nep-ias New Economics Papers
on Insurance Economics
Issue of 2006‒11‒25
nine papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Efficiency of Insurance Firms with Endogenous Risk Management and Financial Intermediation Activities By J. David Cummins; Georges Dionne; Robert Gagné; Abdelhakim Nouira
  2. Insuring Public Finances Against Natural Disasters--A Survey of Options and Recent Initiatives By David Hofman; Patricia Brukoff
  3. Natural vs. financial insurance in the management of public-good ecosystems By Martin F. Quaas; Stefan Baumgärtner
  4. "Retiree Health Benefit Coverage and Retirement" By Stephen A. Woodbury; James Marton
  5. Is There Propitious Selection in Insurance Markets? By Tsvetanka Karagoyozova; Peter Siegelman
  6. Institutional Quality, Knightian Uncertainty, and Insurability: A Cross-Country Analysis By S. Nuri Erbas; Chera L. Sayers
  7. The Unemployment Benefit System: a Redistributive or an Insurance Institution? By Fernando Sanchez-Losada; Daniel Cardona
  8. The Limits of Market-Based Risk Transfer and Implications for Managing Systemic Risks By Yoon Sook Kim; Paul S. Mills; Todd Groome; François Haas; John Kiff; Shinobu Nakagawa; Parmeshwar Ramlogan; Oksana Khadarina; Nicolas R. Blancher; William Lee
  9. The Private and Public Insurance Value of Conservative Biodiversity Management By Martin F. Quaas; Stefan Baumgärtner

  1. By: J. David Cummins; Georges Dionne (IEA, HEC Montréal); Robert Gagné (IEA, HEC Montréal); 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 role in the economy is 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 frontier. 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.
    Date: 2006–04
  2. By: David Hofman; Patricia Brukoff
    Abstract: Natural disasters can put severe strain on public finances, in particular in developing and small countries. But catastrophe insurance markets increasingly offer opportunities for the transfer of such risks. Thus far, developing countries have only tepidly begun to tap these opportunities. More frequent and intensive use of insurance markets may be desirable because it could help introduce an important element of predictability in the post-disaster public finances of disaster-prone developing countries. Against this background, the paper surveys the various available insurance modalities and reviews recent initiatives in developing and emerging market countries. It also identifies some key challenges for the insurance community, donors, and international financial institutions (IFIs).
    Keywords: Natural disasters; public finances , insurance , Public finance , Insurance ,
    Date: 2006–09–12
  3. By: Martin F. Quaas (Department of Ecological Modelling, UFZ-Centre for Environmental Research Leipzig-Halle); Stefan Baumgärtner (Centre for Sustainability, University of Lüneburg)
    Abstract: In the face of uncertainty, ecosystems can provide natural insurance to risk averse users of ecosystem services. We employ a conceptual ecological-economic model to analyze the allocation of (endogenous) risk and ecosystem quality by risk averse ecosystem managers who have access to financial insurances, and study the implications for individually and socially optimal ecosystem management, and policy design. We show that while an improved access to financial insurance leads to lower ecosystem quality, the effect on the free-rider problem and on welfare is determined by ecosystem properties. We derive conditions on ecosystem functioning under which, if financial insurance becomes more accessible, (i) the extent of optimal regulation increases or decreases; and (ii) welfare, in the absence of environmental regulation, increases or decreases.
    Keywords: ecosystem quality, ecosystem services, ecosystem management, endogenous environmental risk, insurance, risk-aversion, uncertainty
    Date: 2006–10–26
  4. By: Stephen A. Woodbury; James Marton
    Abstract: Employer-provided health benefits for workers who retire before age 65 has fallen over the last decade. We examine a cohort of male workers from the Health and Retirement Survey to explore the dynamics of retiree health benefits and the relationship between retiree health benefits and retirement behavior. A better understanding of this relationship is important to the policy debate over the best way to increase health coverage for older Americans without reducing work incentives. Concerning the dynamics at work, we find that, between 1992 and 1996, 24 percent of full-time workers who had retiree health benefits lost their coverage, while 15 percent of full-time workers who lacked coverage gained it. Also, of the full-time employed men who were covered by retiree health benefits in 1992 and had retired by 1996, 3 percent were uninsured, and 15 percent were covered by health insurance other than employer-provided insurance. On the relationship between retiree health benefits and retirement, we find that workers with retiree benefits were 29 to 55 percent more likely to retire than those without. We also find that workers who are eligible for retiree health benefits tend to take advantage of them when they are relatively young.
