nep-ias New Economics Papers
on Insurance Economics
Issue of 2010‒04‒17
twenty-one papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Regulatory Reform and the Cost of Retail Investing Through Life Offices: 1998-2006 By Kevin James
  2. Self-Insurance and Self-Protection as Public Goods By Ulrich Schmidt
  3. Selective contracting and foreclosure in health care markets By Michiel Bijlsma; Jan Boone; Gijsbert Zwart
  4. Introducing Unemployment Insurance to Developing Countries By Vodopivec, Milan
  5. Can Micro Health Insurance Reduce Poverty? Evidence from Bangladesh By Syed Abdul Hammid; Jennifer Roberts; Paul Mosley
  6. The Effect of State Workers' Compensation Program Changes on the Use of Federal Social Security Disability Insurance By Melissa P. McInerney; Kosali I. Simon
  7. Harmful competition in the insurance markets By Giuseppe De Feo; Jean Hindriks
  8. Medical Consumption over the Life Cycle: Facts from a U.S. Medical Expenditure Panel Survey By Juergen Jung; Chung Tran
  9. Modelling dependence in a ratemaking procedure with multivariate Poisson regression models By Lluís Bermúdez; Dimitris Karlis
  10. On the Persistence of Income Shocks over the Life Cycle: Evidence and Implications, Second Version By Fatih Karahan; Serdar Ozkan
  11. The Influence of Retiree Health Benefits on Retirement Patterns By James Marton; Stephen A. Woodbury
  12. Applications of Multilevel Structured Additive Regression Models to Insurance Data By Stefan Lang; Nikolaus Umlauf
  13. Moving back home: insurance against labor market risk By Greg Kaplan
  14. Assessing the financial vulnerability to climate-related natural hazards By Mechler, Reinhard; Hochrainer, Stefan; Pflug, Georg; Lotsch, Alexander; Williges, Keith
  15. The toll of fertility on mothers’ wellb<eing By Julio Cáceres-Delpiano; Marianne Simonsen
  16. Constrained Inefficiency and Optimal Taxation with Uninsurable Risks By Piero Gottardi; Atsushi Kajii; Tomoyuki Nakajima
  17. Buffering Shocks to Well-Being Late in Life By Matthew D. Shapiro
  18. Financial Integration and International Risk Sharing By Yan Bai; Jing Zhang
  19. Stationary-excess operator and convex stochastic orders By Claude Lefèvre; Stéphane Loisel
  20. Reinsurance, ruin and solvency issues: some pitfalls By Arthur Charpentier
  21. Flexicurity in Belgium: A Proposal Based on Economic Principles By Cockx, Bart; Van der Linden, Bruno

  1. By: Kevin James (1776 Consulting)
    Keywords: financial regulation, insurance, life insurance
    Date: 2009–08
  2. By: Ulrich Schmidt
    Abstract: Most pure public goods like lighthouses, dams, or national defense provide utility mainly by insuring against hazardous events. Our paper focuses on this insurance character of public goods. As for private actions against hazardous events, one can distinguish between self-insurance (SI) and self-protection (SP) also in the context of public goods. For both cases of SI and SP we analyze efficient public provision levels as well as provision levels resulting from Nash behavior in a private provision game. An interesting aspect of considering public goods as insurance devices is the interaction with market insurance. It turns out that the availability of market insurance reduces the provision level of the public good for both, the public and the private provision, regardless of whether we consider SI or SP. Moreover, we show that Nash behavior has always a larger impact than the availability of market insurance
    Keywords: Self-insurance, self-protection, private provision of public goods, market insurance
    JEL: G22 H41
    Date: 2010–03
  3. By: Michiel Bijlsma; Jan Boone; Gijsbert Zwart
    Abstract: We analyze exclusive contracts between health care providers and insurers in a model where some consumers choose to stay uninsured. In case of a monopoly insurer, exclusion of a provider changes the distribution of consumers who choose not to insure. Although the foreclosed care provider remains active in the market for the non-insured, we show that exclusion leads to anti-competitive effects on this non-insured market. As a consequence exclusion can raise industry profits, and then occurs in equilibrium. Under competitive insurance markets, the anticompetitive exclusive equilibrium survives. Uninsured consumers, however, are now not better off without exclusion. Competition among insurers raises prices in equilibria without exclusion, as a result of a horizontal analogue to the double marginalization effect. Instead, under competitive insurance markets exclusion is desirable as long as no provider is excluded by all insurers.
