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on Insurance Economics |
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Issue of 2006‒10‒28
eleven papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Bussiness Management |
| By: | Randall P. Ellis (Department of Economics, Boston University); Ching-to Albert Ma (Department of Economics, Boston University) |
| Abstract: | This paper attempts to improve our understanding of why many small private employers in the US choose not to offer health insurance to their employees. We develop a theory model, simulate its predictions, and assesses whether the model helps explain empirical patterns of firm decisions to offer insurance. Our theory model provides an explanation for why many small firms do not offer health insurance to their employees even when it may seem attractive to firms, employees and insurers to do so. Small firms have relatively large between-firm variability in expected employee health care costs, and job turnover rates for young and old employees go down differentially when firms offer health insurance. This heterogeneity and differential change in turnover rates mean that expected health costs will increase once health insurance is offered. State regulations on annual rates of premium change, or insurer reluctance to publicly increase premiums rapidly mean that coverage is only offered to small firms at high premiums, those above initial expected costs. The resulting separating equilibrium is one in which some firms face high initial premiums, choose not to offer health insurance, and tolerate higher turnover rates than if offering insurance at lower premiums were feasible. High administrative costs of offering insurance by small firms exacerbate this dynamic selection problem. We examine the predictions of this model using data from the 1997 Robert Wood Johnson Foundation’s Employer Health Insurance Survey (EHIS), which contains establishment data on employees and their offerings of health insurance. We show that turnover rates are systematically higher for in industries not offering insurance. Consistent with previous studies, the EHIS data confirm that small firms are more heterogeneous in their age distribution, income, other health-related variables than large firms. Rather than interpreting this as causing small firms to choose not to offer insurance, we see this as partial evidence in support of our theoretical model that such heterogeneity is partly the consequence of whether health insurance is offered. We then use MEDSTAT MarketScan data from 1998-99 which has individual health care costs of 890,000 adult employees and their dependents. We develop predictive models of health care spending, and simulate distributions of firm-level expected health costs repeatedly for each firm by merging the MEDSTAT and EHIS samples by age, gender, and industry code. Small firms have a great deal of heterogeneity in expected costs. Even if employees are highly risk averse, many small firms will find it unattractive to offer insurance given with high administrative costs even when large subsidies are provided. Moreover, high turnover rates make it easy for firms to quickly change the expected costs, making it difficult for insurers to commit to constant premiums when offering insurance. |
| JEL: | D45 H40 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:bos:wpaper:wp2005-036&r=ias |
| By: | van Ours, Jan C; Vodopivec, Milan |
| Abstract: | This paper investigates how the potential duration of unemployment benefits affects the quality of post-unemployment jobs. It takes advantage of a natural experiment introduced by a change in Slovenia’s unemployment insurance law that substantially reduced the potential benefit duration. Although this reduction strongly increased job finding rates, the quality of the post-unemployment jobs remained unaffected: the paper finds that the law change had no effect on either the type of the contract (temporary vs. permanent), the duration of the post-unemployment jobs, or the wage earned in this job. |
| Keywords: | job separation rates; post-unemployment wages; potential benefit duration; unemployment insurance |
| JEL: | C41 H55 J64 J65 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5741&r=ias |
| By: | Kling, Alexander; Richter, Andreas; Ruß, Jochen |
| Abstract: | This paper analyzes the numerical impact of different surplus distribution mechanisms on the risk exposure of a life insurance company selling with profit life insurance policies with a cliquet-style interest rate guarantee. Three representative companies are considered, each using a different type of surplus distribution: A mechanism, where the guaranteed interest rate also applies to surplus that has been credited in the past, a slightly less restrictive type in which a guaranteed rate of interest of 0% applies to past surplus, and a third mechanism that allows for the company to use former surplus in order to compensate for underperformance in bad years. Our study demonstrates that regulators should be very careful in deciding which design of a distribution mechanism is to be enforced. Within our model framework, a distribution mechanism of the third type yields preferable results with respect to the considered risk measure. In particular, throughout the analysis, our representative company 3 faces ceteris paribus a significantly lower shortfall risk than the other two companies. Requiring strong guarantees puts companies at a significant competitive disad¬vantage relative to insurers which are subject to regulation that only requires the third type of surplus distribution mechanism. This is particularly true, if annual minimum participation in the insurers investment returns is mandatory for long term contracts. |
