nep-ias New Economics Papers
on Insurance Economics
Issue of 2007‒08‒08
nine papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Do financial incentives for supplementary private health insurance reduce pressure on the public system? Evidence from Australia, CHERE Working Paper 2006/11 By Mingshan Lu; Elizabeth Savage
  2. What Happens to Health Benefits after Retirement By Richard W. Johnson; ; ;
  3. Microinsurance in the Philippines: Policy and Regulatory Issues and Challenges By Llanto, Gilberto M.; Almario, Joselito; Llanto-Gamboa, Marinella Gilda
  4. Modelling the Time on Unemployment Insurance Benefits By Govert E. Bijwaard
  5. Evaluating the Effects of Asymmetric Information in a Model of Crop Insurance By Hoy, M.; Esuola, A.; Islam, Z.; Turvey, C.
  6. Credit Risk Transfer: To Sell or to Insure By James R. Thompson
  7. The win-first probability under interest force By Stéphane Loisel; Didier Rullière
  8. Social and Occupational Security and Labour Market Flexibility in Sweden: The Case of Unemployment Compensation By Gabriella Sjögren Lindquist; Eskil Wadensjö
  9. The Optimal Capital Structure of Banks: Balancing Deposit Insurance, Capital Requirements and Tax-Advantaged Debt By John P. Harding; Xiaozhing Liang; Stephen L. Ross

  1. By: Mingshan Lu; Elizabeth Savage (CHERE, University of Technology, Sydney)
    Abstract: In many developed countries, budgetary pressures have made government investigate private insurance to reduce pressure on their public health system. Between 1997 and 2000 the Australian government implemented a series of reforms intended to increase enrollment in private health insurance and reduce public health care costs. Using the ABS 2001 National Health Survey, we examine the impact of increased insurance coverage on use of the hospital system, in particular on public and private admissions and lengths of stay. We model probability of hospital admission and length of stay for public (Medicare) and private patients. We use Propensity Score Matching to control for selection in the insurance decision and estimate a two-part model for hospital admission and length of stay on the matched sample. Our results indicate that there is selection associated with insurance choice. We also find that unconditional public patient and private patient lengths of stay in 2001 differ markedly depending on insurance duration. Those with shorter periods of insurance coverage behave more like the uninsured than those insured prior to the insurance incentives. While the insurance incentives substantially increased the proportion of the population with supplementary cover, the impact on use of the public system appears to be quite modest. Increased private usage outweighs reduced public usage and the insurance incentives appear to be an extremely costly way of reducing pressure on the public hospital system.
    Keywords: Private Health Insurance, Australia
    JEL: I11
  2. By: Richard W. Johnson; (Urban Institute); ;
    Abstract: Because most workers receive health benefits from their employers, retirement often disrupts health insurance coverage. Some employers offer health insurance to retirees, but many firms are cutting retiree health benefits by passing more costs to retirees or eliminating benefits altogether. Few alternatives exist. Private nongroup coverage is generally quite expensive, and few people in their 50s and early 60s qualify for publicly financed benefits. Many workers who cannot obtain retiree benefits from their own employers or their spouses’ employers delay retirement to age 65, when Medicare coverage begins. This brief examines the availability and cost of health insurance coverage at ages 55 to 64 and changes in coverage after retirement. Today most workers with employer health benefits retain their coverage when they retire early, although their required premium contributions have increased sharply over the past ten years. In the future, however, steady declines in the share of younger workers with access to retiree health benefits may jeopardize income security for the next generations of retirees.
    Keywords: retirement, health benefits, disrupt, cutting benefits, health insurance coverage
    Date: 2007–02
  3. By: Llanto, Gilberto M.; Almario, Joselito; Llanto-Gamboa, Marinella Gilda
    Abstract: This study assesses the state of microinsurance in the country, identifies the players and their performance, and the challenges facing microinsurance development. The term “micro” pertains to the capacity of a program to handle the small, sometime irregular cash flows of poor households, who have been excluded in the commercial insurance system for a variety of reasons. Microinsurance products, specifically designed with the poor in mind, will help mitigate risks and reduce the vulnerability of poor households. The most prominent forms of microinsurance are life insurance and health insurance (carried out as part of an overall health care package that links the health insurance to a health facility), which have been designed to be responsive to the need of poor households. The paper reports 17 players in the emerging microinsurance industry, consisting of 12 cooperatives, three NGOs/MFIs, and two transport associations that are offering “home-made” microinsurance. These “home-made” microinsurance products continue to be provided despite their actuarial weaknesses and lack of financial capacity of the providers because of very strong demand from their membership for such financial products. Given their advantages over commercial insurance companies, the mutual benefit associations (MBAs) are the usual vehicles of microinsurance programs. In 2004, 18 MBAs were registered with the Insurance Commission (IC) with accumulated assets of PhP14.8 billion. Members’ equity totaled PhP4.25 billion. The paper calls attention to the institutional, policy and regulatory issues and challenges facing microinsurance.
