nep-ias New Economics Papers
on Insurance Economics
Issue of 2008‒11‒18
seven papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Determinants of Participation in a Catastrophe Insurance Programme: Empirical Evidence from a Developing Country By Akter, Sonia; Brouwer, Roy; Chowdhury, Saria; Aziz, Salina
  2. Modeling Flood Perils and Flood Insurance Program in Taiwan By Chang, Ching-Cheng; Hsu, Wenko; Su, Ming-Daw
  3. Catastrophe risk pricing : an empirical analysis By Lane, Morton; Mahul, Olivier
  4. Modeling Dependence in the Design of Whole Farm---A Copula-Based Model Approach By Zhu, Ying; Ghosh, Sujit K.; Goodwin, Barry K.
  5. Riskiness, Risk Aversion, and Risk Sharing: Cooperation in a Dynamic Insurance Game By Sarolta Laczó
  6. The Insurance Role of Remittances on Household Credit Demand By Richter, Susan M.
  7. The Employment Effects of Social Security Disability Insurance in the Past 25 Years: A Study of Rejected Applicants Using Administrative Data By Till von Wachter; Jae Song; Joyce Manchester

  1. By: Akter, Sonia; Brouwer, Roy; Chowdhury, Saria; Aziz, Salina
    Abstract: The paper presents empirical evidence of the determinants of catastrophe insurance participation in one of the poorest and most disaster prone countries in the world. In a large-scale household survey carried out in 2006 we ask 3,000 residents in six different districts in Bangladesh facing various environmental risk exposure levels about their willingness to participate in a catastrophe insurance programme. Combining factors put forward in risk theory and economics, we estimate a model of insurance participation. We show that the household decision to participate in the insurance programme differs depending on both exogenous and endogenous risk exposure levels. As predicted by micro-economic theory, ability to pay, measured in terms of household income and access to credit, significantly affects insurance participation. Furthermore, among the sociodemographic factors investigated in this case study, respondent education and occupation are found to significantly influence household decision making. Our study suggests that low participation rates for catastrophe insurance in a developing country can be explained by high rates of illiteracy and limited access to credit.
    Keywords: Natural disasters, catastrophe, insurance, participation, risk, Bangladesh, Consumer/Household Economics, Environmental Economics and Policy, International Development, Risk and Uncertainty, Q54,
    Date: 2008
  2. By: Chang, Ching-Cheng; Hsu, Wenko; Su, Ming-Daw
    Abstract: Taiwan had approximately 3,000 buildings damaged by floods with an economic loss of NT$12.8 billion annually, a figure 4.5 times more than economic losses due to fire damages. Many insurers become extremely cautious when underwriting their flood policies for people living in areas that are frequently struck by floods. The rising damages also trigger the demand for a mandatory national flood insurance program. This paper describes the development of an integrated flood risk assessment model for Taiwan which contains of a hazard, vulnerability and financial analysis module. We take the perspective that the mandatory program will be provided to fire policyholders as part of building and content insurance to mitigate the financial losses. The issue of a long-term balance between fund accumulations and its claim payouts will be addressed along with policy recommendations based on the modeling results.
    Keywords: Risk Assessment, Typhoon, Flood Insurance, Financial Analysis, Resource /Energy Economics and Policy, Risk and Uncertainty,
    Date: 2008
  3. By: Lane, Morton; Mahul, Olivier
    Abstract: The price of catastrophe risks is viewed by many to be too high and/or too volatile. Catastrophe risk practitioners point out that, contrary to standard insurance, such as automobile insurance, catastrophe re-insurance is exposed to infrequent but potentially very large losses. It thus requires keeping a large amount of capital in hand, generating a cost of capital to be added to the long-term expected loss. This paper pulls together data from about 250 catastrophe bonds issued on the capital markets to investigate how catastrophe risks are priced. The analysis reveals that catastrophe risk prices are a function of the underlying peril, the expected loss, the wider capital market cycle, and the risk profile of the transaction. The market-based catastrophe risk price is estimated to be 2.69 times the expected loss over the long term, that is, the long-term average multiple is 2.69. When adjusted from the market cycle, the multiple is estimated at 2.33. Peak perils like US Wind are shown to have a much higher multiple than that of non-peak perils like Japan Wind, revealing the diversification of credit from the market.
