nep-ias New Economics Papers
on Insurance Economics
Issue of 2010‒05‒22
ten papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. On Liability Insurance for Automobiles By Sjur Didrik Flam; Elmar Wolfstetter
  2. Costs and Benefits of Moving to a County ACRE Program By Bruce A. Babcock
  3. Nonlinear optimal stochastic control of the insurance company under small bankrupt probability constraints By Zongxia Liang; Jicheng Yao
  4. Optimal dividend and investing control of a insurance company with higher solvency constraints By Zongxia Liang; Jianping Huang
  5. A Life Insurance Deterrent to Risky Behavior in Africa By de Araujo, Pedro; Murray, James
  6. Social protection in Latin America : achievements and limitations By Ferreira , Francisco H.G.; Robalino, David
  7. Does Staying Healthy Reduce Your Lifetime Health Care Costs? By Wei Sun; Anthony Webb; Natalia Zhivan
  8. Optimal dividend policy of a large insurance company with positive transaction cost under higher solvency and security By Zongxia Liang; Jicheng Yao
  9. Designing the payout phase of funded pension pillars in central and eastern European countries By Vittas, Dimitri; Rudolph, Heinz; Pollner, John
  10. The payout phase of pension systems : a comparison of five countries By Rocha, Roberto; Vittas, Dimitri; Rudolph, Heinz P.

  1. By: Sjur Didrik Flam (Economics Department, University of Bergen); Elmar Wolfstetter (Institute of Economic Theory I, Humboldt-University at Berlin)
    Abstract: Car owners are liable for property damage inflicted on other motorists. In most countries such liability must be insured by law. That law may favor expensive or heavy vehicles, prone to suffer or inflict large losses. This paper explores links between liability rules and vehicle choice. It presumes cooperative insurance, but non-cooperative acquisition of vehicles. Thus, the Nash equilibrium and its degree of efficiency depend on the liability regime.
    Keywords: liability, mutual insurance, core, pure Nash equilibrium, anonymous games, non-atomic measure
    JEL: C71 C72 D61 K13
    Date: 2010–05
  2. By: Bruce A. Babcock (Center for Agricultural and Rural Development (CARD); Midwest Agribusiness Trade Research and Information Center (MATRIC))
    Abstract: Better integration of the different programs that comprise the farm safety net seems inevitable in the next farm bill given widespread public concern over the rapidly growing federal debt. With $5 billion in direct payments flowing annually to farmers who own or rent base acres without regard to farm income, $7 billion flowing to crop insurance companies over the last two years, and $2.6 billion flowing to cotton farmers in the last two years from programs that violate our trade commitments, there is substantial room for improvement. One path toward better integration would be to modify the ACRE (Average Crop Revenue Election) program so that it covers county revenue rather than state revenue. For approximately the same cost as the direct payment program, 100% of planted acres could be covered at a 95% coverage level. Accounting for county ACRE payments before crop insurance payments are made could easily reduce the cost of the crop insurance program by more than $4 billion per year.
    Keywords: ACRE, agricultural risk, Average Crop Revenue Election program, crop insurance, direct payment program, farm bill, farm payments, SURE, Supplemental Revenue Assistance Payments Program.
    Date: 2010–05
  3. By: Zongxia Liang; Jicheng Yao
    Abstract: This paper considers nonlinear optimal stochastic control of insurance company with proportional reinsurance policy under small bankrupt probability constraints. The company controls the reinsurance rate and dividend payout process to maximize the expected present value of the dividends until the time of bankruptcy. However, if the optimal dividend barrier is too low to be acceptable, it will make the company result in bankruptcy soon. In addition, although risk and return should be highly correlated, over-risking is not a good recipe for high return. Therefore, the managements of the company have to impose their preferred risk level and additional charge on firm seeking services beyond or lower than the level. These turn out to be nonlinear regular-singular stochastic optimal problems under small bankrupt probability constraints. This paper aims at solving this kind of the optimal problems, that is, working out the optimal control policy of the insurance company, in particular, exact minimum dividend barrier, and finding the optimal return function associated with the optimal policy.
    Date: 2010–05
  4. By: Zongxia Liang; Jianping Huang
    Abstract: This paper considers optimal control problem of a large insurance company under higher standard of solvency. The company controls proportional reinsurance rate, dividend pay-outs and investing process to maximize the expected present value of the dividend pay-outs until the time of bankruptcy. This paper aims at describing the optimal return function as well as the optimal policy.