    Keywords: health insurance; uninsured; selective contracting; exclusion; foreclosure; anti-competitive effects
    JEL: L42 I11 G22
    Date: 2010–02
  4. By: Vodopivec, Milan (World Bank)
    Abstract: The paper identifies key labor market and institutional differences between developed and developing countries, analyzes how these differences affect the working of the standard, OECD-style unemployment insurance (UI) program, and derives a desirable design of unemployment benefit program in developing countries. It argues that these countries – faced by large informal sector, weak administrative capacity, large political risk, and environment prone to corruption – should tailor the OECD-style UI program to suit their circumstances. To minimize employment disincentives, to ensure affordability, and to minimize administration cots, such adaptations include: (i) relying on self-insurance (via unemployment insurance savings accounts – UISAs) as a main source of financing and complementing it by solidarity funding; (ii) simplifying monitoring of job-search behavior and labor market status, and even eliminating personal monitoring of continuing eligibility requirements in the early phases; (iii) keeping modest benefits both in terms of the replacement rate and potential benefit duration; (iv) drawing on employers’ and workers’ contributions as sources of financing; and (v) piggybacking on existing networks to administer benefits. Particularly attractive is the UISAs-cum-borrowing version that uses pension wealth as collateral, making the system proof to moral hazard and strategic behavior, and allowing it to be rapidly deployed, such as in response to the currently emerging global economic crises.
    Keywords: unemployment, unemployment insurance, unemployment insurance savings accounts
    JEL: J65 J68
    Date: 2009–04
  5. By: Syed Abdul Hammid (Department of Economics, The University of Sheffield); Jennifer Roberts (Department of Economics, The University of Sheffield Author-Person=pro228); Paul Mosley (Department of Economics, The University of Sheffield)
    Abstract: This paper examines the impact of micro health insurance on poverty reduction in rural areas of Bangladesh. The research is based on household level primary data collected from the operating areas of the Grameen Bank during 2006. A number of outcome measures relating to poverty status are considered; these include household income, stability of household income via food sufficiency and ownership of non-land assets, and also the probability of being above or below the poverty line. The results show that micro health insurance has a positive association with all of these indicators, and this is statistically significant and quantitatively important for food sufficiency.
    Keywords: Microcredit, Micro Health Insurance, Poverty, Grameen Bank
    JEL: O12
    Date: 2010–01
  6. By: Melissa P. McInerney; Kosali I. Simon
    Abstract: In addition to traditional forms of private and public medical insurance, two other large programs help pay for costs associated with ill health. In 2007, Workers Compensation (WC) insurance provided $55.4 billion in medical care and cash benefits to employees who are injured at work or contract a work-related illness, and Social Security Disability Insurance (DI) provided $99 billion to individuals who suffer from permanent disabilities and are unable to engage in substantial gainful activity. During the 1990s, real DI outlays increased nearly 70 percent, whereas real WC cash benefit spending fell by 12 percent. There has been concern that part of this relationship between two of the nation’s largest social insurance programs may be due to individuals substituting towards DI as state WC policies tightened. We test this hypothesis using a number of different WC and DI program parameters. We first show that this negative correlation between the national series does not hold over time within states, the level at which a causal relationship should operate. We then test how regulatory changes in state WC program parameters impact WC outcomes (intended effect) and DI outcomes (unintended effect). We find no compelling evidence of WC tightening causing DI rolls to increase, and conclude it is unlikely that state WC changes were a meaningful factor in explaining the rise in DI.
