nep-ias New Economics Papers
on Insurance Economics
Issue of 2009‒05‒02
eight papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Do I Need Crop Insurance? Self Evaluating Crop Insurance as a Risk Management Tool in New York State By Richards, Steve
  2. 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
  3. Pension Risk, Retirement Saving and Insurance By Luigi Guiso; Tullio Jappelli; Mario Padula
  4. On the Systemic Nature of Weather Risk By Xu, Wei; Filler, Guenther; Odening, Martin; Okhrin, Ostap
  5. Case Studies on the Use of Crop Insurance in Managing Risk By Gloy, Brent A.; Staehr, A. Edward
  6. Relevancy of the cost-of-capital rate for the insurance companies. By Mathieu Gatumel
  7. Preparing for Large Natural Catastrophes: The current state and challenges of earthquake insurance in Japan By Yamori, Nobuyoshi; Okada, Taishi; Kobayashi, Takeshi
  8. Works Councils and Separations: Voice, Monopoly, and Insurance Effects By Hirsch, Boris; Schank, Thorsten; Schnabel, Claus

  1. By: Richards, Steve
    Keywords: Crop insurance, Agribusiness, Crop Production/Industries,
    Date: 2009–02
  2. By: Erwann Michel-Kerjan; Paul A. Raschky; Howard C. Kunreuther
    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: Corporate decision making, insurance, terrorism
    JEL: D21 D81 G22 H56
    Date: 2009–03
  3. By: Luigi Guiso (European University Institute and CEPR); Tullio Jappelli (Università di Napoli Federico II, CSEF, and CEPR); Mario Padula (Università di Venezia, and CSEF)
    Abstract: Using a representative sample of Italian investors, we estimate the risk associated with pension benefits by eliciting for each individual the subjective distribution of the replacement rate as a summary indicator of social security wealth. We find substantial heterogeneity of pension risk and show that it is consistently related to observable features in the pension system that have different effects on individuals with different characteristics. We then relate subjective pension risk to individuals’ financial decisions. We find that people try to attenuate the adverse consequences of pension wealth uncertainty by increasing demand for targeted retirement saving and for insurance. Individuals facing more pension wealth risk tend to enroll more often in private pension funds, invest more in life insurance and buy more private health insurance. These effects are consistent with people becoming more risk-averse when pension wealth becomes less predictable, leading them to search for greater financial security.
    Keywords: Pension Risk, Retirement Saving, Insurance
    JEL: H55 E21
    Date: 2009–04–24
  4. By: Xu, Wei; Filler, Guenther; Odening, Martin; Okhrin, Ostap
    Abstract: Systemic weather risk is a major obstacle for the formation of private (nonsubsidized) crop insurance. This paper explores the possibility of spatial diversication of insurance by estimating the joint occurrence of unfavorable weather conditions in dierent locations. For that purpose copula methods are employed that allow an adequate description of stochastic dependencies between multivariate random variables. The estimation procedure is applied to weather data in Germany. Our results indicate that indemnity payments based on temperature as well as on cumulative rainfall show strong stochastic dependence even at a national scale. Thus the possibility to reduce risk exposure by increasing the trading area of the insurance is limited. Irrespective of their economic implications our results pinpoint the necessity of a proper statistical modeling of the dependence structure of multivariate random variables. The usual approach of measuring stochastic dependence with linear correlation coeffcients turned out to be questionable in the context of weather insurance as it may overestimate diversfication effects considerably.
