nep-ias New Economics Papers
on Insurance Economics
Issue of 2009‒04‒05
fourteen papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Macroeconomic Consequences of Alternative Reforms to the Health Insurance System in the U.S. By Zhigang Feng
  2. Sosiaalitilit ja moraalikato By Jukka Lassila; Tarmo Valkonen
  3. Corporate Demand for Insurance: An Empirical Analysis of the U.S. Market for Catastrophe and Non-Catastrophe Risks By Erwann Michel-Kerjan; Paul A. Raschky; Howard C. Kunreuther
  4. Come Rain or Shine: Evidence on Flood Insurance Purchases in Florida By Erwann Michel-Kerjan; Carolyn Kousky
  5. Employer-Sponsored Health Insurance and the Promise of Health Insurance Reform By Thomas C. Buchmueller; Alan C. Monheit
  6. Crop Yield and Revenue Insurance: Choosing Between Policies That Trigger On Farm vs. County Indexes By Chaffin, Ben
  7. Natural Hazards Insurance in Europe – Tailored Responses to Climate Change Needed By Reimund Schwarze; Gert G. Wagner
  8. Estimating claim size and probability in the auto-insurance industry: the zeroadjusted Inverse Gaussian (ZAIG) distribution By Claro, Danny P.
  9. Wage risk and employment risk over the life cycle By Hamish Low; Costas Meghir; Luigi Pistaferri
  10. How a Mandatory Activation Program Reduces Unemployment Durations: The Effects of Distance By Graversen, B.K.; Ours, J.C. van
  11. Risk’s and uncertainty in the knowledge economy By Achim , Marian; Neamtu , Ion
  12. Are boys and girls affected differently when the household head leaves for good? Evidence from school and work choices in Colombia By Emla Fitzsimons; Alice Mesnard
  13. Collective Risks in Local Administrations: Can a Private Insurer Be Better than a Public Mutual Fund? By Luigi Buzzacchi; Gilberto Turati
  14. Why is Mobility in India so Low? Social Insurance, Inequality, and Growth By Kaivan Munshi; Mark Rosenzweig

  1. By: Zhigang Feng (Department of Economics, University of Miami)
    Abstract: This paper examines the macroeconomic and welfare implications of alternative re- forms to the U.S. health insurance system. In particular, I study the effect of the expansion of Medicare to the entire population, the expansion of Medicaid, an individ- ual mandate, the removal of the tax break to purchase group insurance and providing a refundable tax credit for insurance purchases. To do so, I develop a stochastic OLG model with heterogenous agents facing uncertain health shocks. In this model individ- uals make optimal labor supply, health insurance, and medical usage decisions. Since buying insurance is endogenous, my model captures how the reforms may affect the characteristics of the insured as well as health insurance premiums. I use the Medi- cal Expenditure Panel Survey to calibrate the model and succeed in closely matching the current pattern of health expenditure and insurance demand as observed in the data. Numerical simulations indicate that reforming the health insurance system has a quantitatively relevant impact on the number of uninsured, hours worked, and welfare.
    Keywords: Health insurance reform, Heterogeneous agent model, Welfare analysis
    JEL: E21 E62 I10
    Date: 2009–01–12
  2. By: Jukka Lassila; Tarmo Valkonen
    Abstract: ABSTRACT : Moral hazard means that people with insurance may take greater risks because they know they do not bear the full consequences of their actions. This can occur with both private insurance and social insurance. Deductibles can be used to alleviate the problem. An interesting way to bring deductibles into social insurance is to establish individual social accounts. Mandatory payments into individual social accounts that finance social insurance payments replace taxes that are currently financing social-insurance benefits. At retirement, the remaining balances in the accounts are paid to account holders or added to their retirement benefits. If the account balance is negative at that time, the account is set to zero. The report considers individual unemployment accounts, including severance payments accounts and employment bonuses, and health and long-term care accounts.
    Keywords: social insurance, moral hazard, individual social accounts
    JEL: H53 H55
    Date: 2009–03–19
  3. By: Erwann Michel-Kerjan (The Wharton School - University of Pennsylvania, Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X); Paul A. Raschky (University of Innsbruck - (-)); Howard C. Kunreuther (The Wharton School - University of Pennsylvania)
    Abstract: This paper tests some existing theories developed over the past 25 years on corporate demand for insurance. Using a unique dataset of 1,809 large U.S. corporations it provides the first empirical analysis that compares corporate demand for standard property insurance and for catastrophe coverage (here, terrorism). We find that larger companies are more likely to have some catastrophe coverage. Corporate demand for catastrophe insurance is found to be more price inelastic than insurance for non-catastrophe risks. This result differs from the findings on individual demand for insurance. The terrorism insurance premium per dollar of coverage is twice as high in the New York Metropolitan area than in the rest of the U.S. Yet the price elasticity of the demand for terrorism insurance is half in this area relative to the rest of the country.