    JEL: I1 I28 J28 J78
    Date: 2010–04
  7. By: Giuseppe De Feo (Department of Economics, University of Strathclyde); Jean Hindriks (Department of Economics and CORE, Universite catholique de Louvain, Belgium)
    Abstract: There is a general presumption that competition is a good thing. In this paper we show that competition in the insurance markets can be bad and that adverse selection is in general worse under competition than under monopoly. The reason is that monopoly can exploit its market power to relax incentive constraints by cross-subsidization between different risk types. Cream-skimming behavior, on the contrary, prevents competitive firms from using implicit transfers. In effect monopoly is shown to provide better coverage to those buying insurance but at the cost of limiting participation to insurance. Performing simulation for different distributions of risk, we find that monopoly in general performs (much) better than competition in terms of the realization of the gains from trade across all traders in equilibrium. However, most of the surplus is retained by the firm and, as a result, most individuals prefer competitive markets notwithstanding their performance is generally poorer than monopoly.
    Keywords: monopoly, competition, insurance, adverse selection.
    JEL: G22 H20
    Date: 2009–10
  8. By: Juergen Jung (Department of Economics, Towson University); Chung Tran (Department of Economics, University of New South Wales)
    Abstract: In this paper we construct life-cycle profiles of health care spending and financing using data from the Medical Expenditure Panel Survey (MEPS). We separate pure age effects from time and cohort effects by estimating a seminonparametric partial linear model. After controlling for time and cohort effects, we find that medical expenditure age profiles follow an upward trend whereas private insurance take-up profiles over age exhibit a hump-shape. In addition, we find that time effects (i.e. productivity effects, business cycle effects, etc.) dominate cohort effects (i.e. initial condition effects) in size despite the fact that we adjust for inflation in the variables measuring medical expenditures. Health expenditure profiles based on simple inflation adjusted values therefore overpredict the effects of age on health expenditures, especially for agents older than 60.
    Keywords: Age dependent U.S. health care spending, U.S. health expenditure decomposition, life-cycle profiles, partial linear models, pseudo panels, medical expenditure panel survey (MEPS).
    JEL: I10 I11 C14 C23 D12 D91 J10
    Date: 2010–04
  9. By: Lluís Bermúdez (Departament de Matemµatica Econµomica, Financera i Actuarial, Universitat de Barcelona); Dimitris Karlis (Athens University of Economics and Business)
    Abstract: When actuaries face with the problem of pricing an insurance contract that contains different types of coverage, such as a motor insurance or homeowner's insurance policy, they usually assume that types of claim are independent. However, this assumption may not be realistic: several studies have shown that there is a positive correlation between types of claim. Here we introduce di®erent multivariate Poisson regression models in order to relax the independence assumption, including zero-in°ated models to account for excess of zeros and overdispersion. These models have been largely ignored to date, mainly because of their computational di±culties. Bayesian inference based on MCMC helps to solve this problem (and also lets us derive, for several quantities of interest, posterior summaries to account for uncertainty). Finally, these models are applied to an automobile insurance claims database with three different types of claims. We analyse the consequences for pure and loaded premiums when the independence assumption is relaxed by using different multivariate Poisson regression models and their zero-inflated versions.
    Keywords: Multivariate Poisson regression models, Zero-inflated models, Automobile insurance, MCMC inference, Gibbs sampling
    JEL: C51
    Date: 2010–04
  10. By: Fatih Karahan (Department of Economics, University of Pennsylvania); Serdar Ozkan (Department of Economics, University of Pennsylvania)
    Abstract: How does the persistence of earnings change over the life cycle? Do workers at different ages face the same variance of idiosyncratic shocks? This paper proposes a novel specification for residual earnings that allows for a lifetime profile in the persistence and variance of labor income shocks. We show that the statistical model is identified and estimate it using PSID data. We strongly reject the hypothesis of a at life-cycle profile for persistence and variance of persistent shocks, but not for the variance of transitory shocks. Shocks to earnings are only moderately persistent (around 0.75) for young individuals. Persistence rises with age up to unity until midway in life. On the other hand, the variance of persistent shocks exhibits a Ushaped profile over the life cycle (with a minimum of 0.01 and a maximum of 0.045). Our estimate of persistence, for most of the working life, is substantially lower than typical estimates in the literature. We investigate the implications of these profiles for consumption-savings behavior with a standard life-cycle model. The welfare cost of idiosyncratic risk implied by the age-dependent income process is 32% lower compared to an AR(1) process without age profiles. This is mostly due to a higher degree of consumption insurance for young workers, for whom persistence is moderate. We conclude that the welfare cost of idiosyncratic risk will be overstated if one does not account for the age profiles in the persistence and variance of shocks.
