nep-ias New Economics Papers
on Insurance Economics
Issue of 2007‒09‒09
nine papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Dynamic Inefficiencies in Employment-Based Health Insurance System Theory and Evidence By Hanming Fang; Alessandro Gavazza
  2. Mutual versus Stock Insurers: Fair Premium, Capital, and Solvency By Christian Laux; Alexander Muermann
  3. Performance evaluation of portfolio insurance strategies using stochastic dominance criteria By J. ANNAERT; S. VAN OSSELAER; B. VERSTRAETE
  4. A Tax on Work for the Elderly: Medicare as a Secondary Payer By Gopi Shah Goda; John B. Shoven; Sita Nataraj Slavov
  5. Excess use of Temporary Parental Benefit By Engström, Per; Hesselius, Patrik; Persson, Malin
  6. "Consumption Insurance and Risk-Coping Strategies under Non-Separable Utility: Evidence from the Kobe Earthquake" By Yasuyuki Sawada; Satoshi Shimizutani
  7. Do countries default in “bad times”? By Michael Tomz; Mark L. J. Wright
  8. The information method - theory and application By Engström, Per; Hesselius, Patrik
  9. Accident Risk, Limited Liability and Dynamic Moral Hazard By BIAIS, Bruno; MARIOTTI, Thomas; ROCHET, Jean-Charles; VILLENEUVE, Stéphane

  1. By: Hanming Fang; Alessandro Gavazza
    Abstract: We investigate how the employment-based health insurance system in the U.S. affects individuals' life-cycle health-care decisions. We take the viewpoint that health is a form of human capital that affects workers' productivities on the job, and derive implications of employees' turnover on the incentives to undertake health investment. Our model suggests that employee turnovers lead to dynamic inefficiencies in health investment, and particularly, it suggests that employment-based health insurance system in the U.S. might lead to an inefficient low level of individual health during individuals' working ages. Moreover, we show that under-investment in health is positively related to the turnover rate of the workers' industry and increases medical expenditure in retirement. We provide empirical evidence for the predictions of the model using two data sets, the Medical Expenditure Panel Survey (MEPS) and the Health and Retirement Study (HRS). In MEPS, we find that employers in industries with high turnover rates are much less likely to offer health insurance to their workers. When employers offer health insurance, the contracts have higher deductibles and employers' contribution to the insurance premium is lower in high turnover industries. Moreover, workers in high turnover industries have lower medical expenditure and undertake less preventive care. In HRS, instead we find that individuals who were employed in high turnover industries have higher medical expenditure when retired. The magnitude of our estimates suggests significant degree of intertemporal inefficiencies in health investment in the U.S. as a result of the employment-based health insurance system. We also evaluate and cast doubt on alternative explanations.
    JEL: D91 D92 I1 I12
    Date: 2007–09
  2. By: Christian Laux; Alexander Muermann
    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 owner-manager 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.
    JEL: G22 G32
    Date: 2007–04
    Abstract: The continuing creation of portfolio insurance applications as well as the mixed research evidence suggests that so far no consensus has been reached about the effectiveness of portfolio insurance. Therefore, this paper provides a performance evaluation of the stop-loss, synthetic put and constant proportion portfolio insurance techniques based on a block-bootstrap simulation. Apart from more traditional performance measures, we consider the Value-at-risk and Expected Shortfall of the strategies, which are more appropriate in an insurance context. An additional performance evaluation is given by means of the stochastic dominance framework where we account for sampling error. A sensitivity analysis is performed in order to examine the impact on performance of a change in a specific decision variable (ceteris paribus). The results indicate that a buy-and-hold strategy does not dominate the portfolio insurance strategies at any stochastic dominance order. Moreover, both for the stop-loss and synthetic put strategy a 100% floor value outperforms lower floor values. For the CPPI strategy we find that a higher CPPI multiple enhances the upward potential of the CPPI strategies, but harms the protection level in return. As regards the optimal rebalancing frequency, daily rebalancing should be preferred for the synthetic put and CPPI strategy, despite the higher transaction costs.