    Date: 2006–08
  5. By: Tsvetanka Karagoyozova (University of Connecticut); Peter Siegelman (University of Connecticut)
    Abstract: The theory of adverse selection in insurance markets has been enormously influential among scholars, regulators, and the judiciary. But empirical support for adverse selection has been much less persuasive, and several recent studies have found little or no evidence of such selection in insurance markets. "Propitious" (advantageous) selection offers an alternative mechanism that is consistent with these empirical findings. Like adverse selection, the theory assumes that insureds have an informational advantage over insurers. However, propitious selection relies on the plausible assumption that risk aversion is negatively correlated with the riskiness or probability of loss across insureds - the more risk-averse are also the more careful, and hence are least likely to experience a loss. Theorists have recognized the possibility of equilibria in which highly risk averse insureds with a low probability of loss are willing to remain in the market, despite an actuarially unfair premium. But these conclusions derive from models with only two types of insureds. We use a simulation model that allows for flexible correlation between risk aversion and riskiness across a continuum of types, with plausible distributions of risk aversion and riskiness. We find that propitious selection alone can not preserve equilibrium in insurance markets. When insureds have moderate uncertainty about their own riskiness, however, equilibrium does become possible, albeit with considerable selection.
    Date: 2006–11
  6. By: S. Nuri Erbas; Chera L. Sayers
    Abstract: Knightian uncertainty (ambiguity) implies presence of uninsurable risks. Institutional quality may be a good indicator of Knightian uncertainty. This paper correlates non-life insurance penetration in 70 countries with income level, financial sector depth, country risk, a measure of cost of insurance, and the World Bank governance indexes. We find that institutional quality-transparency-uncertainty nexus is the dominant determinant of insurability across countries, surpassing the explanatory power of income level. Institutional quality, as it reflects on the level of uncertainty, is the deeper determinant of insurability. Insurability is lower when governance is weaker.
    Keywords: Institutional quality , Knightian Uncertainty , insurability ,
    Date: 2006–08–04
  7. By: Fernando Sanchez-Losada; Daniel Cardona (Universitat de Barcelona)
    Abstract: In this paper we analyze how the composition of labor taxation affects unemployment in a unionized economy with capital accumulation and an unemployment benefit system. We show that if the unemployment benefit system is gross Bismarckian then the unemployment rate is reduced if wage taxes are decreased (and thus payroll taxes are increased). However, if the unemployment benefit system is net Bismarckian then the unemployment rate does not depend on how the system is financed. Besides, in a Beveridgean system the labor tax composition does not affect the unemployment rate if and only if the unemployed do not pay taxes and the employed pay a constant marginal tax rate. We also analyze when an unemployment benefit budget-balanced rule makes the economy to have a hysteresis process.
    Keywords: payroll tax, unemployment benefit system, wage tax
    JEL: E24 E62 H53 J50 J65
    Date: 2005
  8. By: Yoon Sook Kim; Paul S. Mills; Todd Groome; François Haas; John Kiff; Shinobu Nakagawa; Parmeshwar Ramlogan; Oksana Khadarina; Nicolas R. Blancher; William Lee
    Abstract: The paper discusses the limits to market-based risk transfer in the financial system and the implications for the management of systemic long-term financial risks. Financial instruments or markets to transfer and better manage these risks across institutions and sectors are, as yet, either nascent or nonexistent. As such, the paper investigates why these markets remain "incomplete." It also explores a range of options by which policymakers may encourage the development of these markets as part of governments' role as a risk manager.
    Keywords: Risk transfer , systemic risk , insurance markets , supervision and regulation ,
    Date: 2006–10–11
  9. By: Martin F. Quaas (Department of Ecological Modelling, UFZ-Centre for Environmental Research Leipzig-Halle); Stefan Baumgärtner (Centre for Sustainability, University of Lüneburg)
    Abstract: The ecological literature suggests that biodiversity reduces the variance of ecosystem services. Thus, conservative biodiversity management has an insurance value to risk-averse users of ecosystem services. We analyze a conceptual ecological-economic model in which such management measures generate a private benefit and, via ecosystem processes at higher hierarchical levels, a positive externality on other ecosystem processes at higher hierarchical levels, a positive externality on other ecosystem users. We find that ecosystem management and environmental policy depend on the extent of uncertainty and risk-aversion as follows: (i) Individual effort to improve ecosystem quality unambiguously increases. The free-rider problem may decrease or increase, depending on the characteristics of the ecosytsem and its management; in particular, (ii) the size of the externality may decrease or increase, depending on how individual and aggregate management effort influence biodiversity; and (iii) the welfare loss due to free-riding may decrease or increase, depending on how biodiversity influences ecosystem service provision.
    Keywords: biodiversity, ecosystem services, ecosystem management, free-riding, insurance, public good, risk-aversion, uncertainty
    Date: 2006–10–26

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