nep-ias New Economics Papers
on Insurance Economics
Issue of 2010‒07‒31
ten papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Adverse Selection and Private Health Insurance Coverage in India A Rational Behaviour Model of Insurance Agents under Asymmetric Information By Sukumar Vellakkal
  2. Crop Insurance in India By Gurdev Singh
  3. New approaches for index insurance By Skees, Jerry R.; Collier, Benjamin
  4. Disclosure, Trust and Persuasion in Insurance Markets By de Meza, David; Irlenbusch, Bernd; Reyniers, Diane
  5. Correlation crises in insurance and finance, and the need for dynamic risk maps in ORSA By Stéphane Loisel; Pierre Arnal; Romain Durand
  6. Microinsurance innovations in rural finance By Wiedmaier-Pfister, Martina; Klein, Brigitte
  7. Performance of NAIS By Gurdev Singh
  8. From deterministic to stochastic surrender risk models: impact of correlation crises on economic capital By Stéphane Loisel; Xavier Milhaud
  9. Community-based financial organizations By Ritchie, Anne
  10. Biometric technology in rural credit markets By Giné, Xavier

  1. By: Sukumar Vellakkal
    Abstract: In the backdrop of the low level of health insurance coverage in India, this study examines the determinants of the scaling-up process of health insurance by analyzing the rational behaviour of an insurance agent facing a trade-off between selling ‘health insurance’ and ‘other forms of insurance’ subject to his limited time and efforts, and the implications of such behaviour on adverse selection and equity. The paper presents various pre-conditions affecting the rational behaviour of insurance agents and also discusses two new concepts— ‘insurance habit’ and ‘asymmetric information on health insurance schemes’. Further, the study examines various strategies followed by insurance agents for maximizing their net incomes. The theoretical proposition is empirically validated by applying a binary Probit model and the primary data collected by the author is used in this context. The study concludes that given the existing incentive systems in the Indian insurance market for promoting various forms of insurance, the low level of insurance awareness among the general public, coupled with the dominant role of insurance agents in the market results in a situation of: 1. Low level of health insurance coverage, 2. No adverse selection and 3. Inequity in health insurance coverage. [Working Paper No. 233]
    Keywords: Health Insurance, Insurance Agent, Asymmetric Information, Adverse Selection and Insurance Habit
    Date: 2010
  2. By: Gurdev Singh
    Abstract: This working paper discusses the dependence of Indian agriculture on uncertain rains. In addition the farmers experience other production risks as well as marketing risks related to different crop enterprises and for different agro-climatic regions and areas. It then argues on the need for crop insurance as an alternative to manage production risk. It then takes up the historical overview of crop insurance products and their performance. It is followed by the discussion on the currently available crop insurance products for specific crops and regions. It discusses at length the two important products, namely, National Agricultural Insurance Scheme and Weather Based Insurance Scheme. It also reflects on some deficiencies in these products.
    Date: 2010–06–29
  3. By: Skees, Jerry R.; Collier, Benjamin
    Abstract: The El Niño Southern Oscillation (ENSO) is a climate event associated with warming sea surface temperatures in the Pacific Ocean. In years of extreme El Niño events, areas in northern Peru experience catastrophic flooding. As of 2010, it is possible for stakeholders in northern Peru to purchase a new form of insurance that pays out just as flooding begins and stakeholders begin incurring extra costs and consequential losses. Given the high basis risk associated with selling index insurance to households, this insurance is designed for firms and institutions that serve households that are highly exposed to El Niño. ENSO insurance is sold by a Peruvian insurance company, and a major global reinsurer carries most of the risk. This new insurance product is the first insurance to use sea surface temperature as the proxy for catastrophic losses and also the first regulated “forecast index insurance” product in the world. This innovation could enhance progress in developing index-based insurance products for extreme weather events. Recent years have seen a growing number of pilot tests of index insurance for weather risk, motivated by an increased understanding of how natural disasters affect developing countries. Beyond immediate suffering (including deaths, destroyed assets, and lost income), disasters have troublesome indirect effects: economic growth can be disrupted, the poor are thrust into permanent poverty traps, and the mere presence of these risks constrains access to financial services and causes many decisionmakers to pursue low-return, low-risk strategies that impede economic progress. Much of the development of index insurance focuses on agriculture, because activities associated with agriculture remain the primary livelihood strategies for the rural poor in developing countries. Thus far, most index insurance pilots have involved products targeted at households—that is, micro-level products. Index insurance uses an objective measure (an index) of a natural event known to cause losses (such as excess rain, high river levels, or extreme sea surface temperatures). Using an index as the proxy for loss dispenses with expensive loss assessments. Furthermore, use of an index diminishes moral hazard and adverse selection, problems that plague traditional forms of insurance. Given these advantages, index insurance may be well suited to developing countries where data are sparse and delivery of financial services to smallholder households increases the per-unit cost of traditional insurance. Despite the promise of index insurance, uptake by smallholder households is slow. Presently, index insurance may be better suited for risk aggregators—that is, groups or institutions that aggregate the risk of households either through the services they provide or through informal risk-sharing arrangements (for example, agricultural lenders, firms in the value chain, and farmer associations). Focusing first on risk aggregators should also help build linkages and sustainable products that will directly serve smallholder households.