    Keywords: Portfolio insurance; Performance evaluation; Stochastic dominance; Block-bootstrap simulation
    JEL: G11
    Date: 2007–06
  4. By: Gopi Shah Goda; John B. Shoven; Sita Nataraj Slavov
    Abstract: Medicare as a Secondary Payer (MSP) legislation requires employer-sponsored health insurance to be a primary payer for Medicare-eligible workers at firms with 20 or more employees. While the legislation was developed to better target Medicare services to individuals without access to employer-sponsored insurance, MSP creates a significant implicit tax on working beyond age 65. This implicit tax is approximately 15-20 percent at age 65 and increases to 45-70 percent by age 80. Eliminating this implicit tax by making Medicare a primary payer for all Medicare-eligible individuals could significantly increase lifetime labor supply due to the high labor supply elasticities of older workers. The extra income tax receipts from such a policy would likely offset a large percentage of the estimated costs of making Medicare a primary payer.
    JEL: H51 J14 J21 J26
    Date: 2007–09
  5. By: Engström, Per (IFAU - Institute for Labour Market Policy Evaluation); Hesselius, Patrik (IFAU - Institute for Labour Market Policy Evaluation); Persson, Malin (IFAU - Institute for Labour Market Policy Evaluation)
    Abstract: In this report we examine the excess use of Temporary Parental Benefit for parents who need to stay home from work when their children are sick. This study is based on a randomized experiment that took place during the spring 2006. The method used is rather new and more ambitious than those used in similar studies in the past. One advantage with this more elaborate technique is that a larger part of the veiled excessive use can be discovered. The result points to that as much as 22.5 percent of the costs for this social insurance are due to excess use. There are significant gender differences; women’s excess use amounts to 19 percent of their total use while the corresponding figure for men is 28 percent.
    Keywords: Temporary Parental Benefit; randomized experiment
    JEL: J32
    Date: 2007–08–22
  6. By: Yasuyuki Sawada (Faculty of Economics, University of Tokyo); Satoshi Shimizutani (Institute for International Policy Studies(IIPS))
    Abstract: Using a unique household-level dataset on the situation after the Kobe earthquake in 1995, we test the full consumption risk sharing hypothesis, relaxing the separability assumption, and examine households' simultaneous choice of risk coping measures. Using multivariate probit estimations, we find that the full consumption insurance hypothesis is strongly rejected and our results indicate that households' utility across different expenditure items is not separable. As for households' choice of risk-coping measures, households borrowed extensively against housing damage, but relied on dissaving to cope with smaller asset damage, implying a hierarchy of risk-coping measures from dissaving to borrowing.
    Date: 2007–09
  7. By: Michael Tomz; Mark L. J. Wright
    Abstract: This paper uses a new dataset to study the relationship between economic output and sovereign default for the period 1820-2004. We find a negative but surprisingly weak relationship between output and default. Throughout history, countries have indeed defaulted during bad times (when output was relatively low), but they have also maintained debt service in the face of severe adverse shocks, and they have defaulted when domestic economic conditions were favorable. We show that this constitutes a puzzle for standard theories, which predict a much tighter negative relationship as default provides partial insurance against declines in output.
    Keywords: Default (Finance) ; Debt
    Date: 2007
  8. By: Engström, Per (IFAU - Institute for Labour Market Policy Evaluation); Hesselius, Patrik (IFAU - Institute for Labour Market Policy Evaluation)
    Abstract: When estimating the extent of e.g. excess use of public benefits one traditionally uses direct monitoring. Such direct estimates are afflicted with an intrinsic negative bias since you only count what you find. This paper presents and assesses an alternative intuitive, yet relatively unexplored, approach that may reduce the bias by making use of the individual's own response to information of increased monitoring. Through an extensive randomized social experiment we apply the method to one particular Swedish public benefit: Parental Benefit for Temporary Childcare. In our view the application was successful: the results are interpretable and we are able to surface more hidden excess use through the information method. As a rough estimate we find that the information based estimate of excess use is 40 percent higher than the corresponding estimate based on ordinary random monitoring (22.5 percent compared to 16 percent). The method is potentially applicable to a large number of related fields, such as e.g. tax evasion and insurance fraud.
    Keywords: Monitoring; Social insurance; Randomized experiments
    JEL: C51 C93 H55
    Date: 2007–08–20
  9. By: BIAIS, Bruno; MARIOTTI, Thomas; ROCHET, Jean-Charles; VILLENEUVE, Stéphane
    Date: 2007–08

This nep-ias issue is ©2007 by Soumitra K Mallick. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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