    Keywords: Terrorism - Corporate demand for insurance - Catastrophe financing - Empirical analysis
    Date: 2009–04–01
  4. By: Erwann Michel-Kerjan (The Wharton School - University of Pennsylvania, Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X); Carolyn Kousky (Resources for the Future - (-))
    Abstract: In the U.S., flood insurance is provided essentially through the National Flood Insurance Program (NFIP), a public-private program established in 1968. In the past 10 years, the program has radically expanded to cover $1.1 trillion in assets today. This paper provides a detailed analysis of the largest flood insurance sample ever studied by focusing on the state of Florida, which accounts for 40 percent of the entire NFIP portfolio. We study the demand for flood insurance with a database of more than 7.5 million flood policies-in-force for the years 2000-2005, and all the claims filed in Florida during that period. We answer four questions: What are the characteristics of the buyers of flood insurance? What types of contracts (deductibles and coverage levels) are purchased? Where and when are claims paid and to what extent does mitigation work? How are prices determined and how much does NFIP insurance cost? Given the recent significant increase in the cost of catastrophes worldwide and the debate about the role that insurance can play to enhance adaptation to climate change, the responses to these questions shall be of interest to other countries too.
    Keywords: Flood hazard - Insurance - NFIP - Florida - Catastrophe financing
    Date: 2009–04–01
  5. By: Thomas C. Buchmueller; Alan C. Monheit
    Abstract: The central role that employers play in financing health care is a distinctive feature of the U.S. health care system, and the provision of health insurance through the workplace has important implications well beyond its role as source of health care financing. In this paper, we consider the "goodness of fit" of ESI in the current economic and health insurance environments and in light of prospects for a vigorous national debate over shape of health care reform. The main issue that we explore is whether ESI can have a viable role in health system reform efforts or whether such coverage will need to be significantly modified or even abandoned as reform seeks to address important issues in the efficient provision and equitable distribution of health insurance coverage, to create expanded health plan choices and competition in health insurance markets, and to structure incentives for the more efficient use of health services.
    JEL: I11 I18 I38
    Date: 2009–04
  6. By: Chaffin, Ben
    Abstract: Insurance policies that trigger on county yield and revenue indexes are expected to be more actuarially fair than policies that trigger on individual farm yield and revenue since individual farm hidden actions and hidden information impacting purchase decisions will be built into insurance premium rates. Findings are expected to help farmers, insurance agents, lenders, and those in academia better understand and evaluate insurance policies that trigger indemnity payments based on county indexes. Case studies are provided to facilitate understanding of tracking between farm and county yields and the importance of the farm-county yield correlation. A protocol is developed to standardize county and farm yields to better illustrate tracking and rules-of- thumb are developed to aid in crop insurance purchase decisions. Cumulative probability distributions of net yields with and without insurance are used to show the effects of county and farm trigger insurance policies on risk transfer. The farm location and spatial diversification in a county result in variations in the farm-county yield correlations and yield basis risk. These measures are directly related to the risk transfer performance of county trigger policies relative to no insurance and to farm trigger insurance policies.
    Keywords: Farm Management, Risk and Uncertainty,
    Date: 2009
  7. By: Reimund Schwarze; Gert G. Wagner
    Abstract: This paper provides an overview on the existing systems of natural hazards insurance in Europe, their structural characteristics and peculiarities. It also discusses the difficulties of an adaptation of these systems to climate change and a growing number of natural disasters. Using the case of Germany as an example, the paper demonstrates that the obstacles facing system change are numerous, including failure to recognise the role of state guarantees in enabling private insurance markets, mistaken legal objections against mandatory insurance, distributional conflicts between central and state governments and re-election considerations by politicians. The adjustments to new weather conditions should reflect existing differences in the regional and national insurance systems in the EU. 'Change in diversity’ is seen to offer the best chance to arrive at insurance systems which are prepared for climate change while being adapted to local particularities. Efforts to harmonise national and regional systems as well as top down EU initiatives are rejected in this paper.
    Keywords: Natural Hazards, Insurance, Climate Change, Europe, Germany
    JEL: G22 Q54
    Date: 2009–02
  8. By: Claro, Danny P.
    Date: 2009–10
  9. By: Hamish Low (Institute for Fiscal Studies and Trinity College, Cambridge); Costas Meghir (Institute for Fiscal Studies and University College London); Luigi Pistaferri (Institute for Fiscal Studies and Stanford University)
    Abstract: <p><p>We specify a structural life-cycle model of consumption, labour supply and job mobility in an economy with search frictions that allows us to distinguish between different sources of risk and to estimate their effects. The sources of risk are shocks to productivity, job destruction, the process of job arrival when employed and unemployed and match level heterogeneity. Our model allows for four main social insurance programmes. In contrast to simpler models that attribute all income fluctuations to shocks, our framework allows us to disentangle the effects of the shocks from the responses to these shocks. Estimates of productivity risk, once we control for employment risk and for individual labour supply choices, are substantially lower than estimates that attribute all wage variation to productivity risk. Increases in productivity risk impose a considerable welfare loss on individuals and induce substantial precautionary saving. Increases in employment risk have large effects on output and, primarily through this channel, affect welfare. The welfare value of government programs such as food stamps which partially insure productivity risk is greater than the value of unemployment insurance which provides (partial) insurance against employment risk and no insurance against persistent shocks. </p></p>
    Keywords: Uncertainty, life-cycle models, unemployment, precautionary savings
    JEL: D91 H31 J64
    Date: 2008–09
  10. By: Graversen, B.K.; Ours, J.C. van (Tilburg University, Center for Economic Research)
    Abstract: In an experimental setting some Danish unemployed workers were assigned to an activation program while others were not. Unemployed who were assigned to the activation program found a job more quickly. We show that the activation effect increases with the distance between the place of residence of the unemployed worker and the place where the activation took place. We also find that the quality of the post-unemployment jobs was not affected by the activation program. Both findings confirm that activation programs mainly work because they are compulsory and unemployed don’t like them.