| Keywords: | life insurance; interest guarantees; surplus distribution |
| JEL: | G18 G22 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:msmdpa:1220&r=ias |
| By: | Virve Ollikainen; Tomi Kyyrä |
| Abstract: | In Finland the older unemployed can collect unemployment insurance (UI) benefits until retirement, while the entitlement period for younger groups is two years. In 1997 the eligibility age of persons benefiting from extended benefits was raised from 53 to 55. This paper takes advantage of this quasi-experimental setting to identify the effect of extended UI benefits on transitions out of unemployment among the elderly unemployed. We apply a competing risks version of a split population duration model to account for multiple exit routes and the possibility that some of the elderly unemployed may not be active in the labour market due to pension rules. We estimate that roughly half of the workers with extended UI benefits have effectively withdrawn from the labour market. Those who remain active have a similar hazard rate to employment as individuals with the two-year entitlement period, but much lower hazard rates to non-participation and labour market programmes. |
| Keywords: | unemployment insurance, unemployment duration, early retirement, competing risks models |
| Date: | 2006–10–20 |
| URL: | http://d.repec.org/n?u=RePEc:fer:dpaper:400&r=ias |
| By: | MacMinn, Richard; Richter, Andreas |
| Abstract: | In 2003, Swiss Re introduced a mortality-based security designed to hedge excessive mortality changes for its life book of business. The concern was apparently brevity risk, i.e., the risk of premature death. The brevity risk due to a pandemic is similar to the property risk associated with catastrophic events such as earthquakes and hurricanes and the security used to hedge the risk is similar to a CAT bond. This work looks at the incentives associated with insurance-linked securities. It considers the trade-offs an insurer or reinsurer faces in selecting a hedging strategy. We compare index and indemnity-based hedging as alternative design choices and ask which is capable of creating the greater value for shareholders. Additionally, we model an insurer or reinsurer that is subject to insolvency risk, which creates an incentive problem known as the judgment proof problem. The corporate manager is assumed to act in the interests of shareholders and so the judgment proof problem yields a conflict of interest between shareholders and other stakeholders. Given the fact that hedging may improve the situation, the analysis addresses what type of hedging tool would be best to use. We show that an indemnity-based security tends to worsen the situation, as it introduces an additional incentive problem. Index-based hedging, on the other hand, under certain conditions turns out to be beneficial and therefore clearly dominates indemnity-based strategies. This result is further supported by showing that for the same strike prices the current shareholder value is greater with the index-based security than the indemnity-based security. |
| Keywords: | alternative risk transfer; insurance; default risk |
| JEL: | G22 G32 D82 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:msmdpa:1219&r=ias |
| By: | Døskeland, Trond M. (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration); Nordahl, Helge A. (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration) |
| Abstract: | In this paper we provide a framework for how the traditional life and pension contracts with a guaranteed rate of return can be optimized to increase customers’ welfare. Given that the contracts have to be priced correctly, we use individuals’ preferences to find the preferred design. Assuming CRRA utility, we cannot explain the existence of any form of guarantees. Through numerical solutions we quantify the difference (measured in security equivalents) to the preferred Merton solution of direct investments in a fixed proportion of risky and risk free assets. The largest welfare loss seems to come from the fact that guarantees are effective by the end of each year, not only by the expiry of the contract. However, the demand for products with guarantees may be explained through behavioral models accounting for loss aversion, e.g. cumulative prospect theory. In this case, the optimal design seems to be a simple contract with a life-time guarantee. |
| Keywords: | Household Finance; Portfolio Choice; Life and Pension Insurance; Prospect Theory |
| JEL: | G11 G13 G22 |
| Date: | 2006–10–18 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:nhhfms:2006_014&r=ias |
| By: | Døskeland, Trond M. (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration); Nordahl, Helge A. (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration) |
| Abstract: | In this paper we show that there exist an intergenerational cross-subsidization effect in guaranteed interest rate life and pension contracts as the different generations partially share the same reserves. Early generations build up bonus reserves, which are left with the company at expiry of the contract. These bonus reserves function partly as a subsidy of later generations, such that the latter earn a risk-adjusted return above the risk-free rate. Furthermore, we show that this subsidy may be large enough to explain why late generations buy guaranteed interest rate products, which otherwise would not have been part of the optimal portfolio allocation. |
| Keywords: | Portfolio Choice; Life and Pension Insurance; Interest Rate Guarantees |