    Keywords: ENSO insurance, Farmers, Flooding, forecast index, index insurance,
    Date: 2010
  4. By: de Meza, David (London School of Economics); Irlenbusch, Bernd (University of Cologne); Reyniers, Diane (London School of Economics)
    Abstract: This high-stakes experiment investigates the effect on buyers of mandatory disclosures concerning an insurance policy's value for money (the claims ratio) and the seller's commission. These information disclosures have virtually no effect despite most buyers claiming to value such information. Instead, our data reveal that whether the subject is generally trusting plays an important role. Trust is clearly associated with greater willingness to pay for insurance. Unlike in previous work, trust in our setting is not about obligations being fulfilled. The contract is complete, simple and the possibility of breach is negligible. However, as for much B2C insurance marketing, face-to-face selling plays a crucial role in our experimental design. Trusting buyers are more suggestible, so take advice more readily and buy more insurance, although they are no more risk averse than the uninsured. Moreover, trusting buyers feel less pressured by sellers, and are more confident in their decisions which suggests that they are easier to persuade. Therefore, in markets where persuasion is important, public policy designed to increase consumer information is likely to be ineffective.
    Keywords: insurance selling, trust, persuasion
    JEL: C91 G22 M30
    Date: 2010–07
  5. By: Stéphane Loisel (SAF - Laboratoire de Sciences Actuarielle et Financière - Université Claude Bernard - Lyon I : EA2429); Pierre Arnal (Actuaris - Actuaris); Romain Durand (Actuaris - Actuaris)
    Abstract: We explain why correlation crises may occur in insurance and finance. These phenomena are not taken into account in Solvency II standard formula. We show the importance of taking them into account in internal models or partial internal models. Given the variety of scenarios that could lead to correlation crises and their different potential impacts, we support the idea that ORSA (Own Risk and Solvency Assessment) reports of insurance companies should include dynamic and causal correlation crises analyzes.
    Date: 2010–07–02
  6. By: Wiedmaier-Pfister, Martina; Klein, Brigitte
    Abstract: Poor people in developing countries are vulnerable to a broad range of shocks that affect their livelihoods, including illness, accidents, and death as well as loss of assets such as animals, crops, and machinery. The poor are still predominantly rural, and their vulnerability is even higher than that of their urban peers. Health facilities are less available and less well equipped in rural areas; water, sanitation, roads, and telecommunication are less developed; and people are less educated and not as aware of risk-mitigation mechanisms. Given the rural character of poverty in many countries, poverty reduction remains strongly connected to agricultural development, and sustainable agricultural development depends on well-organized risk mitigation. One important tool for mitigating risk is microinsurance. The International Association of Insurance Supervisors (IAIS) defines microinsurance as “insurance that is accessed by the low-income population, provided by a variety of different providers but run in accordance with generally accepted insurance practices (including the IAIS Insurance Core Principles).” It differs from traditional insurance in that it is adapted to the circumstances of the poor: premiums are low, products have simple designs, it is offered through well-trusted and innovative channels, premium payments are flexible, and claims are settled promptly. Microinsurance has the potential to enable the rural poor to mitigate the effects of shocks that threaten their lives, productivity, and assets. It can help prevent emergencies from depleting poor people’s savings and other assets. Furthermore, it allows households to invest in high-risk, high-return activities by securing the lending risk for agricultural and other investments. Financial sector reforms in many countries have begun to include insurance as an important pro-poor financial service along with other microfinance services such as savings, lending, and cashless payments. According to a study by the International Labour Organization, microinsurance in Africa almost doubled from 2006 to 2009. The survey shows that half of the schemes were growing faster than 30 percent a year between 2007 and 2008. Data on growth in rural areas, however, are not available.
