that SI rights do not depend on remaining UI, creates an incentive to apply for SI, which is strongest immediately before UI expires. Estimation shows that the sickness hazard increases by around 50% when UI is about to end. Data on the sickness spells reveal that those who were given SI shortly before UI expired, are more likely to fully exploit the maximum of 12 months SI.
    Keywords: Unemployment insurance; sickness insurance; unemployment duration
    JEL: C41 I18 J64 J65
    Date: 2006–03–14
  8. By: Neil A. Doherty (The Wharton School, University of Pennsylvania); Alexander Muermann (The Wharton School, University of Pennsylvania)
    Abstract: How do markets spread risk when events are unknown or unknowable and where not anticipated in an insurance contract? While the policyholder can "hold up" the insurer for extra contractual payments, the continuing gains from trade on a single contract are often too small to yield useful coverage. By acting as a repository of the reputations of the parties, we show the brokers provide a coordinating mechanism to leverage the collective hold up power of policyholders. This extends both the degree of implicit and explicit coverage. The role is reflected in the terms of broker engagement, specifically in the ownership by the broker of the renewal rights. Finally, we argue that brokers can be motivated to play this role when they receive commissions that are contingent on insurer profits. This last feature questions a recent, well publicized, attack on broker compensation by New York attorney general, Elliot Spitzer.
    Keywords: Incomplete Insurance Contracts, Brokerage, Contingent Commissions, Reputation
    JEL: G22 G24 L14
    Date: 2005–01–24
  9. By: Mario Jametti; Thomas von Ungern-Sternberg
    Abstract: It is widely recognized that “market failure” prevents efficient risk sharing in natural disaster insurance. As a consequence, many countries adopted institutional frameworks presenting public sector participation, often praised as public-private partnerships. We define risk selection as a situation where private companies pass insurance of high risk agents on to the public “partner”, arguing that this is a potentially important issue in such situations. In order to illustrate our concerns we look at the case of France. We build a simple model that incorporates the main features of the system, such as the uniform premium rate in both high and low risk regions and the existence of a state reinsurer. We show that in our model, risk selection is likely to be present at equilibrium and discuss the policy options available. When comparing with the actual situation in France we find that the “stylized facts” of the system correspond to our results. Additionally, the policies implemented by the government correspond to policies characterized to reduce the potential of risk selection.
    Keywords: risk selection, property insurance, reinsurance, France
    JEL: G22 L11 Q54
    Date: 2006
  10. By: Daniel Cardona; Fernando Sánchez-Losada
    Abstract: We analyze the effects of the unemployment benefit system on the economy. In particular, we focus on both the tax structure and the unemployment benefits composition. We show that if the unemployment benefit system is only paid by firms, then employment and production are maximized. Moreover, the way the government contemplates the unemployment benefit system, either as a redistributive or as an insurance institution, is crucial for the dynamics and the equilibria of the economy.
    Keywords: unemployment benefit system, payroll tax, wage tax.
    JEL: E24 E62 H53 J50 J65
    Date: 2004–12
  11. By: Franklin Allen (The Wharton School, University of Pennsylvania); Elena Carletti (Center for Financial Studies)
    Abstract: Some have argued that recent increases in credit risk transfer are desirable because they improve the diversification of risk. Others have suggested that they may be undesirable if they increase the risk of financial crises. Using a model with banking and insurance sectors, we show that credit risk transfer can be beneficial when banks face uniform demand for liquidity. However, when they face idiosyncratic liquidity risk and hedge this risk in an interbank market, credit risk transfer can be detrimental to welfare. It can lead to contagion between the two sectors and increase the risk of crises.
    Keywords: Financial Innovation, Pareto Inferior, Banking, Insurance
    JEL: G21 G22
    Date: 2005–10–09
  12. By: Silke Brandts (Goethe University Frankfurt); Christian Laux (Goethe University Frankfurt)
    Abstract: We provide a novel benefit of "Alternative Risk Transfer" (ART) products with parametric or index triggers. When a reinsurer has private information about his client's risk, outside reinsurers will price their reinsurance offer less aggressively. Outsiders are subject to adverse selection as only a high-risk insurer might find it optimal to change reinsurers. This creates a hold-up problem that allows the incumbent to extract an information rent. An information-insensitive ART product with a parametric or index trigger is not subject to adverse selection. It can therefore be used to compete against an informed reinsurer, thereby reducing the premium that a low-risk insurer has to pay for the indemnity contract. However, ART products exhibit an interesting fate in our model as they are useful, but not used in equilibrium because of basis-risk.
    Keywords: Cat Bonds, Risk Transfer, Index Trigger, Adverse Selection
    JEL: D82 G22
    Date: 2005–01–21

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