| JEL: | G11 G13 G22 |
| Date: | 2006–10–18 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:nhhfms:2006_013&r=ias |
| By: | Ortega, Javier; Rioux, Laurence |
| Abstract: | A dynamic labour matching economy is presented, in which the unemployed are either entitled to unemployment insurance (UI) or unemployment assistance (UA), and the employees are either eligible for UI or UA upon future separations. Eligibility for UI requires a minimum duration of contributions and UI benefits are then paid for a limited duration. Workers are risk-averse and wages are determined in a bilateral Nash bargain. As eligibility for UI does not automatically follow from employment, the two types of unemployed workers have different threat points, which delivers equilibrium wage dispersion. Most of the variables and parameters of the model are estimated using the French sample of the European Community Household Panel (1994-2000). We show that extending the UI entitlement improves the situation of all groups of workers and slightly lowers unemployment, while raising UI benefits harms the unemployed on assistance and raises unemployment. Easier eligibility for UI also improves the situation of all groups of workers and favours relatively more the least well-off than longer entitlement. Unifying the French unemployment compensation system would raise both wages and unemployment by around 1.5%. The re-entitlement effect in France lowers by 8% the rise in the wage and by 13% the rise in unemployment following a 10% increase in UI benefits. |
| Keywords: | matching; re-entitlement effects; unemployment compensation |
| JEL: | J41 J65 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5826&r=ias |
| By: | Randall P. Ellis (Department of Economics, Boston University); Thomas G. McGuire (Harvard University) |
| Abstract: | This paper re-examines the relation between the predictability of health care spending and incentives due to adverse selection. Within an explicit model of health plan decisions about service levels, we show that predictability (how well spending on certain services can be anticipated), predictiveness (how well the predicted levels of certain services contemporaneously co-vary with total health care spending), and demand responsiveness all matter for adverse selection incentives. The product of terms involving these three measures of predictability, predictiveness, and demand responsiveness define an empirical index of the direction and magnitude of selection incentives. We quantify the relative magnitude of adverse selection incentives bearing on various types of health care services in Medicare. Our results are consistent with other research on service-level selection. The index of incentives can readily be applied to data from other payers. |
| Keywords: | Health Plans, Adverse Selection, Medicare, Managed Care. |
| Date: | 2006–01 |
| URL: | http://d.repec.org/n?u=RePEc:bos:wpaper:wp2006-001&r=ias |
| By: | Irina Peaucelle |
| Abstract: | Ce texte fait le point sur l'évolution du secteur hospitalier en Allemagne depuis 1990, selon trois cibles d'analyse. D'abord, sont examinés les raisons des réformes. Pour le faire, l'hôpital est placé dans l'offre des soins et dans la structuration des espaces industriels régionaux, appelés «professionnels» ou «l économie basée sur la connaissance». Puis, l'applicabilité de la théorie économique de santé à la politique médicale est analysée pour évoquer la succession des réformes sur le territoire de l'ex-RDA, les réformes de la convergence, celles qui remédient à des détériorations démographiques et celles qui sont provoquées par l'évolution de la situation économique générale dans la RFA. ### [english abstract: The paper reports on the evolution of the hospital industry in Germany according to three targets of analysis: first, I examine the reasons of the reforms; for that, I position the hospital in the offer of care and in the structuring the regional industrial spaces of Germany, called "professional" or "based on the knowledge" economy. Then I find out the applicability of the health economy improvements into the medical policy: I evoke the succession of the reforms in Germany and in particular on the territory of ex-GDR i.e. the reforms of convergence, those which remedy current demographic deteriorations, and those which are impelled by the evolution of economic situation.] ### |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:pse:psecon:2006-31&r=ias |
| By: | Per-Olov JOHANSSON |
| Abstract: | The presentation will discuss the economic meaning of the concept of the Value of a Statistical Life (VSL) and review some of its properties. In particular, the age pattern of the VSL is considered. The presentation will also review recent estimates of the magnitude of a VSL taken from different countries and cultures. The value of preventing a fatality or (saving) a statistical life is an important question in health economics as well as environmental economics. This paper reviews several of the issues discussed in the literature. For example, how do we define the value of a (statistical) life? Are there really strong theoretical reasons for believing that the value of a life declines with age? The paper derives definitions of the value of a statistical life in both single-period models and life-cycle models. Models with and without actuarially fair annuities are examined, as well as the age-profile of the value of a statistical life |
| Keywords: | Value of a statistical life, value of preventing a fatality, age-specific values, willingness to pay |
| JEL: | I10 D61 C61 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:mil:wpdepa:2006-23&r=ias |