nep-ias New Economics Papers
on Insurance Economics
Issue of 2009‒04‒18
eight papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Insurance Demand for Disaster-type Risks and the Separation of Attitudes toward Risk and Ambiguity: an Experimental Study By Marielle Brunette; Laure Cabantous; Stéphane Couture; Anne Stenger
  2. Commitment and Lapse Behavior in Long-Term Insurance: A Case Study By Jean Pinquet; Montserrat Guillén; Mercedes Ayuso
  3. The Safety-net Use of Non Timber Forest Products By Philippe Delacote
  4. Business Cycle Dependent Unemployment Insurance By Torben M. Andersen; Michael Svarer
  5. Income and the Demand for Complementary Health Insurance in France By Michel Grignon; Bidénam Kambia-Chopin
  6. Optimal Monetary Policy with Imperfect Unemployment Insurance By NAKAJIMA Tomoyuki
  7. Contract Design in Insurance Groups By Tesssa Bold; Stefan Dercon
  8. Stochastic Mortality, Macroeconomic Risks, and Life Insurer Solvency By Katja Hanewald; Thomas Post; Helmut Gründl

  1. By: Marielle Brunette; Laure Cabantous (Nottingham University Business School); Stéphane Couture (Laboratoire d'Economie Forestière, INRA - AgroParisTech); Anne Stenger (Laboratoire d'Economie Forestière, INRA - AgroParisTech)
    Abstract: This article presents the results of an experiment designed to test theoretical predictions about the impact of public compensation schemes and ambiguity on insurance and self-insurance decisions. Consistent with theory, we find that government assistance significantly reduces willingness to pay (WTP) for insurance and self-insurance (compared with a free insurance market). As expected, we also find significant differences between WTPs for insurance under different types of government compensation programs. For example, results from our experiment confirm the prediction that the WTP for insurance is smaller under a “Fixed Help” program than under a “Contingent Fixed Help” program where the government assistance is conditioned to the purchase of an insurance policy. Thirdly, we find that ambiguity, i.e., uncertainty about probability, significantly increases WTPs for insurance. This result, which indicates that decision-makers are ambiguity averse, is in line with previous results on the impact of ambiguity on insurance demand for low probability risks. Lastly, our experiment provides a clear support for the hypothesis that attitude to risk and attitude to ambiguity are two independent phenomena. In fact in this experiment, decision-makers are both risk-seekers (i.e., the mean WTP for insurance is on average smaller than the expected value of the loss) and ambiguity averse (i.e., the mean WTP for insurance is on average higher for an ambiguous risk than for a ’risky’ risk).
    Keywords: Experimental Economics, Insurance, Self-Insurance, Public Policy, Forest, Ambiguity, Risk
    JEL: C91 D81 Q23
    Date: 2008–10
  2. By: Jean Pinquet (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, Université Paris 10 Nanterre - (-)); Montserrat Guillén (Universitat de Barcelona -); Mercedes Ayuso (Universitat de Barcelona -)
    Abstract: This paper presents a case study of a portfolio of individual long-term insurance contracts. We describe the risk levels, the rating structure and the implied cross-subsidies on the portfolio of a bundle of three coverages related to health, life and long-term care. We show evidence of reclassification risk through the history of disability spells. We also analyze the lapse behavior and try to give a rationale for the observed dynamics of the portfolio. Lastly, we draw conclusions regarding the design of such contracts and the difference between private and public insurance.
    Keywords: Commitment, reclassification risk, long-term insurance.
    Date: 2009–04–08
  3. By: Philippe Delacote (Laboratoire d'Economie Forestière, INRA - AgroParisTech)
    Abstract: Incompleteness of insurance markets is a crucial weakness of developing countries. In this context, the poor households of rural regions often exploit common property resources, such as forests, as insurance in case of economics stress. The aim of this paper is to derive the implications of this insurance use on the forest cover, and thus on deforestation. The land-use choice between agricultural land and forest therefore resembles a portfolio diversification. However, I also show that this insurance strategy may lead to resource overexploitation and constitute a poverty trap.