    Keywords: : Idiosyncratic income risk, Incomplete markets models, Earnings persistence, Consumption insurance
    JEL: C33 D31 D91 E21 J31
    Date: 2009–12–15
  11. By: James Marton (Georgia State University); Stephen A. Woodbury (W.E. Upjohn Institute and Michigan State University)
    Abstract: We estimate the effect of employer offers of retiree health benefits (RHBs) on the timing of retirement using a sample of Health and Retirement Study (HRS) men observed over a period of up to 12 years. We hypothesize that the effect of RHBs differs for workers of different ages—a hypothesis we can test now that the main HRS cohort has aged sufficiently. We apply three wellknown panel data estimators and find that, for men in their 50s, RHBs have little or no effect on retirement decisions; however, a substantial effect emerges for men in their early 60s. We use simulations to illustrate how RHBs alter retirement patterns.
    Keywords: Retirement, Health Insurance, Employee Benefits, Panel Data
    JEL: J26 I18 D14
    Date: 2010–02
  12. By: Stefan Lang; Nikolaus Umlauf
    Abstract: Models with structured additive predictor provide a very broad and rich framework for complex regression modeling. They can deal simultaneously with nonlinear covariate effects and time trends, unit- or cluster specific heterogeneity, spatial heterogeneity and complex interactions between covariates of different type. In this paper, we discuss a hierarchical version of regression models with structured additive predictor and its applications to insurance data. That is, the regression coefficients of a particular nonlinear term may obey another regression model with structured additive predictor. The proposed model may be regarded as an extended version of a multilevel model with nonlinear covariate terms in every level of the hierarchy. We describe several highly efficient MCMC sampling schemes that allow to estimate complex models with several hierarchy levels and a large number of observations typically within a couple of minutes. We demonstrate the usefulness of the approach with applications to insurance data.
    Keywords: Bayesian hierarchical models; multilevel models; P-splines; spatial heterogeneity
    JEL: C
    Date: 2010–01
  13. By: Greg Kaplan
    Abstract: This paper uses an estimated structural model to argue that the option to move in and out of the parental home is an important insurance channel against labor market risk for youths who do not attend college. Using data from the NLSY97, I construct a new monthly panel of parent-youth coresidence outcomes and use it to document an empirical relationship between these movements and individual labor market events. The data is then used to estimate the parameters of a dynamic game between youths and their altruistic parents, featuring coresidence, labor supply and savings decisions. Parents can provide both monetary support through explicit financial transfers, and non-monetary support in the form of shared residence. To account for the data, two types of exogenous shocks are needed. Preference shocks are found to explain most of the cross-section of living arrangements, while labor market shocks account for individual movements in and out of the parental home. I use the model to show that coresidence is a valuable form of insurance, particularly for youths from poorer families. The option to live at home also helps to explain features of aggregate data for low-skilled young workers: their low savings rates and their relatively small consumption responses to labor market shocks. An important implication is that movements in and out of home can reduce the consumption smoothing benefits of social insurance programs.
    Date: 2010
  14. By: Mechler, Reinhard; Hochrainer, Stefan; Pflug, Georg; Lotsch, Alexander; Williges, Keith
    Abstract: National governments are key actors in managing the impacts of extreme weather events, yet many highly exposed developing countries -- faced with exhausted tax bases, high levels of indebtedness, and limited donor assistance -- have been unable to raise sufficient and timely capital to replace or repair damaged infrastructure and restore livelihoods after major disasters. Such financial vulnerability hampers development and exacerbates poverty. Based on the record of the past 30 years, this paper finds many developing countries, in particular small island states, to be highly financially vulnerable, and experiencing a resource gap (net disaster losses exceed all available financing sources) for events that occur with a probability of 2 percent or higher. This has three main implications. First, efforts to reduce risk need to be ramped-up to lessen the serious human and financial burdens. Second, contrary to the well-known Arrow-Lind theorem, there is a case for country risk aversion implying that disaster risks faced by some governments cannot be absorbed without major difficulty. Risk aversion entails the ex ante financing of losses and relief expenditure through calamity funds, regional insurance pools, or contingent credit arrangements. Third, financially vulnerable (and generally poor) countries are unlikely to be able to implement pre-disaster risk financing instruments themselves, and thus require technical and financial assistance from the donor community. The cost estimates of financial vulnerability -- based on today's climate -- inform the design of"climate insurance funds"to absorb high levels of sovereign risk and are found to be in the lower billions of dollars annually, which represents a baseline for the incremental costs arising from future climate change.
