nep-ias New Economics Papers
on Insurance Economics
Issue of 2006‒05‒20
six papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Default Risk, Bankruptcy Procedures and the Market Value of Life Insurance Liabilities By An Chen; Michael Suchanecki
  2. Bank Runs in Emerging-Market Economies: Evidence from Turkey's Special Finance Houses By Martha A. Starr; Rasim Yilmaz
  3. The Insurance Economy of Iowa By Swenson, David A.
  4. Efficiency of Insurance Firms with Endogenous Risk Management and Financial Intermediation Activities By J. David Cummins; Georges Dionne; Robert Gagné; Abdelhakim Nouira
  5. Task Difficulty, Performance Measure Characteristics, and the Trade-Off between Insurance and Well-Allocated Effort By Wendelin Schnedler
  6. Early Retirement and Public Disability Insurance Applications: Exploring the Impact of Depression By Rena M. Conti; Ernst R. Berndt; Richard G. Frank

  1. By: An Chen; Michael Suchanecki
    Abstract: The topic of insolvency risk in connection with life insurance companies has recently attracted a great deal of attention. In this paper, the question is investigated of how the value of the equity and of the liability of a life insurance company are affected by the default risk and the choice of the relevant bankruptcy procedure. As an example, the U.S. Bankruptcy Code with Chapter 7 and Chapter 11 bankruptcy procedures is used. Grosen and Jørgensen's (2002) contingent claim model, implying only a Chapter 7 bankruptcy procedure, is extended to allow for more general bankruptcy procedures such as Chapter 11. Thus, more realistically, default and liquidation are modelled as distinguishable events. This is realized by using so-called standard and cumulative Parisian barrier option frameworks. It is shown that these options have appealing interpretations in terms of the bankruptcy mechanism. Furthermore, a number of representative numerical analyses and comparative statics are performed in order to investigate the effects of different parameter changes on the values of the insurance company's equity and liability, and hence on the value of the life insurance contract. To complete the analysis, the shortfall probabilities of the insurance company implied by the proposed models are computed and compared.
    Keywords: Equity--Linked Life Insurance, Default Risk, Liquidation Risk, Contingent Claims Pricing, Parisian Options, Bankruptcy Procedures
    JEL: G13 G22 G33
    Date: 2006–04
  2. By: Martha A. Starr (Department of Economics, American University); Rasim Yilmaz (Dumlupinar University)
    Abstract: Recent banking crises in emerging-market countries have renewed debates about deposit insurance. Because insurance erodes banks’ incentives to manage risks prudently, some argue that its elimination would improve bank stability. Yet eliminating insurance could be destabilizing if it recreates risks of self-fulfilling runs. This paper examines dynamics of depositor behavior during a set of runs on Turkey’s Special Finance Houses, an uninsured sub-sector of Islamic banks. Detailed data on withdrawals are analyzed in a vector-autoregressive framework that enables us to distinguish between informational and self-fulfilling elements of runs. We find that both types of dynamics were at work during the runs, suggesting a role for deposit insurance, judiciously used, in ruling out expectational problems that fuel tendencies to run.
    Keywords: bank runs, deposit insurance, Islamic banks, financial development
    JEL: G21 G28 O16
    Date: 2006–05
  3. By: Swenson, David A.
    Abstract: The insurance industry in Iowa is an important and growing segment of the state’s economy. Though nominally small in comparison to most other major sectors of the economy, just 2.8 percent of all jobs are in insurance currently, the industry enjoys a competitive advantage in Iowa compared to the rest of the nation. Within Iowa, the central Iowa insurance industry enjoys a strong competitive advantage with the rest of the state. The industry is also important because of the quality of its workers and the attractiveness of the industry to Iowa’s skilled labor force. This report outlines the substantive and statistical importance of Iowa’s insurance industry at the beginning of the 21st century.
    JEL: A1
    Date: 2006–05–15
  4. By: J. David Cummins; Georges Dionne; Robert Gagné; Abdelhakim Nouira
    Abstract: Risk management is now present in many economic sectors. This paper investigates the role of risk management in creating value for financial institutions by analyzing U.S. property-liability insurers. Property-liability insurers are financial intermediaries whose primary roles in the economy are risk pooling and risk bearing. The risk pooling and risk bearing functions performed by insurers are the primary determinants of the need for risk management. The main goal of this paper is to test how risk management and financial intermediation activities create value for insurers by enhancing economic efficiency. Insurer cost efficiency is measured relative to an econometric cost function. Since the prices of risk management and financial intermediation services are not observable, we consider these two activities as intermediate outputs and estimate their shadow prices. The shadow prices isolate the contributions of risk management and financial intermediation to insurer cost efficiency. The econometric results show that both activities significantly increase the efficiency of the property-liability insurance industry.
    Keywords: Risk management, US property-liability insurer, risk pooling, financial intermediation, economic efficiency, intermediate output, shadow price, cost function, translog approximation
    JEL: C34 D24 D81 G22
    Date: 2006
  5. By: Wendelin Schnedler (University of Heidelberg and IZA Bonn)
    Abstract: When designing incentives for a manager, the trade-off between insurance and a “good” allocation of effort across various tasks is often identified with a trade-off between the responsiveness (sensitivity, precision, signal-noise ratio) of the performance measure and its similarity (congruity, congruence) to the benefit of the manager’s employer. A necessary condition for the trade-off between responsiveness and similarity to be meaningful is that a perfectly congruent measure creates a higher benefit than an equally responsive noncongruent measure. We show that this condition is met if and only if all tasks are exactly equally difficult and there are no spill-overs or synergies across tasks. This means that for most practical purposes, notions of responsiveness and similarity are not informative about the tradeoff between insurance and allocation. In order to understand this trade-off, task difficulty has also to be taken into account.
    Keywords: hidden action, multitasking, incentives
    JEL: M41 M52 J33 D82
    Date: 2006–05
  6. By: Rena M. Conti; Ernst R. Berndt; Richard G. Frank
    Abstract: This paper investigates the impact of depression on labor force participation among older workers. Empirically, we use two analytic strategies and rely on a sample drawn from the Health and Retirement Survey. Depression directly and indirectly increases individuals’ probability of retiring early and applying for DI benefits, after accounting for other predictors of labor force exit. Accounting for the independent effects of depression, disability associated with physical illness may be smaller than the official statistics suggest. There may be great economic gains in increasing depression treatment awareness and access to treatment for individuals, employers and society.
    JEL: I12 J21
    Date: 2006–05

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