nep-ias New Economics Papers
on Insurance Economics
Issue of 2007‒03‒17
seven papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Optimal taxation and social insurance in a lifetime perspective By Bovenberg,Lans; Sorensen,Peter Birch
  2. Mutual versus Stock Insurers: Fair Premium, Capital, and Solvency By Christian Laux; Alexander Muermann
  3. Patient Cost-Sharing, Hospitalization Offsets, and the Design of Optimal Health Insurance for the Elderly By Amitabh Chandra; Jonathan Gruber; Robin McKnight
  4. Negishi-Solow Efficiency Wages, Unemployment Insurance and Dynamic Deterministic Indeterminacy By Jean-Michel Grandmont
  5. Policy Issues for Developing Annuities Markets By Fiona Stewart
  6. Benefit Security Pension Fund Guarantee Schemes By Fiona Stewart
  7. Longevity Risk and Private Pensions By Pablo Antolin

  1. By: Bovenberg,Lans; Sorensen,Peter Birch (Tilburg University, Center for Economic Research)
    Abstract: Advances in information technology have improved the administrative feasibility of redistribution based on lifetime earnings recorded at the time of retirement. We study optimal lifetime income taxation and social insurance in an economy in which redistributive taxation and social insurance serve to insure (ex ante) against skill heterogeneity as well as disability risk. Optimal disability benefits rise with previous earnings so that public transfers depend not only on current earnings but also on earnings in the past. Hence, lifetime taxation rather than annual taxation is optimal. The optimal tax-transfer system does not provide full disability insurance. By offering imperfect insurance and structuring disability benefits so as to enable workers to insure against disability by working harder, social insurance is designed to offset the distortionary impact of the redistributive labor income tax on labor supply.
    Keywords: optimal lifetime income taxation;optimal social insurance
    JEL: H21 H55
    Date: 2007
  2. By: Christian Laux (Frankfurt University and CFS); Alexander Muermann (University of Pennsylvania, The Wharton School)
    Abstract: Mutual insurance companies and stock insurance companies are different forms of organized risk sharing: policyholders and owners are two distinct groups in a stock insurer, while they are one and the same in a mutual. This distinction is relevant to raising capital, selling policies, and sharing risk in the presence of financial distress. Up-front capital is necessary for a stock insurer to offer insurance at a fair premium, but not for a mutual. In the presence of an ownermanager conflict, holding capital is costly. Free-rider and commitment problems limit the degree of capitalization that a stock insurer can obtain. The mutual form, by tying sales of policies to the provision of capital, can overcome these problems at the potential cost of less diversified owners.
    Keywords: Ownership Structure, Insurance, Qwner-Manager Conflict, Capital, Default
    JEL: G22 G32
    Date: 2006–12–07
  3. By: Amitabh Chandra; Jonathan Gruber; Robin McKnight
    Abstract: Patient cost-sharing for primary care and prescription drugs is designed to reduce the prevalence of moral hazard in utilization. Yet the success of this strategy depends on two factors: the elasticity of demand for those medical goods, and the risk of downstream hospitalizations by reducing access to beneficial health care. Amazingly, we know little about either of these factors for the elderly, the most intensive consumers of health care in our country. We remedy both of these deficiencies by studying a policy change that raised patient cost-sharing for retired public employees in California. We find that physician office visits and prescription drug utilization are very price sensitive; while direct comparison is difficult, the price sensitivity appears to greatly exceed that of the famous RAND Health Insurance Experiment (HIE). Moreover, unlike the HIE, we find large "offset" effects in terms of increased hospital utilization in response to the combination of higher copayments for physicians and prescription drugs. These offset effects are concentrated in patients for whom medical care is presumably efficacious: those with a chronic disease. Finally, we find that the savings from increased cost-sharing accrue mostly to the supplemental insurer, while the costs of increased hospitalization accrue mostly to Medicare; thus, there is a fiscal externality associated with cost-sharing increases by supplemental insurers. Our findings suggest that optimal insurance should be tied to underlying health status, with chronically ill patients facing lower cost-sharing. We also conclude that the externalities to Medicare from supplemental insurance coverage may be more modest than previously suggested due to these offsets.
