nep-ias New Economics Papers
on Insurance Economics
Issue of 2009‒11‒07
six papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. The benefits of introducing a mandatory state hurricane insurance scheme in Florida By Thomas von Ungern-Sternberg
  2. Microinsurance, Trust and Economic Development: Evidence from a Randomized Natural Field Experiment By Hongbin Cai; Yuyu Chen; Hanming Fang; Li-An Zhou
  3. On the Use of Information in Repeated Insurance Markets By Iris Kesternich; Heiner Schumacher
  4. The Effect of Wage Insurance on Labor Supply: A Test for Income Effects By Henry Hyatt
  5. Optimal auditing with scoring: theory and application to insurance fraud By Dionne, Georges; Giuliano, Florence; Picard, Pierre
  6. Investment Shocks and the Comovement Problem By Hashmat Khan; John Tsoukalas

  1. By: Thomas von Ungern-Sternberg
    Abstract: As a result of its hurricane exposure, Florida is probably the part of the industrialised world most prone to natural catastrophes. Over the last 20 years the Florida legislator has tried to maintain a situation, where the private insurance sector plays a major role in providing hurricane-insurance. Its attempts to keep such insurance affordable have, however, led to a situation, where the public sector still ends up bearing a large part of the risk. Drawing on the experience of various European countries with mandatory state run catastrophe insurance schemes, we argue that the cost of hurricane insurance for the population could be substantially reduced, if Florida created a similar institution. The massive reduction in sales costs, loss adjustment costs and general administrative costs would allow such a system to work with premiums that are on average 25% lower. The problems of adverse selection which plague the current situation would of course (by definition) be eliminated.
    Keywords: hurricane insurance; mandatory insurance; regulation; market failure; Florida
    JEL: L51 L88
    Date: 2009–10
  2. By: Hongbin Cai (Department of Applied Economics, Guanghua School of Management, Peking University); Yuyu Chen (Department of Applied Economics, Guanghua School of Management, Peking University); Hanming Fang (Department of Economics, University of Pennsylvania); Li-An Zhou (Department of Applied Economics, Guanghua School of Management, Peking University)
    Abstract: We report results from a large randomized natural field experiment conducted in southwestern China in the context of insurance for sows. Our study sheds light on two important questions about microinsurance. First, how does access to formal insurance affect farmers' production decisions? Second, what explains the low takeup rate of formal insurance, despite substantial premium subsidy from the government? We find that providing access to formal insurance significantly increases farmers' tendency to raise sows. We argue that this finding also suggests that farmers are not previously insured efficiently through informal mechanisms. We also provide several pieces of evidence suggesting that trust, or lack thereof, for government-sponsored insurance products is a significant barrier for farmers' willingness to participate in the insurance program.
    Keywords: Microinsurance; Trust, Natural Field Experiment
    JEL: C93 O12 O16
    Date: 2009–09–24
  3. By: Iris Kesternich (Ludwig Maximilian Universität München); Heiner Schumacher (Goethe Universität Frankfurt)
    Abstract: We analyze the use of information in a repeated oligopolistic insurance market. To sustain collusion, insurance companies might refrain from changing their pricing schedules even if new information about risks becomes available. We therefore provide an explanation for the existence of "unused observables" that is information which a) insurance companies collect or could collect, b) is correlated with the risk experience, but c) is not used by companies to set prices. Furthermore, the existence of bulk discounts becomes rationalizable. These results also obtain if we include communication among companies and market entry to our framework.
    Keywords: repeated games, insurance markets, oligopoly, unused observables
    JEL: C72 G22 L13
    Date: 2009–09
  4. By: Henry Hyatt
    Abstract: Studies of moral hazard in wage insurance programs such as Unemployment Insurance (UI) or Workers Compensation (WC) have demonstrated that higher benefits discourage work, emphasizing the price distortion inherent in benefit provision. Utilizing administrative data linking WC claim records to wage records from a UI payroll tax database, I find that the effect of WC benefits on the duration of benefit receipt cannot fully account for the effect of these benefits on post-injury unemployment. This indicates that a significant fraction of the effect of WC benefits on employment is due to an income effect rather than a price distortion.
    Date: 2009–10
  5. By: Dionne, Georges; Giuliano, Florence; Picard, Pierre
    Abstract: This article makes a bridge between the theory of optimal auditing and the scoring methodology in an asymmetric information setting. Our application is meant for insurance claims fraud, but it can be applied to many other activities that use the scoring approach. Fraud signals are classified based on the degree to which they reveal an increasing probability of fraud. We show that the optimal auditing strategy takes the form of a “Red Flags Strategy” which consists in referring claims to a Special Investigative Unit (SIU) when certain fraud indicators are observed. The auditing policy acts as a deterrence device and we explain why it requires the commitment of the insurer and how it should affect the incentives of SIU staffs. The characterization of the optimal auditing strategy is robust to some degree of signal manipulation by defrauders as well as to the imperfect information of defrauders about the audit frequency. The model is calibrated with data from a large European insurance company. We show that it is possible to improve our results by separating different groups of insureds with different moral costs of fraud. Finally, our results indicate how the deterrence effect of the audit scheme can be taken into account and how it affects the optimal auditing strategy.
    Keywords: Audit; scoring; insurance fraud; red flags strategy; fraud indicators; suspicion index; moral cost of fraud; deterrence effect; signal manipulation.
    JEL: D0 G22 C4
    Date: 2009–01
  6. By: Hashmat Khan (Department of Economics, Carleton University); John Tsoukalas (Department of Economics, University of Nottingham)
    Abstract: Recent work based on sticky price-wage estimated dynamic stochastic general equilibrium (DSGE) models suggests investment shocks are the most important drivers of post-World War II US business cycles. Consumption, however, typically falls after an investment shock. This finding sits oddly with the observed business cycle comovement where consumption, along with hours-worked and investment, moves with economic activity. We show that this comovement problem is resolved in an estimated DSGE model when the cost of capital utilization is specified in terms of increased depreciation of capital, as originally proposed by Greenwood et al. (1988) in a neoclassical setting. Traditionally, the cost of utilization is specified in terms of forgone consumption following Christiano et al. (2005), who studied the effects of monetary policy shocks. The alternative specication we consider has two additional implications relative to the traditional one: (i) it has a substantially better fit with the data and (ii) the contribution of investment shocks to the variance of consumption is over three times larger. The contributions to output, investment, and hours, are also relatively higher, suggesting that these shocks may be quantitatively even more important than previous estimates based on the traditional specification.
    Keywords: Investment shocks, comovement, estimated DSGE models
    JEL: E2 E3
    Date: 2009–10–21

This nep-ias issue is ©2009 by Soumitra K Mallick. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.