nep-ias New Economics Papers
on Insurance Economics
Issue of 2010‒01‒16
nine papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. The Unholy Trinity: Fat Tails, Tail Dependence, and Micro-Correlations By Kousky, Carolyn; Cooke, Roger M.
  2. On the Rise of Health Spending and Longevity By Raquel Fonseca; Pierre-Carl Michaud; Titus Galama; Arie Kapteyn
  3. Insuring college failure risk By Satyajit Chatterjee; Felicia Ionescu
  4. An P-VAR analysis of the dynamics of UK insurance underwriting regimes By Mamatzakis, E; Milidonis, A; Christodoulakis, G
  5. How Deep is the Annuity Market Participation Puzzle? By Joachim Inkmann; Paula Lopes; Alexander Michaelides
  6. More Than a Wing and a Prayer: Government Indemnification of the Commercial Space Launch Industry By Brennan, Timothy J.; Kousky, Carolyn; Macauley, Molly K.
  7. Household Responses to Individual Shocks: Disability and Labor Supply By Giovanni Gallipoli; Laura Turner
  8. Welfare reforms and labour supply in Italy By Brugiavini, Agar
  9. Intra-Household Labor Supply, Migration, and Subsistence Constraints in a Risky Environment: Evidence from Rural El Salvador By Timothy J. Halliday

  1. By: Kousky, Carolyn (Resources for the Future); Cooke, Roger M. (Resources for the Future)
    Abstract: Recent events in the financial and insurance markets, as well as the looming challenges of a globally changing climate point to the need to re-think the ways in which we measure and manage catastrophic and dependent risks. Management can only be as good as our measurement tools. To that end, this paper outlines detection, measurement, and analysis strategies for fat-tailed risks, tail dependent risks, and risks characterized by micro-correlations. A simple model of insurance demand and supply is used to illustrate the difficulties in insuring risks characterized by these phenomena. Policy implications are discussed.
    Keywords: risk, fat tails, tail dependence, micro-correlations, insurance, natural disasters
    JEL: Q54 G22 C02
    Date: 2009–11–09
  2. By: Raquel Fonseca; Pierre-Carl Michaud; Titus Galama; Arie Kapteyn
    Abstract: The authors use a calibrated stochastic life-cycle model of endogenous health spending, asset accumulation and retirement to investigate the causes behind the increase in health spending and life expectancy over the period 1965-2005. They estimate that technological change along with the increase in the generosity of health insurance may explain independently 53% of the rise in health spending (insurance 29% and technology 24%) while income less than 10%. By simultaneously occurring over this period, these changes may have lead to a "synergy" or interaction effect which helps explain an additional 37% increase in health spending. They estimate that technological change, taking the form of increased productivity at an annual rate of 1.8%, explains 59% of the rise in life expectancy at age 50 over this period while insurance and income explain less than 10%.
    Keywords: demand for health, health spending, insurance, technological change, longevity
    JEL: I10 I38 J26
    Date: 2009–12
  3. By: Satyajit Chatterjee; Felicia Ionescu
    Abstract: Participants in student loan programs must repay loans in full regardless of whether they complete college. But many students who take out a loan do not earn a degree (the dropout rate among college students is between 33 to 50 percent). The authors examine whether insurance against college-failure risk can be offered, taking into account moral hazard and adverse selection. To do so, they developed a model that accounts for college enrollment, dropout, and completion rates among new high school graduates in the US and use that model to study the feasibility and optimality of offering insurance against college-failure risk. The authors find that optimal insurance raises the enrollment rate by 3.5 percent, the fraction acquiring a degree by 3.8 percent and welfare by 2.7 percent. These effects are more pronounced for students with low scholastic ability (the ones with high failure probability).
    Keywords: Education, Higher - Economic aspects ; Insurance
    Date: 2010
  4. By: Mamatzakis, E; Milidonis, A; Christodoulakis, G
    Abstract: Using a unique dataset for the five major UK insurance industries, we adopt a novel approach in the insurance literature and model the evolution of their underwriting returns as Regime Switching processes, which outperforms standard approaches. This produces estimates of time-varying conditional regime probabilities and captures the non-normality present in the data, thus allowing the study of joint dynamics of industry regime probabilities using Dynamic Panel and Panel Vector Auto-Regressions and their attribution to economic factors. Our evidence uncovers high/low volatility regime switching for all industries, where their joint evolution is mainly attributed to industry specific factors. Impulse response functions and variance decompositions from a panel VAR identify a plethora of causal links among our variables and their underlying persistence of interaction, showing that shocks from changes in claims assert a positive impact on the probability of high volatility regime.
