nep-ias New Economics Papers
on Insurance Economics
Issue of 2007‒01‒23
eight papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Large - scaledisasters and the insurance industry By Prof. Dr. Walter Krämer; Sebastian Schich
  2. Get a GRIP: Should Area Revenue Coverage Be Offered through the Farm Bill or as a Crop Insurance Program? By Paulson, Nicholas; Babcock, Bruce A.
  3. Poptávková funkce na trhu s pojištěním: porovnání maximalizace paretovské pravděpodobnosti přežití s teorií EUT von-Neumanna a Morgensterna a s prospektovou teorií Kahnemana a Tverského / Demand for Insurance: Comparison of von Neumann-Morgenstern's and Kahneman-Tverovsky's Approaches [available in Czech only] By Jiří Hlaváček; Michal Hlaváček
  4. Self-Protection and Insurance with Interdependencies By Alexander Muermann; Howard Kunreuther
  5. Optimal Risk-Sharing and Deductables in Insurance By Aase, Knut K.
  6. Mandated Health Insurance Benefits and the Utilization and Outcomes of Infertility Treatments By M. Kate Bundorf; Melinda Henne; Laurence Baker
  7. Climate Change, Insurability of Large-scale Disasters and the Emerging Liability Challenge By Howard C. Kunreuther; Erwann O. Michel-Kerjan
  8. How to help unemployed find jobs quickly ; experimental evidence from a mandatory activation program By Graversen,Brian Krogh; Ours,Jan C. van

  1. By: Prof. Dr. Walter Krämer (Fachbereich Statistik, Universität Dortmund); Sebastian Schich (OECD, Division for Financial Market Affairs, Paris)
    Abstract: We investigate the effect of the 20 largest – in terms of insured losses – man-made or natural disasters on the insurance industry. We show via an event study that insurance markets worldwide are quite resilient to unexpected losses to capital and are even outperforming the general market subsequent to great disasters.
    Keywords: disaster, insurance industry, event-study
    Date: 2005–03
  2. By: Paulson, Nicholas; Babcock, Bruce A.
    Abstract: The successful expansion of the U.S. crop insurance program has not eliminated ad hoc disaster assistance. An alternative currently being explored by members of Congress and others in preparation of the 2007 farm bill is to simply remove the “ad hoc” part of disaster assistance programs by creating a standing program that would automatically funnel aid to hard-hit regions and crops. One form such a program could take can be found in the area yield and area revenue insurance programs currently offered by the U.S. crop insurance program. The Group Risk Plan (GRP) and Group Risk Income Protection (GRIP) programs automatically trigger payments when county yields or revenues, respectively, fall below a producer-elected coverage level. The per-acre taxpayer costs of offering GRIP in Indiana, Illinois, and Iowa for corn and soybeans through the crop insurance program are estimated. These results are used to determine the amount of area revenue coverage that could be offered to farmers as part of a standing farm bill disaster program. Approximately 55% of taxpayer support for GRIP flows to the crop insurance industry. A significant portion of this support comes in the form of net underwriting gains. The expected rate of return on money put at risk by private crop insurance companies under the current Standard Reinsurance Agreement is approximately 100%. Taking this industry support and adding in the taxpayer support for GRIP that flows to producers would fund a county target revenue program at the 93% coverage level.
    Keywords: area revenue insurance, commodity programs, crop insurance, Group Risk Income Protection.
    Date: 2007–01–16
  3. By: Jiří Hlaváček (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Michal Hlaváček (Czech National Bank, Prague, Czech Republic; Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: This paper shows results of comparison of the original theoretical conception of modeling human decisions under risk with two well known models. In the paper the demand function for insurance is constructed for the model of maximization of the probability of agent’s (economical) survival. This demand function is compared with the demand function in two models: the expected-utility theory (von-Neumann, Morgenstern) and the asymmetric value function (Kahnemann, Tversky). While in the expected-utility model the purest agents are interested in insurance in the first place, in the model of Kahnemann-Tversky purest agents do not buy insurance because of their liking for risk. The model of maximization of the probability of survival corresponds better to the real structure of insured: neither extremely rich people, nor extremely poor people accept insurance contracts. The first ones do not accept the game because of negative expected value of gains, for the second ones is the insurance – in relation to their income - too expensive.