    Keywords: Hazard Risk Management,Debt Markets,Insurance&Risk Mitigation,Banks&Banking Reform,Climate Change Economics
    Date: 2010–03–01
  15. By: Julio Cáceres-Delpiano; Marianne Simonsen
    Abstract: In this paper we study the impact of fertility on the overall wellbeing of mothers First, using US Census data for the year 1980, we study the impact of number of children on family arrangements, welfare participation and poverty status. Second, using the National Health Interview Survey (NHIS) for the period 1982-2003, we study the impact on a series of health risk factors. The findings reveal, first, that a raise in family size increases the likelihood of marital breakdown measured by the likelihood of divorce or the likelihood of the mother not living with the children’s father. Second, we find evidence that mothers facing an increase in family size are not only more likely to live with other family members such as grandparents, aunts and uncles, they are also more likely to receive help from welfare programs. Third, consistent with an increase in welfare participation, families (mothers) are more likely to fall below the poverty line, and they face a reduction in total family income. The results using NHIS confirm a negative impact of fertility on marriage stability and an increase in welfare participation measured by an increase in the likelihood of using Medicaid and for some samples a reduction in the take-up of private health insurance. Finally, we find evidence that a shock in fertility increases the likelihood for mothers to suffer from high blood pressure during the last 12 months and also increases the propensity to smoke and risk of being obese
    Keywords: Fertility, Family arrangements, Poverty, Welfare participation, Health insurance, Obesity
    JEL: J12 J13 I3
    Date: 2010–01
  16. By: Piero Gottardi; Atsushi Kajii; Tomoyuki Nakajima
    Abstract: Should capital and labor be taxed, and if so how when individuals' labor and capital income are subject to uninsurable idiosyncratic risks? In a two period general equilibrium model with production, we first show that reducing investment is welfare improving if households are homogeneous enough ex ante. On the other hand, when the degree of heterogeneity is sufficientlyhigh a welfare improvement is achieved by increasing investment, even if the investment level is already higher than at the e¢ cient allocation obtained when full insurance markets were available. Consequently, the optimal capital tax rate might be negative. We derive a decomposition formula of the e¤ects of the tax which allow us to determine how the sign of optimal tax on capital and labor depends both on the nature of the shocks and the degree of heterogeneity among consumers as well as on the way in which the tax revenue is allocated.
    Date: 2010
  17. By: Matthew D. Shapiro (University of Michigan and NBER)
    Abstract: Consumption provides a comprehensive measurement of economic well-being. This research shows that consumption is well-insured with respect to health status and widowing. Using data from the Health and Retirement Study (HRS) and its CAMS supplement, it shows that consumption responds little to changes in health status even though adverse health generates substantial out-of-pocket medical expenses. Similarly, the effect of widowing on consumption, though substantial, is not strongly driven by changes in economic resources. Men experience little loss of monetary resources when being widowed. Women have the same overall loss in consumption as men when being widowed despite greater declines in economic resources. Hence, despite the adverse consequences for income and wealth for female widows, women experience no greater drop in consumption from losing a spouse than do men.
