nep-ias New Economics Papers
on Insurance Economics
Issue of 2007‒11‒17
five papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Intermediation, Compensation and Collusion in Insurance Markets By Focht, Uwe; Richter, Andreas; Schiller, Jörg
  2. Dental Insurance and Dental Care: the Role of Insurance and Income By Murat K. Munkin; Pravin K. Trivedi
  3. Debt Sustainability under Catastrophic Risk: The Case for Government Budget Insurance By Eduardo Borensztein; Eduardo Cavallo; Patricio Valenzuela
  4. Outsourcing, Unemployment and Welfare Policy By Christian Keuschnigg; Evelyn Ribi
  5. Bargaining power and efficiency in insurance contracts By John Quiggin; Robert G. Chambers

  1. By: Focht, Uwe; Richter, Andreas; Schiller, Jörg
    Abstract: Recent events involving major insurance companies and insurance brokerage firms highlight substantial incentive problems in commercial and reinsurance markets where intermediation takes place. We show that in markets with informed as well as uninformed consumers and heterogeneous risk profiles intermediation has the potential to improve social welfare. However, since intermediation reduces insurers’ market power, incentives for tacit collusion are higher compared to markets without intermediation. A controversial matter in the discussion concerning insurance intermediation is the issue of compensation customs. Our analysis provides explanations for the counterintuitive observation that brokers are usually compensated by insurance companies. The rationale for the latter is the fact that a fee paid by uninformed consumers limits the insurers’ ability to extract rents from informed consumers.
    Keywords: insurance; brokerage; collusion; compensation; information
    JEL: D83 G22 J33
    Date: 2007
  2. By: Murat K. Munkin; Pravin K. Trivedi
    Abstract: This paper analyzes the effect of dental insurance on utilization of general dentist services by adult US population aged from 25 to 64 years. Our econometric framework accommdates endogeneity of insurance and the ordered nature of the measure of dental utilization. The study finds strong evidence of endogeneity of dental insurance to utilization and identifies interesting patterns of nonlinear dependencies between the dental insurance status and individual’s age and income. The calculated average treatment effect supports the claim of adverse selection into the treated (insured) state and indicates a strong positive incentives effect of dental insurance.
    Date: 2007–07
  3. By: Eduardo Borensztein (International Monetary Fund); Eduardo Cavallo (Inter-American Development Bank); Patricio Valenzuela (International Monetary Fund)
    Abstract: Natural disasters are an important source of vulnerability in the Caribbean region. Despite being one of the more disaster-prone areas of the world, it has the lowest levels of insurance coverage. In this paper, we examine the vulnerability of Belize’s public finance to the occurrence of hurricanes and the potential impact of insurance instruments in reducing that vulnerability. We find that catastrophic risk insurance improves Belize’s debt sustainability significantly. In addition, the methodology employed enables us to estimate the appropriate level of insurance, which for the case of Belize is a maximum coverage of US$ 120 million per year. International organization can play a role assisting countries to overcome the distortions in insurance markets, as well as helping to relax the internal political resistance to the purchase of insurance policies.
    Keywords: Public Finance, Insurance, Natural Disasters
    JEL: H30 G15 G22 Q54
    Date: 2007–06
  4. By: Christian Keuschnigg (University of St. Gallen (IFF-HSG), CEPR and CESifo); Evelyn Ribi (University of St. Gallen (IFF-HSG))
    Abstract: Outsourcing of labor intensive activities challenges the welfare state and undermines the protection of low-skilled workers. The stylized facts are that profits are concentrated among the high-skilled, involuntary unemployment is mostly among the low-skilled, and private unemployment insurance is missing. This paper analyzes the effectiveness of redistribution and insurance policies when heterogeneous firms can outsource labor intensive components to low-wage economies. The main results are: (i) Social insurance props up wages, leading to more outsourcing and unskilled unemployment. (ii) Redistribution from the skilled to the working poor acts as a wage subsidy to unskilled workers, thereby reducing gross wages, outsourcing and unemployment. (iii) A trend to outsourcing, induced by lower transport costs of imported components, depresses low-skilled wages, raises unemployment, and boosts profits. The resulting polarization of society and the increased income risk of unskilled workers emphasizes the social gains from redistribution and insurance and thus calls for a more active role of the welfare state in more open economies.
    Keywords: Outsourcing, unemployment, social insurance, redistribution
    JEL: F23 H21 J64 J65 L23
    Date: 2007
  5. By: John Quiggin (Risk & Sustainable Management Group, School of Economics, University of Queensland); Robert G. Chambers (Dept of Agricultural and Resource Economics, University of Maryland, College Park)
    Abstract: Insurance contracts are frequently modelled as principal--agent relationships. Although it is commonly assumed that the principal, in this case the insurer, has complete freedom to design the contract, the problem formulation in much of the principal--agent literature presumes that the contract is constrained-Pareto-efficient. In the present paper, we consider the implications of a richer specification of the choices available to clients. In particular, we consider the entire spectrum of possible power differentials in the contracting relationship between insurers and clients. Our central result is that the agent can exploit information asymmetries to offset the bargaining power of the insurer, but that this process is socially costly.
    JEL: D82 G22
    Date: 2007–03

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