    Keywords: deforestation, household model, risk aversion, agricultural expansion, forest products
    JEL: O12 O13 Q12 Q15 Q23
    Date: 2008–09
  4. By: Torben M. Andersen; Michael Svarer
    Abstract: The consequences of cylical contingencies in unemployment insurance systems are considered in a search-matching model allowing for shifts between “good” and “bad” states of nature. An argument for state contingencies is that insurance arguments are stronger and incentive effects weaker in "bad" than in "good" states of nature. We con.rm this and show that cyclically dependent benefit levels not only provide better insurance but may have structural effects implying that the structural (average) unemployment rate decreases, although the variability of unemployment may increase
    Date: 2009–03
  5. By: Michel Grignon (McMaster University, Department of Economics and Department of Health, Aging, and Society, Hamilton, Ontario, Canada); Bidénam Kambia-Chopin (IRDES institut for research and information in health economics)
    Abstract: This paper examines the demand for complementary health insurance (CHI) in the non-group market in France and the reasons why the near poor seem price insensitive. First we develop a theoretical model based on a simple tradeoff between two goods: CHI and a composite good reflecting all other consumptions. Then we estimate a model of CHI consumption and empirically test the impact of potential determinants of demand for coverage: risk aversion, asymmetrical information, non-expected utility, the demand for quality and health, and supply-side factors such as price discrimination. We interpret our empirical findings in terms of crossed price and income elasticity of the demand for CHI. Last, we use these estimates of elasticity to simulate the effect of various levels of price subsidies on the demand for CHI among those with incomes around the poverty level in France. We find that the main motivation for purchasing CHI in France is protection against the financial risk associated with co-payments in the public health insurance scheme. We also observe a strong income effect suggesting that affordability might be an important determinant. Our simulations indicate that no policy of price subsidy can significantly increase the take-up of CHI among the near poor; any increase in the level of subsidy generates a windfall benefit for richer households.
    Keywords: Demand for health insurance, Uninsured, Premium subsidies
    JEL: D12 D81 I11 I18
    Date: 2009–04
  6. By: NAKAJIMA Tomoyuki
    Abstract: We consider an efficiency-wage model with the Calvo-type sticky prices and analyze the optimal monetary policy when the unemployment insurance is not perfect. With imperfect risk sharing, the strict zero-inflation policy is no longer optimal even when the steady-state equilibrium is made (conditionally) efficient. Quantitative results depend on how the idiosyncratic earnings loss due to unemployment varies over business cycles. If the idiosyncratic income loss is acyclical, the optimal policy differs very little from the zero-inflation policy. However, if it varies countercyclically, as evidence suggests, the deviation of the optimal policy from the complete price-level stabilization becomes quantitatively signifficant. Furthermore, the optimal policy in such a case involves stabilization of output to a much larger extent.
    Date: 2009–04
  7. By: Tesssa Bold; Stefan Dercon
    Abstract: In many rural settings, informal mutual support networks have evolved into semiformal insurance groups, such as funeral societies. Using detailed panel data for six villages in Ethiopia, we can distinguish two types of contracts, in terms of whether payments are only made at the time of death or savings are accumulated by the group based on premiums paid ex-ante. We characterize these contracts as the coalition-proof equilibria of a symmetric and stationary risk-sharing game, and we show numerically that a contract with savings makes higher demands on enforceability, leading to less cohesive groups finding it in their interest to choose the contract without savings and that coalition-proofness is a necessary condition for the coexistence of both contract types. We show in the data that the type of contract chosen by groups is correlated with the level of trust and other enforcement improving factors. We also predict that among the observed contracts, those with group-based savings and ex-ante payments will attain higher welfare in terms of consumption smoothing than those observed using no group savings. Using panel data, and controlling for household fixed effects and time-varying village level fixed effects, we show that funeral groups are vehicles for risk-sharing and that contract type matters for performance in line with these predictions. The results appear robust to endogeneity of group formation and endogenous selection into contract types.
    Keywords: Insurance, Savings, Coalition formation
    JEL: D02 D12 D86
    Date: 2009
  8. By: Katja Hanewald; Thomas Post; Helmut Gründl
    Abstract: Motivated by a recent demographic study establishing a link between macroeconomic fluctuations and the mortality index kt in the Lee-Carter model, we assess the impact of macroeconomic fluctuations on the solvency of a life insurance company. Liabilities in our stochastic simulation framework are driven by a GDP-linked variant of the Lee-Carter mortality model. Furthermore, interest rates and stock prices are allowed to react to changes in GDP, which itself is modeled as a stochastic process. Our results show that insolvency probabilities are significantly higher when the reaction of mortality rates to changes in GDP is incorporated.
    Keywords: Life insurance, asset-liability management, stochastic mortality, Lee-Carter model, business cycle
    JEL: G22 G23 G28 G32 E32 J11
    Date: 2009–03

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