    Keywords: agricultural development, microinsurance, rural areas, rural development policies, Rural finance, Rural poor,
    Date: 2010
  7. By: Gurdev Singh
    Abstract: This working paper confines its scope to performance of National Agricultural Insurance Scheme (NAIS). It examines the progress of NAIS in India and in one selected state, Gujarat. The two dimensions considered are coverage over time and across the states. It is further disaggregated for different seasons. The performance was studied with respect to number of performance indicators, namely, farmers covered, area covered, sum insured, premium collected, subsidy to small farmers, claims made and farmers benefited. The state-wise performance gives the comparative picture of NAIS among the states. Detailed performance was studied for Gujarat. Again the progress was examined over time and among the districts. Though the data shows impressive growth over time it cannot be termed as satisfactory. The coverage of area as well as loanee farmers has been disappointing. The scheme has many flaws. The mandatory aspect has not been appreciated by farmers.
    Date: 2010–06–30
  8. By: Stéphane Loisel (SAF - Laboratoire de Sciences Actuarielle et Financière - Université Claude Bernard - Lyon I : EA2429); Xavier Milhaud (SAF - Laboratoire de Sciences Actuarielle et Financière - Université Claude Bernard - Lyon I : EA2429, Axa Global Life - AXA)
    Abstract: In this paper we raise the matter of considering a stochastic modeling of the surrender rate instead of the classical S-shaped deterministic curve (in function of the spread), still used in almost all insurance companies. A stochastic model in which surrenders are conditionally independent with respect to a S-curve disturbance would be tempting in some extreme scenarii, especially to address the question of the lack of data. However, we explain why this conditional independence between policyholders, which has the advantage to be the simplest assumption, looks particularly maladaptive when the spread increases. Indeed the correlation between policyholders' decisions is most likely to increase in this situation. We suggest and develop a simple model which integrates those phenomena. With stochastic orders it is possible to compare it to the conditional independence approach qualitatively. In an partially internal Solvency II model, we quantify the impact of the correlation phenomenon on a real life portfolio for a global risk management strategy.
    Date: 2010–07–08
  9. By: Ritchie, Anne
    Abstract: Community-based financial organizations (CBFOs) are user-owned and -operated groups that provide mainly saving and lending services but may also offer other financial services such as insurance. These independent organizations are based in local communities, with local governance and management. CBFOs range in size. They can take the form of informal and unregistered groups of five to seven people, usually women, who meet weekly to save small amounts of money that they then lend to each other and possibly to other members of the community. They also include larger, slightly more formal groups of up to 40 people who have written by-laws, and they include small financial cooperatives. CBFOs flourish among people who have poor access to banks and nonbank financial institutions such as microfinance institutions (MFIs).
    Keywords: Community-based financial organizations (CBFOs), Insurance, lending, saving,
    Date: 2010
  10. By: Giné, Xavier
    Abstract: Identity theft is a common crime the world over. In developing countries, the damage caused by identity theft and identity fraud goes far beyond the individual victim, however, and ultimately creates a direct impediment to progress, particularly in credit markets. Recent research reveals that biometric technology can help reduce these problems. A biometric is a measurement of physical or behavioral characteristics used to verify or analyze identity. Common biometrics include a person’s fingerprints; face, iris, or retina patterns; speech; or handwritten signature. These are effective personal identifiers because they are unique and intrinsic to each person, so, unlike conventional identification methods (such as passport numbers or government-issued identification cards), they cannot be forgotten, lost, or stolen. Recent advances in recognition technology coupled with increases in both digital storage capacity and computer processing speeds have made biometric technology (for example, ocular or fingerprint scanners) feasible in many applications, from controlling restricted building access to allowing more effective delivery of targeted government programs with large-scale identification systems, such as those being implemented in India by the Unique Identification Authority of India. Biometric technology can also improve access to credit and insurance markets, especially in countries that do not have a unique identification system, where identity fraud—the use of someone else’s identity or a fictitious one—to gain access to services otherwise unavailable to an individual is rather common. For example, lenders in Malawi describe past borrowers who purposefully defaulted then tried to obtain a fresh loan from the same or another institution under a false identity. And, although less common in developing countries because markets are less developed, the potential for sick individuals without healthcare coverage to use the insurance policy of a friend or relative does exist. The response of lenders and insurance companies has been to restrict the supply of such services to the detriment of the greater population, not just those people committing identity fraud.
    Keywords: Biometric technology, Commodities, conditional cash transfers, credit, Insurance, rural areas, Subsidies,
    Date: 2010

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