    Keywords: microfinance institutions, insurance industry, microinsurance, risk protection services, life insurance, mutual benefit associations, social protection, microinsurance delivery
    Date: 2006
  4. By: Govert E. Bijwaard (Erasmus University Rotterdam and IZA)
    Abstract: A duration model based on the time on Unemployment Insurance (UI) benefits instead of a model based on the time till re-employment is more relevant from a cost-benefit perspective. The contribution of this paper is to extend the standard (mixed) Proportional Hazard model to account for an upper bound on the duration. We use a modified mover-stayer model to this end and discuss the interpretation of the parameters. In an empirical application we compare the method with the standard analysis of unemployment duration. We also derive the expected UI-benefit costs implied by the model for some typical unemployed individuals.
    Keywords: UI-benefits, maximum duration, mixed proportional hazard, mover-stayer model
    JEL: C41 J64 J65
    Date: 2007–07
  5. By: Hoy, M.; Esuola, A.; Islam, Z.; Turvey, C.
    Date: 2007
  6. By: James R. Thompson (Queen's University)
    Abstract: This paper analyzes credit risk transfer in banking. Specifically, we model loan sales and loan insurance (e.g. credit default swaps) as the two instruments of risk transfer. Recent empirical evidence suggests that the adverse selection problem is as relevant in loan insurance as it is in loan sales. Contrary to previous literature, this paper allows for informational asymmetries in both markets. We show how credit risk transfer can achieve optimal investment and minimize the social costs associated with excess risk taking by a bank. Furthermore, we find that no separation of loan types can occur in equilibrium. Our results show that a well capitalized bank will tend to use loan insurance regardless of loan quality in the presence of moral hazard and relationship banking costs of loan sales. Finally, we show that a poorly capitalized bank may be forced into the loan sales market, even in the presence of possibly significant relationship and moral hazard costs that can depress the selling price.
    Keywords: credit risk transfer, banking, loan sales, loan insurance, credit derivatives
    JEL: G21 G22 D82
    Date: 2007–06
  7. By: Stéphane Loisel (SAF - EA2429 - Laboratoire de Science Actuarielle et Financière - [Université Claude Bernard - Lyon I]); Didier Rullière (SAF - EA2429 - Laboratoire de Science Actuarielle et Financière - [Université Claude Bernard - Lyon I])
    Abstract: In a classical risk model under constant interest force, we study the probability that the surplus of an insurance company reaches an upper barrier before a lower barrier. We define this probability as win-first probability. Borrowing ideas from life-insurance theory, hazard rates of the maximum of the surplus before ruin, regarded as a remaining future lifetime random variable, are studied, and provide an original derivation of the win-first probability. We propose an algorithm to efficiently compute this risk-return indicator and its derivatives in the general case, as well as bounds of these quantities. The efficiency of the proposed algorithm is compared with adaptations of other existing methods, and its interest is illustrated by the computation of the expected amount of dividends paid until ruin in a risk model with a dividend barrier strategy.
    Keywords: Ruin probability; hazard rate; upper absorbing barrier; constant interest force; risk-return indicator; win-first probability
    Date: 2007–07–27
  8. By: Gabriella Sjögren Lindquist (SOFI, Stockholm University); Eskil Wadensjö (SOFI, Stockholm University, SULCIS and IZA)
    Abstract: The Swedish labour market and social policy is aimed at facilitating flexibility in the labour market. The active labour market policy and the design of the social security pension system are two frequently mentioned examples of that policy. This does not necessarily mean that all policy programs are in accordance with the goal of enhancing flexibility. In this paper we analyze one part of the social and occupational (collectively bargained) security system - the compensation at unemployment with special emphasis on the schemes complementing compensation from the unemployment insurance scheme. We focus on the effects of those systems on labour market flexibility. Some parts of these complementing systems support mobility and return to work after layoffs, other parts of the systems may lead to that workers avoid job mobility and to prolonged periods of unemployment. Of special interest is that those complementing systems differ between different sectors of the labour market and that many, especially young people, are not covered.
    Keywords: unemployment, unemployment insurance, occupational insurance, severance pay
    JEL: J65 J64 J32
    Date: 2007–07
  9. By: John P. Harding (University of Connecticut); Xiaozhing Liang (State Street Corporation); Stephen L. Ross (University of Connecticut)
    Abstract: The capital structure and regulation of financial intermediaries is an important topic for practitioners, regulators and academic researchers. In general, theory predicts that firms choose their capital structures by balancing the benefits of debt (e.g., tax and agency benefits) against its costs (e.g., bankruptcy costs). This paper studies the impact and interaction of deposit insurance, capital requirements and tax benefits on a bank's choice of optimal capital structure. Using a contingent claims model to value the firm and its associated claims, we find that there exists an interior optimal capital ratio in the presence of deposit insurance, taxes and a minimum fixed capital standard as long as there is a significant financial burden associated with violating capital requirements. Banks voluntarily choose to maintain capital in excess of the minimum required in order to balance the risks of insolvency (especially to future tax benefits) against the benefits of additional debt. Because our model includes all three contingent claims, our results differ from those of previous studies of the capital structure of banks that have generally found corner solutions (all equity or all debt) to the capital structure problem.
    Date: 2007–07

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