nep-ias New Economics Papers
on Insurance Economics
Issue of 2008‒03‒08
three papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Collusion in a One-Period Insurance Market with Adverse Selection By Alexander Alegria; Manuel Willington
  2. Pricing the Option to Surrender in Incomplete Markets By Consiglio, Andrea; De Giovanni, Domenico
  3. Integrating Income Tax and National Insurance: an interim report By Stuart Adam; Glen Loutzenhiser

  1. By: Alexander Alegria (Facultad de Ciencias Económicas y Administrativas, Ponti?cia Universidad Javeriana de Cali, Colombia); Manuel Willington (ILADES-Georgetown University, Universidad Alberto Hurtado)
    Abstract: We show how collusive outcomes may arise as equilibrium in a one-period competitive insurance market characterized by adverse selection. We build on Inderst and Wambach (2001) model ?they show that the Rothschild and Stiglitz separating equilibrium always exists when there are capacity constraints? and assume that insurees must pay a minimum premium; which is a common feature on many health systems. In this setup, we show that there is a range of equilibria from the zero profit one in which low-risks implicitly subsidize high risks to one where firms obtain profits with both types of consumers. Moreover, we show that rents only partially dissipate if we assume free entry. Along these equilibria, high risks always obtain full insurance while low risks’ coverage decrease as the firms profits increase. Recently the Chilean antitrust authority (Fiscalía Nacional Económica) accused five of the largest private health insurers of collusion after they reduced the coverage offered to their customers and significantly raised their profits. Our model is consistent with this accusation.
    Keywords: adverse selection, collusion, insurance, capacity constraints
    JEL: L41 I11
    Date: 2007–12
  2. By: Consiglio, Andrea (Department of Statistics and Mathematics “Silvio Vianelli”, University of Palermo,); De Giovanni, Domenico (Department of Business Studies, Aarhus School of Business)
    Abstract: New international accounting standards require insurers to reflect the value of embedded options and guarantees in their products. Pric- ing techniques based on the Black & Scholes paradigm are often used, however, the hypotheses underneath this model are rarely met. We propose a framework that encompasses the most known sources of incompleteness. We show that the surrender option, joined with a wide range of claims embedded in insurance contracts, can be priced through our tool, and deliver hedging portfolios to mitigate the risk arising from their positions. We provide extensive empirical analysis to highlight the effect of incompleteness on the fair value of the option
    Keywords: Life insurance; Policies with minimum guarantee; Option pricing; Incomplete markets; Surrender options
    Date: 2007–10–31
  3. By: Stuart Adam (Institute for Fiscal Studies); Glen Loutzenhiser
    Abstract: <p><p><p>Income Tax and National Insurance are now sufficiently similar that merging them appears to be a plausible option, yet still sufficiently different that integration raises significant difficulties. This paper surveys the potential benefits of integration - increased transparency and reduced administrative and compliance costs - and the potential obstacles, assessing the extent to which each of the differences between Income Tax and NICs - in particular the contributory principle, the levying of an employer charge and the differences in tax base - constitute serious barriers to integration. The paper concludes that few of the difficulties look individually prohibitive, but that trying too hard to avoid significant reform of the current policy framework could produce a merged tax so complicated as to nullify much or all of the benefits of integration.</p></p></p>
    Keywords: Taxation, social insurance, administration
    JEL: H24 H25 H83 K34
    Date: 2007–12

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