    Keywords: Unemployment insurance;unemployment duration;experiment;activation programs
    JEL: C41 H55 J64 J65
    Date: 2009
  11. By: Achim , Marian; Neamtu , Ion
    Abstract: In the context of a bright economy towards we aim the insurances represent are activity branch a services department with a financial character and with many valences. Beyond of the essential role of these is that the protection of the properties and the persons too between the various risks, the insurances accomplish many socio-economic functions like as attending as an offeror on the loan capital’s market the achievement of investment by resources or on the value document’s market, the creation of P.I.B. and the creation of jobs. The specialized bearers of risk are presented in any national economy in nowadays and they always take over them the risks which threaten the physical persons and the juridical persons, offering them a high level of certainty in change of the insurance’s prices. Consequently these specialized societies which accomplish the insurant role just unload of their contact partners which are the insurants by material consequences of the risks which threaten them. The insurance premium is the cost which is payed by insurants to the insurer, this being much more reduced than the damage which it could suffer in case by producing an insurant risk. This can be a protection form between the worst events which can appear and influence the human life and the economic agent’s activity.
    Keywords: economy/ risk/ evaluation
    JEL: G22 G29 G20
    Date: 2009–01–20
  12. By: Emla Fitzsimons (Institute for Fiscal Studies); Alice Mesnard (Institute for Fiscal Studies)
    Abstract: <p><p>This paper investigates how the permanent departure of the head from the household, mainly due to death or divorce, affects children's school enrolment and work participation in rural Colombia. In our empirical specification we use household-level fixed effects to deal with the fact that households that experience the departure of the head are likely to differ in unobserved ways from those that do not, and we also address the issue of non-random attrition from the panel. We find remarkably different effects for boys and girls. For boys, the adverse event reduces school participation and increases participation in paid work, whereas for girls we find evidence of the adverse event having a beneficial impact on schooling. To explain these differences, we provide evidence for boys consistent with the head's departure having an important effect through the income reduction associated with it, whereas for girls, changes in the household decision-maker appear to play an important role.</p></p>
    Keywords: Child labour; schooling; adverse event; income loss; credit and insurance market failures; bargaining
    JEL: I20 J12 J22 O16
    Date: 2008–11
  13. By: Luigi Buzzacchi (Department of Production Systems and Business Economics, Polytechnic University of Torino); Gilberto Turati (Department of Economics and Public Finance "G. Prato", University of Torino)
    Abstract: In this paper we consider the institutional arrangements needed in a decentralised framework to cope with the potential adverse welfare effects caused by localized negative shocks (e.g., natural disasters, terrorist attacks, or even clinical errors) that can be limited by precautionary investments. We model the role of a public mutual fund to cover these “collective risks”. We start from the under-investment problem stemming from the moral hazard of Local administrations when the fund is managed by the Central government, which also takes into account the equalisation of resources across administrations. We then study the potential role of private insurers in solving the under-investment problem. Our analysis shows that the public fund is always superior to the private insurance solution in the presence of hard budget constraints. However, when the Central government cannot credibly commit to an optimal transfer rule, private insurers are sometimes able to improve on the public mutual fund solution by inducing a higher level of investments.
    Keywords: intergovernmental relations, private insurer, collective risks
    JEL: H23 H77 G22
    Date: 2009–03
  14. By: Kaivan Munshi; Mark Rosenzweig
    Abstract: This paper examines the hypothesis that the persistence of low spatial and marital mobility in rural India, despite increased growth rates and rising inequality in recent years, is due to the existence of sub-caste networks that provide mutual insurance to their members. Unique panel data providing information on income, assets, gifts, loans, consumption, marriage, and migration are used to link caste networks to household and aggregate mobility. Our key finding, consistent with the hypothesis that local risk-sharing networks restrict mobility, is that among households with the same (permanent) income, those in higher-income caste networks are more likely to participate in caste-based insurance arrangements and are less likely to both out-marry and out-migrate. At the aggregate level, the networks appear to have coped successfully with the rising inequality within sub-castes that accompanied the Green Revolution. The results suggest that caste networks will continue to smooth consumption in rural India for the foreseeable future, as they have for centuries, unless alternative consumption-smoothing mechanisms of comparable quality become available.
    JEL: J12 J61 O11
    Date: 2009–04

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