    JEL: I1
    Date: 2007–03
  4. By: Jean-Michel Grandmont (CREST, Malakoff Cédex, France)
    Abstract: This paper introduces efficiency wages designed to provide workers with incentives to make appropriate effort levels, and involuntary unemployment, along the pioneering lines of Negishi (1979), Solow (1979), Shapiro and Stiglitz (1984), in a dynamic model involving heterogeneous agents and financial constraints as in Woodford (1986) and Grandmont, Pintus and de Vilder (GPV, 1998). Effort varies continuously while there is unemployment insurance funded out of taxation of labour incomes. Increasing unemployment insurance is beneficial to employment along the deterministic stationary state, and can even in some cases lead to a Pareto welfare improvement for all agents, through general equilibrium effects, by generating higher individual real labour incomes, hence larger consumptions of employed and unemployed workers, and thus a higher production. On the other hand, the local (in)determinacy properties of the stationary state are opposite to those obtained in the competitive specification of the model (GPV, 1998) : local determinacy (indeterminacy) occurs for elasticities of capitalefficient labour substitution lower (larger) than a quite small bound. Increasing unemployment insurance is more likely to lead to local indeterminacy and thus to generate dynamic inefficiencies due to the corresponding expectations coordination failures.
    Keywords: Efficiency wages, involuntary unemployment, unemployment insurance, effort incentives, local indeterminacy, capital-labour substitution, local bifurcations.
    JEL: E24 E32 C62
    Date: 2006
  5. By: Fiona Stewart
    Abstract: Annuities are specifically designed to cover the risk that an individual outlives their own resources by transferring such risk to an insurance undertaking. Despite an increasing need for annuity products (due to increasing longevity, decreasing state pensions, a rise in Defined Contribution pension plans etc.), these markets remains under-developed in many OECD countries. This paper attempts to address why this is the case and what policy options exist for encouraging annuity markets to develop. <P>Politiques pour le développement du marche viager <BR>Les rentes viagères sont particulièrement désigné pour couvrir le risque de que une individu survivre a sont ressources, ils façon sa par le transfèrement de cet risque à une entreprise d’assurance. Malgré la nécessite croisant de produits de rente viager (attribuable à l’incrément de la longévité, la réduction de la pension publique, et le succès de les plans de pension a prestation contributive), cet marches reste sous développe dans la plus part des pais de l’OECD. Cet papier étudie les raisons qui peux expliquer cet situation et qui options de politique peux aider à développer cet marche.
    Keywords: pensions de retraite, retirement, private pensions, pension privée, rente, marchés de rente, plans de pension à cotisations définies, plans de pensions à prestation définie, viager, rente viagère, Annuities, annuity markets, defined contribution plans , defined benefit pension plans.
    JEL: G29 G32 J32
    Date: 2007–01
  6. By: Fiona Stewart
    Abstract: The issue of pension benefit security has returned to the foreground of both economic and political debate in many OECD countries - following high profile losses of pension benefits due to plan sponsors becoming bankrupt and leaving underfunded pension schemes. Some countries have dealt with pension benefit protection via strong funding rules (the route taken for example by the Dutch authorities). Two OECD papers examine other methods for increasing benefit security in retirement – via pension benefit guarantee schemes (such as the Pension Protection Fund recently introduced in the UK) and the position of pension creditors within insolvency proceedings (which has been examined, for example, in Canada).<p> Pension Benefit Guarantee Schemes are insurance type arrangements - with premiums paid by pension funds - which take on outstanding obligations which cannot be met by the insolvent plan sponsors. Arguments for such schemes stem from ‘market failure’ (with workers not fully understanding the trade off between pensions – deferred wages – and current income), and diversification– as most workers are highly exposed to the insolvency of the plan sponsor (in terms of current and retirement income) and cannot properly diversify this risk (particularly where the pension is funded by book reserves). However challenges to these schemes exist – mainly in the form of moral hazard and adverse selection – which are problems for all insurance contracts, and potentially in the form of systematic risk (as bankruptcies tend to be correlated, as does pension underfunding across schemes, and indeed as are these two factors).