    Keywords: moral hazard; adverse selection; Pareto survival distribution
    Date: 2006–05
  4. By: Alexander Muermann; Howard Kunreuther
    Abstract: We study optimal investment in self-protection of insured individuals when they face interdependencies in the form of potential contamination from others. If individuals cannot coordinate their actions, then the positive externality of investing in self-protection implies that, in equilibrium, individuals underinvest in self-protection. Limiting insurance coverage through deductibles can partially internalize this externality and thereby improve individual and social welfare.
    JEL: C22 D80 G22 H23
    Date: 2007–01
  5. By: Aase, Knut K. (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    Abstract: Risk-sharing in insurance is analyzed, with a view towards explaining the prevalence of deductibles. First we introduce, in a modern setting, the main concepts of the theory of risk-sharing in a group of agents. This theory we apply to the risk-sharing problem between an insurer and an insurance customer. We motivate the development through simple examples, illustrating some of the subtle points of this theory. In order to deduce deductibles endogenously, not explained in the neoclassical model, we separately introduce (i) the insurable asset as a decision variable, (ii) administrative costs, and (iii) moral hazard, and illustrate by examples.
    Keywords: Reinsurance Exchange; Equilibrium; Pareto Optimality; Representative Agent; Core Solution; Individual Rationality; Deductibles; Costs; Moral Hazard
    JEL: D50 G22
    Date: 2006–12–29
  6. By: M. Kate Bundorf; Melinda Henne; Laurence Baker
    Abstract: During the last two decades, the treatment of infertility has improved dramatically. These treatments, however, are expensive and rarely covered by insurance, leading many states to adopt regulations mandating that health insurers cover them. In this paper, we explore the effects of benefit mandates on the utilization and outcomes of infertility treatments. We find that use of infertility treatments is significantly greater in states adopting comprehensive versions of these mandates. While greater utilization had little impact on the number of deliveries, mandated coverage was associated with a relatively large increase in the probability of a multiple birth. For relatively low fertility patients who responded to the expanded insurance coverage, treatment was often unsuccessful and did not result in a live birth. For relatively high fertility patients, in contrast, treatment often led to a multiple, rather than a singleton, birth. We also find evidence that the beneficial effects on the intensive treatment margin that have been proposed in other studies are relatively small. We conclude that, while benefit mandates potentially solve a problem of adverse selection in this market, these benefits must be weighed against the costs of the significant moral hazard in utilization they induce.
    JEL: I1
    Date: 2007–01
  7. By: Howard C. Kunreuther; Erwann O. Michel-Kerjan
    Abstract: This paper focuses on the interaction between uncertainty and insurability in the context of some of the risks associated with climate change. It discusses the evolution of insured losses due to weather-related disasters over the past decade, and the key drivers of the sharp increases in both economic and insured catastrophe losses over the past 20 years. In particular we examine the impact of development in hazard-prone areas and of global warming on the potential for catastrophic losses in the future. In this context we discuss the implications for insurance risk capital and the capacity of the insurance industry to handle large-scale events. A key question that needs to be addressed is the factors that determine the insurability of a risk and the extent of coverage offered by the private sector to provide protection against extreme events where there is significant uncertainty surrounding the probability and consequences of a catastrophic loss. We discuss the concepts of insurability by focusing on coverage for natural hazards, such as earthquakes, hurricanes and floods. The paper also focuses on the liability issues associated with global climate change, and possible implications for insurers (including D&O), given the difficulty in identifying potential defendants, tracing harm to their actions and apportioning damages among them. The paper concludes by suggesting ways that insurers can help mitigate future damages from global climate change by providing premium reductions and rate credits to companies investing in risk-reducing measures.
    JEL: H23 H75 K32
    Date: 2007–01
  8. By: Graversen,Brian Krogh; Ours,Jan C. van (Tilburg University, Center for Economic Research)
    Abstract: This paper investigates how a mandatory activation program in Denmark affects the job finding rate of unemployed workers. The activation program was introduced in an experimental setting where about half of the workers who became unemployed in the period from November 2005 to March 2006 were randomly assigned to the program while the other half was not. It appears that the activation program is very effective. The median unemployment duration of the control group is 14 weeks, while it is 11.5 weeks for the treatment group. The analysis shows that the job finding rate in the treatment group is 30% higher than in the control group. This result is mainly driven by the more intensive contacts between the unemployed and the public employment service.
    Keywords: unemployment insurance;unemployment duration;experiment
    JEL: C41 H55 J64 J65
    Date: 2006

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