nep-ias New Economics Papers
on Insurance Economics
Issue of 2007‒03‒03
ten papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Prudential supervision of general insurance stage 2 reforms: Risk and financial management By Australian Prudential Regulation Authority
  2. The Joint Design of Unemployment Insurance and Employment Protection. A First Pass By Blanchard, Olivier J; Tirole, Jean
  3. Insurance and Rural Welfare: What can Panel Data tell us? By Chris Elbers; Jan Willem Gunning; Lei Pan
  4. Statistical Early Warning Model of Financial Distress in Australian General Insurance By Ian G. Sharpe; Andrei Stadnik
  5. Principle of uncertain future and utility By Harin, Alexander
  6. Ethnic Discrimination in the Greek Labour Market: Occupational Access, Insurance Coverage, and Wage Offers By Minas Vlassis; Nick Drydakis
  7. Constant Proportion Portfolio Insurance in presence of Jumps in Asset Prices By Rama Cont; Peter Tankov
  8. Risk Pooling through Transfers in Rural Ethiopia By Lei Pan
  9. On the Coherence of VAR Risk Measure for Levy Stable Distributions By Wilson Sy
  10. Money in Motion: Dynamic Portfolio Choice in Retirement By Wolfram J. Horneff; Raimond H. Maurer; Olivia S. Mitchell; Michael Z. Stamos

  1. By: Australian Prudential Regulation Authority (Australian Prudential Regulation Authority)
    Date: 2005–05–03
  2. By: Blanchard, Olivier J; Tirole, Jean
    Abstract: Unemployment insurance and employment protection are typically discussed and studied in isolation. ln this paper, we argue that they are tightly linked, and we focus on their joint optimal design in a simple model, with risk averse workers, risk neutral firms, and random shocks to productivity. We show that, in the 'first best', unemployment insurance comes with employment protection - in the form of layoff taxes; indeed, optimality requires that layoff taxes be equal to unemployment benefits. We then explore the implications of four broad categories of deviations from first best: limits on insurance, limits on layoff taxes, ex-post wage bargaining, and ex-ante heterogeneity of firms or workers. We show how the design must be modified in each case. Finally, we draw out the implications of our analysis for current policy debates and reform proposals, from the financing of unemployment insurance, to the respective roles of severance payments and unemployment benefits.
    Keywords: employment protection; experience rating; layoff taxes; layoffs; severance payments; unemployment benefits; Unemployment insurance
    JEL: D60 E62 H21 J30 J32 J38 J65
    Date: 2007–02
  3. By: Chris Elbers (Vrije Universiteit Amsterdam); Jan Willem Gunning (Vrije Universiteit Amsterdam); Lei Pan (Vrije Universiteit Amsterdam)
    Abstract: Assessing the scope for insurance in rural communities usually requires a structural model of household behavior under risk. One of the few empirical applications of such models is the study by Rosenzweig and Wolpin (1993) who conclude that Indian farmers in the ICRISAT villages would not benefit from the introduction of formal weather insurance. In this paper we investigate how models such as theirs can be estimated from panel data on production and assets. We show that if assets can take only a limited number of values the coefficients of the model cannot be estimated with reasonable precision. We also show that this can affect the conclusion that insurance would not be welfare improving.
    Keywords: Structural estimation; discrete choices; insurance
    JEL: C51 D91
    Date: 2007–01–26
  4. By: Ian G. Sharpe; Andrei Stadnik (Australian Prudential Regulation Authority)
    Abstract: We develop and test a statistical early warning model to identify Australian general insurers experiencing deteriorating financial health over the 1999–2001 period. Using a logit model and two measures of financial distress we are able to predict, with reasonable confidence, the insurers more likely to be distressed. They are generally small and have low return on assets and cession ratios. Relative to holdings of liquid assets they have high levels of property and reinsurance assets, and low levels of equity holdings. They also write more overseas business, and less motor insurance and long-tailed insurance lines, relative to fire and household insurance.<p>
    Date: 2006–03–16
  5. By: Harin, Alexander
    Abstract: The principle of uncertain future: the probability of a future event contains a degree of (hidden) uncertainty. As a result, this uncertainty (in a sense, similar to vibrations, fluctuations) pushes the probability value back from the bounds to the middle of its range (from ~100% and ~0% to the middle probability values). In other words, the real values of high probabilities are lower than the preliminarily determined ones. Conversely, the real values of low probabilities are higher than the preliminarily determined ones. This result provides the uniform solution of a number of fundamental problems: the underweighting of high and the overweighting of low probabilities, the Allais paradox, risk aversion, loss aversion, the Ellsberg paradox, the equity premium puzzle, etc. The principle and its consequences can be applied in the fields of banking, investment, insurance, trade, industry, planning and forecasting. Explanations of the principle and examples of solution of three types of basic utility problems are provided.
