nep-ias New Economics Papers
on Insurance Economics
Issue of 2006‒06‒10
six papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Does Propitious Selection Explain why Riskier People Buy less Insurance By Philippe, DE DONDER; Jean, HINDRIKS
  2. Equilibrium Social Insurance with Policy-Motivated Parties By Philippe, DE DONDER; Jean, HINDRIKS
  3. Steuerung des GKV-Arzneimittelmarktes – Auswirkungen von Selbstbeteiligungen und Härtefallregelungen By Bernhard Langer; Anita B. Pfaff; Axel Olaf Kern
  4. Task Difficulty, Performance Measure Characteristics, and the Trade-Off between Insurance and Well-Allocated Effort By Wendelin Schnedler
  5. The Collateral Source Rule: A Common Law Norm Under Special Interest Attack By David Schap; Andrew Feeley
  6. An empirical analysis of the annuity rate in Chile By Thorburn, Craig; Morales, Marco; Rocha, Roberto

  1. By: Philippe, DE DONDER; Jean, HINDRIKS (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)
    Abstract: Empirical testing of asymmetric information in the insurance market has uncovered a negative correlation between risks levels and insurance purchases, rather than the positive correlation predicted by the standard insurance theory. Hemenway (1990) proposes an explanation for this negative correlation, called “propitious selection”. He argues that potential insurance buyers have different tastes for risk and that ‘individuals who are highly risk avoiding are more likely both to try to reduce the hazard and to purchase insurance’ (p. 1064). Chiappori and Salanie (2000) also suggest that this line of argument, which they call ‘cherry picking’, may explain the observed negative correlation. In this paper, we show that the propitious selection argument does not imply negative correlation between risk levels and insurance purchases, because it fails to take into account the supply side of the insurance market. To illustrate this claim, we provide a model where, although we assume that individuals differ in risk aversion and that the more risk averse individuals exert more precaution and buy more insurance, we end up with a positive correlation between risk and insurance purchases at equilibrium. The reason is that, in any separating equilibrium, the more risk averse individuals face insurance overprovision which, combined with moral hazard, increases their risk relative to the less risk averse individuals. To obtain the negative correlation between risk and insurance purchases, one further needs the extra condition of decreasing marginal willingness to pay for the less risk averse individuals. Finally, we find that propitious selection has profound policy implications for social insurance
    Keywords: preference-based adverse selection, cherry picking, precaution, social insurance
    JEL: D82 G22
    Date: 2006–03–15
  2. By: Philippe, DE DONDER; Jean, HINDRIKS (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)
    Abstract: We study the political economy of social insurance with double heterogeneity of voters (i.e., different income and risk levels). Social insurance is financed through distortionary taxation and redistributes across income and risks. Individuals vote over the extent of social insurance, which they can complement on the private market. Private insurance suffers from adverse selection which results into insurance rationing. We model political competition a la Wittman, with two parties maximizing the utility of their members. Party membership is endogenously determined. We show that although individuals differ in two dimensions, their preference for social insurance can be aggregated into a single dimensional type function. We then resort to numerical simulations to solve the political equilibrium resort to numerical simulations to solve the political equilibrium outcome as a function of the distribution of income and risk. We obtain equilibrium policy differentiation with the Left party proposing more social insurance than the Right party. The Left party’s equilibrium membership is made of low risk and high income individuals, with high risk and low income individuals forming the Right party’s constituency. In equilibrium, each party is tying for winning. Unlike the median voter outcome, our equilibrium outcome depends on the whole income and risks distribution, and increasing income polarization leads both parties to propose less social insurance. We also compare the political equilibrium outcome with the Rawlsian and utilitarian outcomes.
    Keywords: electoral competition, endogenous parties, Wittman equilibrium, social insurance, adverse selection
    JEL: H23 H50
    Date: 2006–02–15
  3. By: Bernhard Langer (University of Augsburg, Department of Economics); Anita B. Pfaff (University of Augsburg, Department of Economics); Axel Olaf Kern (University of Applied Sciences Ravensburg-Weingarten, Faculty Social Work, Health and Nursing)
    Abstract: This analysis shows that hardship and not hardship cases respectively reject clear differences both at the demand and at the expenditures for pharmaceuticals financed by the statutory health insurance. Hardship cases without exemption regulations would be burden therefore by enormous co-payments. Moreover, it also turns out that straight hardship cases are less healthy on average than not hardship cases. Co-payments without accompanying hardship case regulations would therefore hardly make a supply possible adapted to the needs of hardship cases. On the other hand the effectivity of drug co-payment regulations is reduced by hardship case regulations considerably.
    Keywords: co-payments, pharmaceutical market, statutory health insurance, public finance
    JEL: I10 I18
    Date: 2006–06
  4. By: Wendelin Schnedler
    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 non-congruent 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
  5. By: David Schap (Department of Economics, College of the Holy Cross); Andrew Feeley (Department of Economics, College of the Holy Cross)
    Abstract: According to Posnerian law and economics, common law (i.e., judge-made law) tends to promote efficiency. Public choice teaches that statutory (legislated) law need have no such efficiency property because, unlike appointed judges, legislators are subject to short election cycles and are beholden to special interests for election and re-election. The collateral source rule is a common law norm that permits an injured party to recover damages from both the tortfeasor (injurer) and from private insurance. Published work in the law and economics literature indicates that despite an appearance that the rule permits unwarranted double recover, the rule is indeed generally efficient. Despite its efficiency properties, the rule has been modified by statute in many jurisdictions in recent decades. Insurers reap transitory gains if exceptions to the collateral source rule are granted by statute whereas medical care providers achieve an ongoing gain if their sector is specifically excluded from the rule's application. The authors report the results of their exhaustive survey of statutory law concerning the collateral source rule in the fifty states, District of Columbia, Puerto Rico and Virgin Islands. The categorized findings reveal significant exceptions to the collateral source rule introduced into statutory law to the benefit of the special interests identified.
    Keywords: forensic economics
    JEL: K13 D72
    Date: 2006–06
  6. By: Thorburn, Craig; Morales, Marco; Rocha, Roberto
    Abstract: Empirical analyses of annuities markets have been limited to a few industrial countries and restricted by data limitations. Chile provides excellent conditions for research on annuities because of the depth of its market and the availability of data. The authors use a panel of life insurance company data to examine econometrically the main determinants of the annuity rate, defined as the internal rate of return on annuities. The results indicate that the annuity rate is determined by the risk-free interest rate, the share of privately-issued higher yield securities in the portfolio of providers as a proxy for the spread over the risk-free rate, the leverage of providers, the level of broker ' s commissions, the market share of individual providers, the level of the premium, and the degree of market competition. The results also show that efforts to improve market transparency produced structural shifts in the parameters of the annuity rate equation. The results are consistent with separate research on money ' s worth ratios, and indicate the need to develop appropriate financial instruments, allowing providers to hedge their risks while extracting higher returns, and also to ensure competition and transparency in annuities markets, in order to ensure good outcomes for annuitants.
    Keywords: Insurance & Risk Mitigation,Pensions & Retirement Systems,Economic Theory & Research,Investment and Investment Climate,Non Bank Financial Institutions
    Date: 2006–06–01

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