    Date: 2010–05
  5. By: de Araujo, Pedro; Murray, James
    Abstract: The spread of HIV and AIDS and risky sexual behavior continues to be a problem in Sub-Saharan African countries despite government measures to educate people on the risk and severity of the disease and measures to promote safe sex practices such as making condoms readily available at reduced or no cost. We examine whether people decide to engage in risky sexual behavior due to low income and low life expectancy. Sub-Saharan Africa is characterized by conditions that significantly reduce life expectancy such as unsanitary conditions prevalent in poverty stricken areas, inaccessibility to health care, and dangerous working conditions such as those in very poor mining regions. Moreover, since income per capita in these countries is very low, the opportunity cost associated with dying from AIDS and foregoing future consumption is very low. We examine how a government provided life insurance benefit may be an effective means of deterring risky sexual behavior. To evaluate this policy prescription we develop a life-cycle model with personal and family consumption and endogenous probability of survival. In the model, agents can receive life insurance benefits if their death is not the result of AIDS. We demonstrate that excessive risky behavior does result from low life expectancy and low levels of income and illustrate the conditions for which the life insurance benefit can replicate the effects of higher income and life expectancy, deterring risky sexual behavior and reducing the spread of HIV/AIDS.
    Keywords: AIDS; life-cycle; life expectancy; sub-Saharan Africa
    JEL: H51 I18 I38
    Date: 2010–05–12
  6. By: Ferreira , Francisco H.G.; Robalino, David
    Abstract: Social protection systems in Latin America have been transformed in the past two decades. Until the 1980s, those who were not covered by the social security arrangements available primarily in the urban formal sector received little public assistance beyond universal subsidies for some food or fuel purchases. Since the 1990s, the introduction of non-contributory social insurance programs (including"social pensions") and conditional cash transfers has substantially extended the coverage and improved the incidence of social assistance. However, the organic growth of subsidized social assistance in parallel to the older social insurance system, financed largely out of taxes on formal sector employment, has led to a dual system that is neither properly equitable nor efficient. The twin challenges that now face social protection in Latin America are to better integrate those two halves of the system, and to develop programs that promote sustainable self-reliance, by moving from"safety nets"to"opportunity ropes."
    Keywords: Rural Poverty Reduction,Services&Transfers to Poor,Debt Markets,Insurance Law,Health Monitoring&Evaluation
    Date: 2010–05–01
  7. By: Wei Sun; Anthony Webb; Natalia Zhivan
    Abstract: Medical and long-term care costs represent a substantial uninsured risk for most retired households. A recent brief from the Center for Retirement Research at Boston College reported new findings on average lifetime health care costs at selected ages and on the distribution of those costs. This second brief explores the relationship between health care costs and health status. That is, it considers whether current good health is a predictor of low health care costs over one’s remaining lifetime. If so, healthy households could set aside less for health care expenditures than the unhealthy, and households that stay healthy could release for general consumption money that they had previously set aside for health care costs. Our main finding is that although the current health care costs of healthy retirees are lower than those of the unhealthy, the healthy actually face higher total health care costs over their remaining lifetime. To illustrate, the expected present value of lifetime health care costs for a couple turning 65 in 2009 in which one or both spouses suffer from a chronic disease is $220,000, including insurance premiums and the cost of nursing home care, and 5 percent can expect to spend more than $465,000. The comparable numbers for couples free of chronic disease are substantially higher, at $260,000 and $570,000, respectively. This brief explains this somewhat counterintuitive finding.
    Keywords: savings and consumption, health
    Date: 2010–05
  8. By: Zongxia Liang; Jicheng Yao
    Abstract: Based on a point of view that solvency and security are first, this paper considers optimal control and financial valuation problems of a large insurance company facing positive transaction cost asked by reinsurer. The company controls proportional reinsurance and dividend pay-out policy to maximize the expected present value of the dividend pay-outs until the time of bankruptcy. The paper aims at finding explicitly value function and an optimal control policy of the company by using stochastic analysis and PDE methods. The results present the best equilibrium point between maximization of dividend pay-outs and minimization of risks.
    Date: 2010–05
  9. By: Vittas, Dimitri; Rudolph, Heinz; Pollner, John
    Abstract: Over the past decade or so, most Central and Eastern European countries have reformed their pension systems, significantly downsizing their public pillars and creating private pillars based on capitalization accounts. Early policy attention was focused on the accumulation phase but several countries are now reaching the stage where they need to address the design of the payout phase. This paper reviews the complex policy issues that will confront policymakers in this effort and summarizes recent plans and developments in four countries (Poland, Hungary, Estonia, and Lithuania). The paper concludes by highlighting a number of options that merit detailed consideration.
    Keywords: Debt Markets,Pensions&Retirement Systems,Financial Literacy,Insurance&Risk Mitigation,Investment and Investment Climate
    Date: 2010–04–01
  10. By: Rocha, Roberto; Vittas, Dimitri; Rudolph, Heinz P.
    Abstract: This paper provides a comparative summary of the payout phase of pension systems in five countries -- Australia, Chile, Denmark, Sweden, and Switzerland. All five countries have large pension systems with mandatory or quasi-mandatory retirement savings schemes. But they exhibit important differences in the structure and role of different pillars, regulation of payout options, level of annuitization, market structure, capital regulations, risk management, and use of risk sharing arrangements. The paper summarizes the experience of these countries and highlights the lessons they offer to other countries.
    Keywords: Pensions&Retirement Systems,Debt Markets,Emerging Markets,Insurance&Risk Mitigation,Investment and Investment Climate
    Date: 2010–04–01

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