    Keywords: weather risk, crop insurance, copula, Risk and Uncertainty, C14, Q19,
    Date: 2009
  5. By: Gloy, Brent A.; Staehr, A. Edward
    Abstract: Managing the risk associated with farming is challenging. Fortunately, farmers have a variety of risk management tools at their disposal. This series of case studies examines how crop insurance can be used to manage some of the risks faced by farmers. The examples illustrate how crop insurance purchases would impact the returns generated to a farming enterprise. While the examples cover a variety of commodities and insurance products, they do not consider every possible risk that might arise. Likewise, they do not consider all of the possible financial situations that might be experienced by a farmer. Instead, they focus on highlighting how crop insurance impacts the profitability of the farm. Companion spreadsheets are available for all of the examples so that readers can examine a wider range of scenarios than those discussed in the examples. These spreadsheets and other related materials are available for download at: pIns.html
    Keywords: Managing Risk, Crop insurance, Apple production, grape production, soybeans, forage production, Agribusiness, Crop Production/Industries, Financial Economics,
    Date: 2009–02
  6. By: Mathieu Gatumel (Centre d'Economie de la Sorbonne)
    Abstract: For many assets and liabilities there exist deep and liquid markets so that the market value are reasily observed. However, for non-hedgeable risks, the market value of liabilities must be estimated. The Draft Solvency II Directive suggests in article 75 that the valuation of technical provisions (for non hedgeable risks) shall be the sum of a best estimate and a market value margin measuring the cost of risk. The market value margin is calculated as the present value of the cost of holding the solvency capital requirement for non-hedgeable risks during the whole run-off period of the in-force portfolio. One of the majour input of the market value margin is the cost-of-capital rate which corresponds to the risk premium applied on each unit of risk. According to European Commission (2007), European insurance and Reinsurance Federation (2008), and Chief Risk Officer Forum (2008), a single cost-of-capital rate shall be used by all insurance undertakings and for all lines of business. This paper aims at analyzing the cost-of-capital rate given by European Insurance and Reinsurance Federation (2008), and Chief Risk Officer Forum (2008). In particular, we highlight that it is very difficult to assess a cost-of- capital rate by using either the frictional cost approach or the full industry information beta methodology. Nevertheless, we highlight also that it seems to be irrelevant to use only one risk premium or all the risks and all the companies. We show that risk is not characterized by a fixed prices. In fact, the price of risk depends on the basket of risks at which it belongs, the risk level considered and the time period.
    Keywords: Market value margin, cost-of-capital rate, diversification effect, risk level.
    JEL: G12 G20 G22 G32
    Date: 2008–11
  7. By: Yamori, Nobuyoshi; Okada, Taishi; Kobayashi, Takeshi
    Abstract: Global incidents of major natural catastrophes are becoming increasingly common in recent years. Seismological research has shown earthquake-prone Japan to be at particular risk from not only inland earthquakes, but also from repeat incidents of major earthquakes such as the Tokai, Tonankai, and Nankai earthquakes. In such an eventuality, earthquake insurance is expected to play a part in ex-post recovery efforts from the damage caused by these earthquakes, with the Japanese government developing special support programs. The previously low penetration rate of earthquake insurance in Japan, however, meant that it did not play a significant role in recovery efforts following the 1995 Great Hanshin-Awaji Earthquake. Despite recent progress in improving the system and an increasing awareness of the risks from earthquakes, the penetration rate of earthquake insurance in Japan remains at approximately 20%. In this study we discuss the current state and issues of earthquake insurance in Japan.
    Keywords: Earthquake Insurance; natural catastrophes; Hanshin-Awaji Earthquake
    JEL: G22 O53 G28
    Date: 2009–04
  8. By: Hirsch, Boris (University of Erlangen-Nuremberg); Schank, Thorsten (University of Erlangen-Nuremberg); Schnabel, Claus (University of Erlangen-Nuremberg)
    Abstract: Using a large linked employer-employee data set for Germany, we find that the existence of a works council is associated with a lower separation rate to employment, in particular for men and workers with low tenure. While works council monopoly effects show up in all specifications, clear voice effects are only visible for low tenured workers. Works councils also reduce separations to non-employment, and this impact is more pronounced for men. Insurance effects only show up for workers with tenure of more than one year. Our results indicate that works councils primarily represent the interests of a specific clientele.
    Keywords: works council, separations, collective voice, duration models, Germany
    JEL: J53 J63
    Date: 2009–04

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