    Keywords: Insurance; Reinsurance; Business Cycles; Regime Switching; Panel VAR
    JEL: E30 G30 C1
    Date: 2009–12
  5. By: Joachim Inkmann (The University of Melbourne and Netspar); Paula Lopes (London School of Economics, FMG and Netspar); Alexander Michaelides (Central Bank of Cyprus, London School of Economics, CEPR, FMG, and Netspar)
    Abstract: Using UK microeconomic data, we analyze the empirical determinants of voluntary annuity market demand. We find that annuity market participation increases with financial wealth, life expectancy and education and decreases with other pension income and a possible bequest motive for surviving spouses. We then show that these empirically-motivated determinants of annuity market participation have the same, quantitatively important, effects in a life-cycle model of annuity and life insurance demand, saving and portfolio choice. Moreover, reasonable preference parameters predict annuity demand levels comparable to the data. For stockholders, a relatively strong bequest motive is sufficient to simultaneously generate balanced portfolios and low annuity demand.
    Keywords: Annuities, portfolio choice, life insurance, bequest motive
    JEL: E21 H00
    Date: 2009–10
  6. By: Brennan, Timothy J. (Resources for the Future); Kousky, Carolyn (Resources for the Future); Macauley, Molly K. (Resources for the Future)
    Abstract: Using rockets to launch communications satellites and other spacecraft poses risks to the uninvolved public, including persons and property under the flight path of the launch vehicle. The federal government plays a pivotal technical role during the actual launch by carrying out certain risk-related procedures, thus causing third-party risk to be jointly produced by the company and the government. In addition, under the Commercial Space Launch Act, the government partially indemnifies commercial launch companies for third-party damages. We compare the indemnification policy to optimal liability rules under public-private co-production of risk. Under modest assumptions, shared liability created by the indemnification rules decreases the incentive of both parties to take care relative to the optimum. If care were observable, it would be preferable for the government to fully indemnify companies that take due care. The role of the government as an agent for third parties may qualify these findings.
    Keywords: government indemnification, liability, insurance, space transportation
    JEL: L51 L98
    Date: 2009–09–28
  7. By: Giovanni Gallipoli (UBC); Laura Turner (UBC)
    Abstract: What are idiosyncratic shocks and how do people respond to them? This paper starts from the observation that idiosyncratic shocks are experienced at the individual level, but responses to shocks can encompass the whole household. Understanding and accurately modeling these responses is essential to the analysis of intra-household allocations, especially labor supply. Using longitudinal data from the Canadian Survey of Labour and Income Dynamics (SLID) we exploit information about disability and health status to develop a life-cycle framework which rationalizes observed responses of household members to idiosyncratic shocks. Two puzzling findings associated to disability onset motivate our work: (1) the almost complete absence of `added worker' effects within households and, (2) the fact that single agents' labor supply responses to disability shocks are larger and more persistent than those of married agents. We show that a first-pass, basic model of the household has predictions about dynamic labor supply responses which are at odds with these facts; despite such failure, we argue that these facts are consistent with optimal household behavior when we account for two simple mechanisms: the first mechanism relates to selection into and out of marriage, while the second hinges on insurance transfers taking place within households. We show that these mechanisms arise naturally when we allow for three features: a linkage between human capital accumulation and life-cycle labor supply, endogenous marriage contracts and the possibility of time transfers between partners. We also report evidence that the extended model with endogenous marriage contracts can fit divorce patterns observed in Canadian data, as well as correlations between disability prevalence and marital status, providing an ideal framework to study intra-household risk-sharing with limited commitment.
    Keywords: Idiosyncratic Risk, Disability, Life Cycle Labor Supply, Intrahousehold Insurance
    JEL: D13 I10 J12 J22
    Date: 2009–11
  8. By: Brugiavini, Agar (University of Venice)
    Abstract: This paper looks at welfare reforms in Italy and their effects on labour supply. I focus on social security reforms, which have taken place in the 1990s and on labour market reforms. Old age social security expenditure in Italy is high (14% of GDP) and the system has been very generous on early retirement possibilities: the reforms have tried to tackle these issues with mixed results. The labour market reforms have addressed the rigidity of the labour market by making it easier for firms to hire on a short-term basis. However the UI system is limited to open-ended contracts and coverage is also restricted, so that young workers employed in short-term contracts have very little protection from the welfare state.
    Keywords: Social security system; unemployment insurance; labour supply
    JEL: H53 H55 I38 J08 J26 J65
    Date: 2009–12–16
  9. By: Timothy J. Halliday (Department of Economics, University of Hawaii at Manoa; Institute for the Study of Labor (IZA))
    Abstract: We use panel data from El Salvador to investigate migration and the intra-household allocation of labor as a strategy for coping with uninsured risk. Consistent with a model of a farm household with a binding subsistence constraint, we show that adverse agricultural productivity shocks increased both male migration to the US and the supply of male agricultural labor within the household in El Salvador. In contrast, after damage sustained from the 2001 earthquakes, female migration from El Salvador declined. This is consistent with the earthquakes increasing the demand for home production. Overall, household responses to uninsured risk appear to be consistent with a simple framework in which household members are allocated to sectors according to their comparative advantage. Finally, we show no evidence that the labor market in El Salvador is capable of helping rural Salvadoran households to buffer the effects of adverse shocks.
    Keywords: Migration, Labor Supply, Insurance, Intra-Household Allocation, Subsistence Constraints
    JEL: J22 J61
    Date: 2009–12–16

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