nep-ias New Economics Papers
on Insurance Economics
Issue of 2009‒12‒11
seven papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Pitfalls and potential of institutional change: Rain-index insurance and the sustainability of rangeland management By Birgit Müller; Martin Quaas; Karin Frank; Stefan Baumgärtner
  2. Moral Hazard in a Mutual Health-Insurance System: German Knappschaften, 1867-1914 By Guinnane, Timothy; Streb, Jochen
  3. Diversification in Area-Yield Crop Insurance : The Multi Linear Additive Model By Geoffroy Enjolras; Robert Kast; Patrick Sentis
  4. Monopolistische Konkurrenz und die Kosten im Gesundheitswesen By Ingmar Kumpmann
  5. Mortality Contingent Claims: Impact of Capital Market, Income, and Interest Rate Risk By Wolfram Horneff; Raimond Maurer
  6. How Much Consumption Insurance Beyond Self-Insurance? By Greg Kaplan; Giovanni L. Violante
  7. De Finetti's dividend problem and impulse control for a two-dimensional insurance risk process By Irmina Czarna; Zbigniew Palmowski

  1. By: Birgit Müller (Department of Ecological Modelling, UFZ, Helmholtz Centre for Environmental Research - UFZ, Leipzig, Germany); Martin Quaas (Department of Economics, University of Kiel, Germany); Karin Frank (Department of Ecological Modelling, UFZ, Helmholtz Centre for Environmental Research - UFZ, Leipzig, Germany); Stefan Baumgärtner (Department of Sustainability Sciences, Leuphana University of Lüneburg, Germany)
    Abstract: Rain-index insurance is strongly advocated in many parts of the developing world to help farmers to cope with climatic risk that prevail in (semi-)arid rangelands due to low and highly uncertain rainfall. We present a modeling analysis of how the availability of rain-index insurance affects the sustainability of rangeland management. We show that a rain-index insurance with frequent payos, i.e. a high strike level, leads to the choice of less sustainable grazing management than without insurance available. However, a rain-index insurance with a low to medium strike level enhances the farmer's well-being while not impairing the sustainability of rangeland management.
    Keywords: ecological-economic modeling, weather-index insurance, Namibia, grazing management, risk, sustainability, weather-based derivatives
    JEL: D81 G22 Q14 Q56 Q57
    Date: 2009–10
  2. By: Guinnane, Timothy (Yale University); Streb, Jochen (University of Hohenheim)
    Abstract: This paper studies moral hazard in a sickness-insurance fund that provided the model for social-insurance schemes around the world. The German Knappschaften were formed in the medieval period to provide sickness, accident, and death benefits for miners. By the mid-nineteenth century, participation in the Knappschaft was compulsory for workers in mines and related occupations, and the range and generosity of benefits had expanded considerably. Each Knappschaft was locally controlled and self-funded, and their admirers saw in them the ability to use local knowledge and good incentives to deliver benefits at low costs. The Knappschaft underlies Bismarck's sickness and accident insurance legislation (1883 and 1884), which in turn forms the basis of the German social-insurance system today and, indirectly, many social-insurance systems around the world. This paper focuses on a problem central to any insurance system, and one that plagued the Knappschaften as they grew larger in the later nineteenth century: the problem of moral hazard. Replacement pay for sick miners made it attractive, on the margin, for miners to invent or exaggerate conditions that made it impossible for them to work. Here we outline the moral hazard problem the Knappschaften faced as well as the internal mechanisms they devised to control it. We then use econometric models to demonstrate that those mechanisms were at best imperfect.
    JEL: H53 H55 I18 N33 N43
    Date: 2009–09
  3. By: Geoffroy Enjolras; Robert Kast; Patrick Sentis
    Abstract: Diversification is the traditional way farmers use to hedge against crop yield variations. However, most insurance policies and financial contracts do not take into account this strategy in their design. In this context, we develop a of portfolio insurance model based on area-yield crop indices. This Multi-Linear Additive Model (Multi-LAM extends previous linear approaches while it preserves their theoretical properties. We determine the conditions of use of our model and prove that it can be used despite crop yields correlations. An application to a large sample of French farms reveals the potential extent of the Multi-LAM, which significantly reduces the area-yield basis risk associated to the use of indices. We then discuss implications for crop insurance.