<p> Though setting up benefit guarantee schemes successfully is often a challenge in practice (particularly maintaining true political independence), they can be run successfully - as the funds operating in practice show. Though the problems of the USA guarantee scheme, the PBGC, are well known, similar schemes also exist in Sweden, Germany, Ontario – Canada, Switzerland and Japan and one has recently been launched in the UK. Lessons can be learnt from all these schemes - for example the UK’s PPF is working to apply fully risk adjusted premiums, whilst the Swedish fund can take a lien on plan sponsor’s assets to protect its own financial position. One of the key conclusions from the OECD’s report is that, to work effectively, these schemes must have suitable independence and powers to set and collect appropriately risk-adjusted premiums – but they also need to be considered along with other benefit protection policies (notably effective funding rules). <P>Systèmes de garantie des fonds de pension <BR>La question de la sécurité des prestations de pension est revenue au premier plan du débat, tant économique que politique, dans de nombreux pays de l’OCDE – suite à des affaires dont on a beaucoup parlé où les prestations ont été perdues, les promoteurs des plans ayant fait faillite et laissant des systèmes de pension sous-capitalisés. Certains pays s’efforcent de protéger les prestations de pension en imposant des règles de financement strictes (c’est la voie qu’ont empruntée les autorités néerlandaises, par exemple). D’autres méthodes peuvent s’envisager pour améliorer la sécurité des prestations en vue de la retraite et deux documents de l’OCDE les examinent – elles concernent les systèmes de garantie des prestations (comme le Pension Protection Fund qui a récemment été mis en place au Royaume-Uni) et le rang de créanciers des participants aux plans de pension dans les procédures de mise en liquidation (question à laquelle on a réfléchi, par exemple, au Canada).<p> Les systèmes de garantie des prestations de pension sont des dispositifs de type assuranciel – les primes sont acquittées par les fonds de pension – qui se substituent aux promoteurs des plans, devenus insolvables, pour assumer leurs obligations. Les arguments qui militent en faveur de ce type de dispositif sont la défaillance du marché (les travailleurs ne perçoivent pas pleinement la relation entre les pensions – salaire différé – et le salaire courant), et la diversification – la plupart des travailleurs sont fortement exposés au risque d’insolvabilité du promoteur du plan (en ce qui concerne leur revenu courant et en ce qui concerne leur revenu au moment de la retraite) et ne peuvent pas convenablement diversifier le risque (en particulier lorsque les pensions sont financées sur des réserves comptables). Cependant, ces dispositifs soulèvent des problèmes – qui tiennent essentiellement à l’aléa moral et à l’anti-sélection – qui sont des problèmes qui se posent pour tous les contrats de type assuranciel, outre, potentiellement, un risque systémique (il tend à y avoir corrélation entre les faillites, ainsi qu’entre les cas de sous-financement des pensions, de même qu’entre ces deux facteurs).<p> Si la mise en place de systèmes de garantie des prestations peut souvent constituer un défi (en particulier pour ce qui est de maintenir une véritable indépendance politique), de tels systèmes peuvent fonctionner avec succès – ainsi, d’ailleurs, que le montrent les fonds existants. On connaît bien les problèmes du système de garantie, le PBGC, qui existe aux Etats-Unis, mais il existe des dispositifs de ce type également en Suède, en Allemagne, au Canada (Ontario), en Suisse, au Japon et, depuis peu, au Royaume-Uni. On peut tirer des enseignements de tous les dispositifs qui existent – par exemple, au Royaume-Uni, le PPF prévoit d’appliquer des primes totalement ajustées en fonction du risque, tandis qu’en Suède, le Fonds de garantie peut prendre une sûreté sur les actifs du promoteur du plan afin de protéger sa propre situation financière. L’une des conclusions essentielles du rapport de l’OCDE est que, pour être efficaces, ces dispositifs doivent jouir d’une indépendance suffisante et doivent pouvoir fixer et appliquer des primes qui tiennent convenablement compte du risque – mais il faut aussi les envisager en association avec d’autres mesures de protection des prestations (en particulier des règles de financement adéquates).
    Keywords: système de pensions, PBGC, PPF, prestation de pension, système de garantie, assurance insolvabilité, pension benefit, guarantee scheme, insolvency insurance, pension scheme, PBGC, PPF
    JEL: G23 J32
    Date: 2007–01
  7. By: Pablo Antolin
    Abstract: This paper examines how uncertainty regarding future mortality and life expectancy outcomes, i.e. longevity risk, affects employer-provided defined benefit (DB) private pension plans liabilities. The paper argues that to assess uncertainty and associated risks adequately, a stochastic approach to model mortality and life expectancy is preferable because it permits to attach probabilities to different forecasts. In this regard, the paper provides the results of estimating the Lee-Carter model for several OECD countries. Furthermore, it conveys the uncertainty surrounding future mortality and... <P>Risque de longévité et pensions privées <BR>Cet article examine l'impact de l’incertitude concernant l'évolution de la mortalité et de l’espérance de vie (risque de longévité) sur le passif des fonds de pensions privés à prestations définies. Cet article soutient l'argument que, pour évaluer de manière adéquate cette incertitude et les risques associés, il est préférable de recourir à une approche stochastique pour l'établissement de projections de mortalité et d'espérance de vie afin de pouvoir associer des probabilités à des prévisions différentes. A ce sujet, le présent article présente les résultats de l'application simulée du modèle Lee-Carter à plusieurs...
    Keywords: demographic trends and forecasts, retirement, private pensions, pension privée, plans de pensions à prestation définie, mortalité et l'espérance de vie, tableaux de survie, risque de longévité, modèle Lee-Carter, simulation Monte Carlo, histogrammes, prévisions démographiques, defined benefit pension plans., mortality and life expectancy, life tables, longevity risk, Lee-Carter models, Monte Carlo methods, histograms
    JEL: C15 C32 G23 J11 J26 J32
    Date: 2007–01

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