nep-ias New Economics Papers
on Insurance Economics
Issue of 2007‒06‒30
four papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. On the Extent of Re-Entitlement Effects in Unemployment Compensation By Javier Ortega; Laurence Rioux
  2. Consumption risk, technology adoption, and poverty traps : evidence from Ethiopia By Christiaensen, Luc; Dercon, Stefan
  3. The theory of life-cycle saving and investing By Zvi Bodie; Jonathan Treussard; Paul Willen
  4. Calibrating CAT bonds for Mexican earthquakes By Wolfgang Härdle; Brenda López Cabrera

  1. By: Javier Ortega (Université de Toulouse (GREMAQ, IDEI), CEP (LSE), CEPR and IZA); Laurence Rioux (CREST-INSEE)
    Abstract: A dynamic labor matching economy is presented, in which the unemployed are either entitled to unemployment insurance (UI) or unemployment assistance (UA), and the employees are either eligible for UI or UA upon future separations. Eligibility for UI requires a minimum duration of contributions and UI benefits are then paid for a limited duration. Workers are riskaverse and wages are determined in a bilateral Nash bargain. As eligibility for UI does not automatically follow from employment, the two types of unemployed workers have different threat points, which delivers equilibrium wage dispersion. Most of the variables and parameters of the model are estimated using the French sample of the European Community Household Panel (1994-2000). We show that extending the UI entitlement improves the situation of all groups of workers and slightly lowers unemployment, while raising UI benefits harms the unemployed on assistance and raises unemployment. Easier eligibility for UI also improves the situation of all groups of workers and favours relatively more the least well-off than longer entitlement. The re-entitlement effect in France lowers by 10% the rise in the wage and by 13% the rise in unemployment following a 10% increase in benefit levels.
    Keywords: re-entitlement effects, unemployment compensation, matching
    JEL: J41 J65
    Date: 2007–05
  2. By: Christiaensen, Luc; Dercon, Stefan
    Abstract: Much has been written on the determinants of input and technology adoption in agriculture, with issues such as input availability, knowledge and education, risk preferenc es, profitability, and credit constraints receiving much attention. This paper focuses on a factor that has been less well documented-the differential ability of households to take on risky production technologies for fear of the welfare consequences if shocks result in poor harvests. Building on an explicit model, this is explored in panel data for Ethiopia. Historical rainfall distributions are used to identify the counterfactual consumption risk. Controlling for unobserved household and time-varying village characteristics, it emerges that not just ex-ante credit constraints, but also the possibly low consumption outcomes when harvests fail, discourage the application of fertilizer. The lack of insurance causes inefficiency in production choices.
    Keywords: Economic Theory & Research,Financial Intermediation,Consumption,Insurance & Risk Mitigation,Inequality
    Date: 2007–06–01
  3. By: Zvi Bodie; Jonathan Treussard; Paul Willen
    Abstract: How much should a family save for retirement and for the kids’ college education? How much insurance should they buy? How should they allocate their portfolio across different assets? What should a company choose as the default asset allocation for a mandatory retirement saving plan? We believe that the life-cycle model developed by economists over the last fifty years provides guidance for making such decisions. The theory teaches us to view financial assets as vehicles for transferring resources across different times and outcomes over the life cycle, and that perspective allows households and planners to think about their decisions in a logical and rigorous way. This paper lays out and illustrates the basic analytical framework from the theory in nonmathematical terms, with the aim of providing guidance to financial service providers, consumers, and policymakers.
    Date: 2007
  4. By: Wolfgang Härdle; Brenda López Cabrera
    Abstract: The study of natural catastrophe models plays an important role in the prevention and mitigation of disasters. After the occurrence of a natural disaster, the reconstruction can be financed with catastrophe bonds (CAT bonds) or reinsurance. This paper examines the calibration of a real parametric CAT bond for earthquakes that was sponsored by the Mexican government. The calibration of the CAT bond is based on the estimation of the intensity rate that describes the earthquake process from the two sides of the contract, the reinsurance and the capital markets, and from the historical data. The results demonstrate that, under specific conditions, the financial strategy of the government, a mix of reinsurance and CAT bond, is optimal in the sense that it provides coverage of USD 450 million for a lower cost than the reinsurance itself. Since other variables can affect the value of the losses caused by earthquakes, e.g. magnitude, depth, city impact, etc., we also derive the price of a hypothetical modeled-index (zero) coupon CAT bond for earthquakes, which is based on a compound doubly stochastic Poisson pricing methodology. In essence, this hybrid trigger combines modeled loss and index trigger types, trying to reduce basis risk borne by the sponsor while still preserving a non-indemnity trigger mechanism. Our results indicate that the (zero) coupon CAT bond price increases as the threshold level increases, but decreases as the expiration time increases. Due to the quality of the data, the results show that the expected loss is considerably more important for the valuation of the CAT bond than the entire distribution of losses.
    Keywords: CAT bonds, Reinsurance, Earthquakes, Doubly Stochastic Poisson Process, Trigger mechanism.
    JEL: G19 G29 N26 N56 Q29 Q54
    Date: 2007–06

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