    Date: 2009–11
  4. By: Ingmar Kumpmann
    Abstract: Competition among health insurers is widely considered to be a means of enhancing efficiency and containing costs in the health care system. In this paper, it is argued that this could be unsuccessful since health care providers hold a strong position on the market for health care services. Physicians exert a type of monopolistic power which can be described by Chamberlin’s model of monopolistic competition. If many health insurers compete with one another, they cannot counterbalance the strong bargaining position of the physicians. Thus, health care expenditure is higher, financing either extra profits for physicians or a higher number of them. In addition, health insurers do not have an incentive to contract selectively with health care providers as long as there are no price differences between physicians. A monopolistic health insurer is able to counterbalance the strong position of physicians and to achieve lower costs.
    Keywords: health care system, monopolistic competition, health insurance, costs
    JEL: I11 I18 H51 D43
    Date: 2009–11
  5. By: Wolfram Horneff (Goethe University); Raimond Maurer (Goethe University)
    Abstract: In this paper, we consider optimal insurance, portfolio allocation, and consumption rules for a stochastic wage earner with CRRA preferences whose lifetime is random. In a continuous time framework, the investor has to decide among short and long positions in mortality contingent claims a.k.a. life insurance, stocks, bonds, and money market investment when facing a risky stock market and interest rate risk. We find an analytical solution for the complete market case in which human capital is exactly priced. We also extend the analysis to the case where income is unspanned. An illustrative analysis shows when the wage earner’s demand for life insurance switches to the demand for annuities.
    Date: 2009–09
  6. By: Greg Kaplan; Giovanni L. Violante
    Abstract: We assess the degree of consumption smoothing implicit in a calibrated life-cycle version of the standard incomplete-markets model, and we compare it to the empirical estimates of Blundell et al. (2008) (BPP hereafter). We find that households in the model have access to less consumption-smoothing against permanent earnings shocks than what is measured in the data. BPP estimate that 36% of permanent shocks are insurable (i.e., do not translate into consumption growth), whereas the model’s counterpart of the BPP estimator varies between 7% and 22%, depending on the tightness of debt limits. In the model, the age profile of the insurance coefficient is sharply increasing, whereas BPP find no clear age slope in their estimate. Allowing for a plausible degree of “advance information” about future earnings does not reconcile the model-data gap. If earnings shocks display mean reversion, even with very high autocorrelation, then the average degree of consumption smoothing in the model agrees with the BPP empirical estimate, but its age profile remains steep. Finally, we show that the BPP estimator of the true insurance coefficient has, in general, a downward bias that grows as borrowing limits become tighter.
    JEL: D31 D91 E21
    Date: 2009–12
  7. By: Irmina Czarna; Zbigniew Palmowski
    Abstract: Consider two insurance companies (or two branches of the same company) that have the same claims and they divide premia in some specified proportions. We model the occurrence of claims according to a Poisson process. The ruin is achieved if the corresponding two-dimensional risk process first leave the positive quadrant. We will consider two scenarios of controlled process: refraction and the impulse control. In first one the dividends are payed out when two-dimensional risk process exit fixed region. In the second scenario whenever process hits horizontal line, the risk process is reduced by paying dividend to some fixed point in the positive quadrant and waits there for the first claim to arrive. In both models we calculate discounted cumulative dividend payments until the ruin time. This paper is an attempt at understanding the effect of dependencies of two portfolios on the the join optimal strategy of paying dividends. For the proportional reinsurance we can observe for example the interesting phenomenon that is dependence of choice of the optimal barrier on the initial reserves. This is a contrast to the one-dimensional Cram\'{e}r-Lundberg model where the optimal choice of barrier among optimal barrier strategies is uniform for all initial reserves.
    Date: 2009–06

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