    Date: 2009–10
  18. By: Yan Bai (Arizona State University); Jing Zhang (University of Michigan)
    Abstract: Conventional wisdom suggests that financial liberalization can help countries insure against idiosyncratic risk. There is little evidence, however, that countries have increased risk sharing despite recent widespread financial liberalization. This work shows that the key to understanding this puzzling observation is that conventional wisdom assumes frictionless international financial markets, while actual international financial markets are far from frictionless. In particular, financial contracts are incomplete and enforceability of debt repayment is limited. Default risk of debt contracts constrains borrowing, and more importantly, it makes borrowing more difficult in bad times, precisely when countries need insurance the most. Thus, default risk of debt contracts hinders international risk sharing. When countries remove their official capital controls, default risk is still present as an implicit barrier to capital flows; the observed increase in capital flows under financial liberalization is in fact too limited to improve risk sharing. If default risk of debt contracts were eliminated, capital flows would be six times greater, and international risk sharing would increase substantially.
    Keywords: international risk sharing, financial integration, financial liberalization, financial frictions, sovereign default, international capital flows
    JEL: F02 F34 F36 F41
    Date: 2009–05
  19. By: Claude Lefèvre (Département de Mathématique - Université Libre de Bruxelles); Stéphane Loisel (SAF - Laboratoire de Sciences Actuarielle et Financière - Université Claude Bernard - Lyon I : EA2429)
    Abstract: The present paper aims to point out how the stationary-excess operator and its iterates transform the s-convex stochastic orders and the associated moment spaces. This allows us to propose a new unified method on constructing s-convex extrema for distributions that are known to be t-monotone. Both discrete and continuous cases are investigated. Several extremal distributions under monotonicity conditions are derived. They are illustrated with some applications in insurance.
    Keywords: Insurance risks; s-convex stochastic orders; Extremal distributions; t-monotone distributions; Stationary-excess operator; Discrete and continuous versions.
    Date: 2010
  20. By: Arthur Charpentier (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, CREM - Centre de Recherche en Economie et Management - CNRS : UMR6211 - Université de Rennes I - Université de Caen)
    Abstract: In this paper, we consider optimal reinsurance from an insurer's point of view. Given a (low) ruin probability target, insurers want to find the optimal risk transfer mechanism, i.e. either a proportional or a nonproportional reinsurance treaty. Since it is usually admitted that reinsurance should lower ruin probabilities, it should be easy to derive an efficient Monte Carlo algorithm to link ruin probability and reinsurance parameter. Unfortunately, if it is possible for proportional reinsurance, this is no longer the case in nonproportional reinsurance. Some examples where reinsurance might increase ruin probabilities are given at the end, when claim arrival and claim size are not independent.
    Keywords: Dependence; Reinsurance; Ruin probability; Solvency requirements
    Date: 2010–03–12
  21. By: Cockx, Bart (Ghent University); Van der Linden, Bruno (Université Catholique de Louvain)
    Abstract: The current unemployment insurance and employment protection legislation were set up in an economic environment in which relationships between workers and firms were typically long-lasting and stable. The increasing globalisation of the economy and the rapid technological and organisational changes require more flexibility of both workers and firms leading to career paths which are much more volatile both within and between firms. Current institutions must be therefore urgently reformed to reconcile this new need of more flexibility with that of security for workers. The call for “flexicurity” is not new, but there is no unanimity on the corresponding institutional model it implies. Rather than proposing a reform on the basis of existing institutions abroad, we propose a reform that is explicitly guided by economic principles. In a nutshell, we propose to transform the bulk of the advance notice payments by a unique lay-off contribution, independently of the type of worker (blue or white-collar) and type of contract (temporary or open-ended). A severance payment, less important than the lay-off contribution, is due to cover the psychic cost related to dismissal. In order to make the employer accountable for the costs he imposes on society, the lay-off contribution should be made proportional to the cumulative past earnings since the moment that the worker was hired in the firm. This contribution would be used not only to finance a supplement to the current unemployment benefits, but also, as to make the worker more accountable, to finance active labour market policies for the unemployed. Aside of this scheme, it makes sense to generalise the current scheme of temporary unemployment benefits for blue-collar workers to white-collar workers, but only to the extent that one introduces experience rating in the funding, so that again the employers are made accountable for the social costs that they induce by these temporary lay-offs.
    Keywords: lexicurity, employment protection, unemployment insurance, active labour market policies, optimal design
    JEL: H11 H21 H23 J65 J68
    Date: 2009–05

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