nep-ias New Economics Papers
on Insurance Economics
Issue of 2006‒12‒16
four papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Screening disability insurance applications By de Jong, Philip; Lindeboom, Maarten; van der Klaauw, Bas
  2. Self-Insurance and Self-Protection as Public Goods By Lohse, Tim; Julio R. Robledo; Ulrich Schmidt
  3. A Comment Concerning Deposit Insurance and Moral Hazard By Gary Richardson
  4. Catastrophe Bonds, Reinsurance, and the Optimal Collateralization of Risk-Transfer By Darius Lakdawalla; George Zanjani

  1. By: de Jong, Philip (University of Amsterdam); Lindeboom, Maarten (Free University Amsterdam); van der Klaauw, Bas (Free University Amsterdam)
    Abstract: This paper investigates the effects of stricter screening of disability insurance applications. A large-scale experiment was setup where in two of the 26 Dutch regions case workers of the disability insurance administration were instructed to screen applications more stringently. The empirical results show that stricter screening reduces long-term sickness absenteeism and disability insurance applications. We find evidence for direct effects of stricter screening on work resumption during the period of sickness absence and for self-screening by potential disability insurance applicants. Stricter screening seems to improve targeting efficiency, without inducing negative spillover effects to the inflow into unemployment insurance. The costs of stricter screening are only a small fraction of the monetary benefits.
    Keywords: Disability insurance; experiment; policy evaluation; sickness absenteeism; self-screening
    JEL: J26 J65
    Date: 2006–11–30
  2. By: Lohse, Tim; Julio R. Robledo; Ulrich Schmidt
    Abstract: Many public goods like dams, fire departments, and lighthouses do not provide direct utility but act more as insurance devices against floods, fire, and shipwreck. They either diminish the probability or the size of the loss. We extend the public good model with this insurance aspect and generalize Samuelson's efficient allocation rule when self-insurance and self-protection expenditures are pure public goods. Some comparative static results with respect to changes in income and risk behavior are derived. As some of the sketched risks are insurable while some others are not, we introduce further the possibility of risk coverage by private market insurance. We analyze the interaction of such an insurance with the public good level, both for efficient provision and for private provision equilibria. It turns out that the levels of self-insurance and self-protection decrease when being privately provided. Moreover, it appears a strategic substitutability between the public good and market insurance which leads to an additional decline of the provision levels.
    Keywords: self-insurance, self-protection, efficient provision of public goods, private provision of public goods, market insurance
    JEL: G22 H41
    Date: 2006–12
  3. By: Gary Richardson
    Abstract: Hooks and Robinson argue that moral hazard induced by deposit insurance induced banks to invest in riskier assets in Texas during the 1920s. Their regressions suggest this manifestation of moral hazard may explain a portion of the events that occurred during the 1920s, but some other phenomena, hitherto overlooked, must also be at work. Economic logic and evidence form the archives of the Board of Governors suggest that phenomenon is mismanagement and defalcation by corporate officers, which increases when insurance reduces depositors' incentives to monitor and react to the safety and soundness of banks.
    JEL: E42 E44 E65 N1 N13 N2
    Date: 2006–12
  4. By: Darius Lakdawalla; George Zanjani
    Abstract: Catastrophe bonds feature full collateralization of the underlying risk transfer, and thus abandon the insurance principle of economizing on collateral through diversification. We examine the theoretical foundations beneath this paradox, finding that fully collateralized instruments have important uses in a risk transfer market when insurers cannot contract completely over the division of assets in the event of insolvency, and, more generally, cannot write contracts with a full menu of state-contingent payments. In this environment, insureds have different levels of exposure to an insurer's default. When contracting constraints limit the insurer's ability to smooth out such differences, catastrophe bonds can be used to deliver coverage to those most exposed to default. We demonstrate how catastrophe bonds can improve welfare in this way by mitigating differences in default exposure, which arise with: (1) contractual incompleteness, and (2) heterogeneity among insureds, which undermines the efficiency of the mechanical pro rata division of assets that takes place in the event of insurer insolvency.
    JEL: G11 G22
    Date: 2006–12

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