    Keywords: Markets and Market Access,Insurance&Risk Mitigation,Debt Markets,Access to Markets,Emerging Markets
    Date: 2008–11–01
  4. By: Zhu, Ying; Ghosh, Sujit K.; Goodwin, Barry K.
    Abstract: The objective of this study is to evaluate and model the risks of corn and soybean production. This study focuses on the risk of revenue variability that arises from changes in prices, yields shortfalls or both. There are several models for price and yield risk factors for corn and soybeans. For instance, yield risks can be modeled by a family of Beta distributions, whereas price shocks can be modeled by log-normal distributions. In order to develop a multivariate model that preserves a given set of marginals, a copula approach can be used to characterize the joint yield and price risk of corn and soybeans, which are usually highly correlated. The copula approach has been spurred by the recent developments in the whole farm insurance (WFI), resulting in an increasing need for the modeling of multivariate risk factors and their interaction. As a part of the study, various copula models are investigated for their suitability in modeling yield and price risks. Finally, the proposed copula approach is illustrated with simulated data to calculate the premium rate of the whole farm insurance. Results show that WFI is superior to crop-specific insurance with premia 36% cheaper than the latter.
    Keywords: Copula, Crop Insurance, Loss Distribution, Farm Management,
    Date: 2008
  5. By: Sarolta Laczó (Toulouse School of Economics (Gremaq))
    Abstract: This paper examines how cooperation in an insurance game depends on risk preferences and the riskiness of income. It considers a dynamic game where commitment is limited, and characterizes the level of cooperation as measured by the reciprocal of the discount factor above which perfect risk sharing is self-enforcing. When agents face no aggregate risk, there is more cooperation, if (i) the utility function is more concave, and if (ii) income is more risky considering a mean-preserving spread or an SSD deterioration. However, (ii) no longer holds when insurance can only be incomplete, because of the interplay of idiosyncratic and aggregate risk. In the case of exponential (isoelastic) utility, cooperation depends positively on both the coefficient of absolute (relative) risk aversion and the standard deviation (coefficient of variation), and is independent of mean income. This paper also relates the level of cooperation to informal insurance transfers and the smoothness of consumption when perfect risk sharing is not achieved.
    Keywords: informal insurance, limited commitment, risk preferences, riskiness, comparative statics, dynamic stochastic games
    JEL: C73 D80
    Date: 2008–10
  6. By: Richter, Susan M.
    Abstract: The economic literature has highlighted how in the absence of income insurance risk averse households may voluntarily withdraw from credit markets, since contract terms may transfer too much risk to the household (Boucher, Carter, and Guirkinger, 2007). Therefore, households may forgo activities with higher expected income in favor of activities with less income variability across states of nature (Morduch, 1995). Recent literature has also evaluated how remittances provide households with insurance against income shocks (Yang and Choi, 2007; Rosenzweig and Stark, 1989) and how remittances may help households bypass financial intermediaries (Woodruff and Zenteno, 2001; Taylor, Rozelle, and de Brauw, 2003). There has been minimal attention, however, on how access to the potential receipt of remittances affects household participation in financial credit markets. On the one hand, the direct effect of remittances might decrease liquidity constraints at the household level and thus decrease credit demand. On the other hand remittances may provide households with insurance and thus increase willingness to accept credit contract terms. In this paper I estimate the effect of the potential receipt of remittances on credit demand. Potential receipt of remittances is estimated by predicting the household's receipt of remittances and variables that proxy for the strength and vulnerability of migration networks. Results indicate that the predicated amount of remittances received at the household level have a positive effect on credit demand.
    Keywords: Financial Economics, Health Economics and Policy, F22, F24, L14, O1, 015,
    Date: 2008
  7. By: Till von Wachter (Columbia University - Department of Economics); Jae Song (Social Security Administration); Joyce Manchester (Social Security Administration)
    Abstract: We use administrative longitudinal data on earnings, impairment, and mortality to replicate and extend Bound¡¯s seminal study of rejected applicants to federal Disability Insurance (DI). We confirm Bound¡¯s main result that rejected older male applicants do not exhibit substantial labor force participation. We show this result is stable over time, robust to more narrow control groups, and similar within gender, impairment, industry, and earnings groups. However, we also find that younger rejected applicants have substantial employment after application. To what extent this translates into potential employment for new beneficiaries depends on which group among them is considered "on the margin" of receiving DI. If we use initially rejected applicants - a large and growing fraction of new beneficiaries - the resulting counterfactual employment rate for younger applicants is low, too. We also find that rejected applicants bear signs of economically induced applicants. DI appears to induce a growing number of less successful workers to apply, an important fraction of which ends up without benefits and non-employed.
    Date: 2008

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