    Keywords: risk; market; banking; industry; development; investments; insurance; hidden causes
    JEL: D8 A1 E22 G22 C7
    Date: 2007–02–28
  6. By: Minas Vlassis (Department of Economics, University of Crete, Greece); Nick Drydakis (Department of Economics - University of Crete, Greece)
    Abstract: The paper investigates whether low skilled male Albanians face unequal treatment in the Greek labour market, two years after the national adoption of the European anti-discrimination employment legislation. By means of a Correspondence Test we have estimated that Albanians face 43.5% net discrimination of access to occupations. Concentrating on the equal chance cases, we subsequently found that Albanians face 36.5% less chance of being registered with insurance coverage, while their potential wage contracts are on the average 8.8% below those of Greeks, and 5.3% below the legal minimum wage. As it comes to the reasons for wage discrimination, using an indirect approach we interestingly found that the employers themselves “put the blame” on profit strategies (84.4%), on statistical discrimination (9.6%), and on taste discrimination (7.8%).
    Keywords: Field Experiment, Ethnic Discrimination., Hiring Discrimination, Insurance Coverage, Wage Inequality
    JEL: J7 J16 J31 J42 J
    Date: 2007–02–22
  7. By: Rama Cont (Center for Financial Engineering, Columbia University - [Columbia University], CMAP - Centre de Mathématiques Appliquées - [CNRS : UMR7641] - [Université de Versailles-Saint Quentin en Yvelines] - [Polytechnique - X]); Peter Tankov (PMA - Laboratoire de Probabilités et Modèles Aléatoires - [CNRS : UMR7599] - [Université Pierre et Marie Curie - Paris VI][Université Denis Diderot - Paris VII])
    Abstract: Constant proportion portfolio insurance (CPPI) allows an investor to limit downside risk while retaining some upside potential by maintaining an exposure to risky assets equal to a constant multiple m>1 of the 'cushion', the difference between the current portfolio value and the guaranteed amount. In diffusion models with continuous trading, this strategy has no downside risk, whereas in real markets this risk is non-negligible and grows with the multiplier value. We study the behavior of CPPI strategies in models where the price of the underlying portfolio may experience downward jumps. This allows to quantify the 'gap risk' of the portfolio while maintaining the analytical tractability of the continuous--time framework. We establish a direct relation between the value of the multiplier m and the risk of the insured portfolio, which allows to choose the multiplier based on the risk tolerance of the investor, and provide a Fourier transform method for computing the distribution of losses and various risk measures (VaR, expected loss, probability of loss) over a given time horizon. The results are applied to a jump-diffusion model with parameters estimated from market data.
    Keywords: Portfolio insurance; CPPI; Lévy process; Value at Risk; expected loss
    Date: 2007–02–07
  8. By: Lei Pan (Vrije Universiteit Amsterdam)
    Abstract: It is often assumed that transfers received from governments, nongovernment organizations (NGOs), friends and relatives help rural households to pool risk. In this paper I investigate two functions of transfers in Ethiopia: risk pooling and income redistribution. Unlike most of the literature this paper investigates not only whether but also how much risk pooling is achieved. I find evidence that transfers from governments/NGOs play a role in insuring covariant income shocks, (weak) evidence that transfers from friends/relatives insure idiosyncratic income shocks and evidence that transfers target the poor households. However, the contributions of transfers to risk pooling and income redistribution are economically very limited.
    Keywords: Risk; Insurance; Income redistribution
    JEL: I38 O17
    Date: 2007–01–26
  9. By: Wilson Sy (Australian Prudential Regulation Authority)
    Abstract: The Value-at-Risk (VaR) risk measure has been widely used in finance and insurance for capital and risk management. However, in recent years it has fallen somewhat out of favour due to a seminal paper by Artzner et al. (1999) who showed that VaR does not in general have all the four coherence properties which are desirable for a risk measure. In particular, the violation of the sub-additive property discourages diversification and is counter-intuitive to risk finance. In this paper, it is proved (Theorem 3.1) that VaR for independent Levy-stable random variates is a coherent risk measure being translational invariant, monotonic, positively homogeneous and sub-additive. That is, Levy-stable distributions are VaR coherent. As Levy-stable distributions are a rich class of probability distributions, the VaR risk measure may still have widespread applications. A brief comparative discussion is also given for L-stable variates for the expected shortfall risk measure.<p>
    Date: 2006–05–01
  10. By: Wolfram J. Horneff; Raimond H. Maurer; Olivia S. Mitchell; Michael Z. Stamos
    Abstract: Retirees confront the difficult problem of how to manage their money in retirement so as to not outlive their funds while continuing to invest in capital markets. We posit a dynamic utility maximizer who makes both asset location and allocation decisions when managing her retirement financial wealth and annuities, and we prove that she can benefit from both the equity premium and longevity insurance in her retirement portfolio. Even without bequests, she will not fully annuitize; rather, her optimal stock allocation amounts initially to more than half of her financial wealth and declines with age. Welfare gains from this strategy can amount to 40 percent of financial wealth (depending on risk parameters and other resources). In practice, it turns out that many retirees will do almost as well by purchasing a variable annuity invested 60/40 in stocks/bonds.
    JEL: D14 G11 G22 G23 H55 J26
    Date: 2007–02

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