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on Insurance Economics |
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Issue of 2007‒02‒17
two papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Bussiness Management |
| By: | Aase, Knut K. (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration) |
| Abstract: | A standard result states that under decreasing absolute risk aversion the indifference premium of the insured is a decreasing function of wealth. This has been interpreted to mean that insurance is an inferior good, which has been considered as a puzzle in insurance theory, in particular since the result does not seem to explain observed behavior in insurance markets. <p> We reformulate the standard model of risk sharing to incorporate the amount invested in the insurable asset. From this we identify two wealth effects, one direct and one indirect. The direct one is explained by the classical result, and is negative when risk aversion is decreasing. The indirect effect is positive when the insurable asset is a normal good, and we find conditions when insurance is a normal good, and when it is not. <p> The analysis is extended to Pareto optimal risk sharing, where we also analyze the joint problem of finding an optimal amount in the insurable asset, as well as a Pareto optimal insurance contract. In this latter case insurance turns out to be inelastic to changes in wealth of the insurance customer, provided the insurer’s reserves are held fixed, but a normal good if this assumption is relaxed. |
| Keywords: | The wealth effect in insurance; decreasing absolute risk aversion; inferior good; normal good; deductible; Pareto optimal risk exchange |
| JEL: | G22 G32 |
| Date: | 2007–02–13 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:nhhfms:2007_006&r=ias |
| By: | Devesh Kapur; Richard Webb |
| Abstract: | A consensus has developed that the International Monetary Fund (IMF) is not fulfilling its role, prompting multiple proposals for reform. However, this paper argues that the focus on reform should be complemented with an exploration of alternatives outside the IMF which hold the potential to not only give developing countries greater bargaining leverage with the Fund but also, by increasing competition, spurring the institution to better performance. The paper argues that most of the IMF’s functions are being carried out in part through alternative institutional arrangements. It focuses in particular on the insurance role of the Fund and argues that developing countries are developing alternative insurance mechanisms, from a higher level of reserves, to regional co-insurance facilities to remittances as a counter-cyclical source of foreign exchange. The de facto exit of its clientele has been driven by the high political costs associated with Fund borrowing and now poses unprecedented challenges for the Fund, in particular pressures on its income. The paper argues for a rapid restructuring and significant cuts of the Fund’s administrative budget with the budget savings instead directed to lower the interest rates charged to borrowers. |
| Keywords: | IMF, reform, developing countries, insurance, foreign exchange, remittances, |
| JEL: | F33 F34 F35 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:cgd:wpaper:99&r=ias |