nep-ias New Economics Papers
on Insurance Economics
Issue of 2007‒12‒01
five papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Mind the Gap! Consumer Perceptions and Choices of Medicare Part D Prescription Drug Plans By Florian Heiss; Daniel McFadden; Joachim Winter
  2. Dynamic Optimal Insurance and Lack of Commitment By Alexander K. Karaivanov; Fernando M. Martin
  3. Hybrid Cat-bonds By Pauline Barrieu; Henri Loubergé
  4. Urban Poor in China: A Case Study of Changsha By Erqian Zhu; Shunfeng Song

  1. By: Florian Heiss; Daniel McFadden; Joachim Winter
    Abstract: Medicare Part D provides prescription drug coverage through Medicare approved plans offered by private insurance companies and HMOs. In this paper, we study the role of current prescription drug use and health risks, related expectations, and subjective factors in the demand for prescription drug insurance. To characterize rational behavior in the complex Part D environment, we develop an intertemporal optimization model of enrollment decisions. We generally find that seniors' choices respond to the incentives provided by their own health status and the market environment as predicted by the optimization model. The proportion of individuals who do not attain the optimal choice is small, but the margin for error is also small since enrollment is transparently optimal for most eligible seniors. Further, there is also evidence that seniors over-react to some salient features of the choice situation, do not take full account of the future benefit and cost consequences of their decisions, or the expected net benefits and risk properties of alternative plans.
    JEL: C25 C61 C81 D12 D91 H51 I10 I12 I18
    Date: 2007–11
  2. By: Alexander K. Karaivanov (Simon Fraser University); Fernando M. Martin (Simon Fraser University)
    Abstract: We analyze the role of commitment in a dynamic principal-agent model of optimal insurance with hidden effort and observable but non-contractible savings. We argue that the optimal contract under full commitment is time-inconsistent. Consequently, we analyze the optimal time-consistent Markov-perfect insurance contract when both the agent and the principal cannot commit for longer than one period and contrast our results with the full commitment case from the existing literature. We find that the optimal contract under lack of commitment provides additional insurance relative to the autarky allocation and features non-degenerate long-run asset and consumption distributions. Furthermore, the no-commitment contract differs significantly from the commitment contract in the time profiles of consumption, savings, and welfare. We solve for the optimal insurance contracts in several environments featuring different degrees of market incompleteness and find that the welfare loss due to lack of commitment can be very high relative to the welfare costs of moral hazard or savings non-contractibility.
    Keywords: optimal insurance, time consistency, moral hazard
    JEL: D11 E21
    Date: 2007–10
  3. By: Pauline Barrieu (London School of Economics); Henri Loubergé (University of Geneva and Swiss Finance Institute)
    Abstract: Natural catastrophes attract regularly the attention of media and have become a source of public concern. From a financial viewpoint, natural catastrophes represent idiosyncratic risks, diversifiable at the world level. But for reasons analyzed in this paper reinsurance markets are unable to cope with this risk completely. Insurance-linked securities, such as cat bonds, have been issued to complete the international risk transfer process, but their development is disappointing so far. This paper argues that downside risk aversion and ambiguity aversion explain the limited success of cat bonds. Hybrid cat bonds, combining the transfer of cat risk with protection against a stock market crash, are proposed to complete the market. Using the concept of market modified risk measure, the paper shows that replacing simple cat bonds with hybrid cat bonds would lead to an increase in market volume.
    Keywords: Risk management, Risk transfer, Catastrophes, Risk measures, Reinsurance, Optimal design
    JEL: D81 G22
    Date: 2006–02
  4. By: Erqian Zhu (Department of Resource Economics, University of Nevada, Reno); Shunfeng Song (Department of Economics, University of Nevada, Reno)
    Abstract: Since the late 1970s, many state-owned enterprise employees have been laid off and more and more rural people have migrated to urban areas. In this massive laying-off and migration process, many laid-off workers and migrants have become urban poor. Using data collected from a survey on 1641 relatively low-income households in Changsha in January 2007, this paper compares migrant workers with their city counterpart regarding income, employment, education, and social support. Based on qualitative and regression analysis, we found that worker’s age, Hukou status, education, enterprise ownership, and contract length are significantly affecting the annual income. There exists a big gap in the coverage of social security between urban and migrant workers. This paper provides some policy recommendations.
    Keywords: Urban poor; Hukou; Laid-off workers; Migrant workers; Income determinants; Social insurance
    JEL: R23 I30
    Date: 2007–11
  5. By: Dolores Jiménez-Rubio (Universidad de Granada. Dpto. Economía Aplicada)
    Abstract: An important recent change in the Spanish society is the increasing proportion of the population who are immigrants. Immigrants often face situations of social exclusion and disadvantage, circumstances that may affect their health status. Empirical evidence about differences in health status or the utilisation of health services between native and immigrant population is however insufficient. This paper uses the 2003 National Health Survey to explore whether non-Spaniards, for the same level of need, use health care services at the same rate as national citizens. The findings show different patterns of health care use to the disadvantage of immigrants.
    Keywords: Equity in health care, immigrant population, Spanish National Health System
    JEL: I11 J15
    Date: 2007–11–22

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