nep-ias New Economics Papers
on Insurance Economics
Issue of 2010‒09‒11
twelve papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  2. Dynamics of health insurance ownership in Vietnam, 2004 – 06 By Trong-Ha Nguyen; Suiwah Leung
  3. Public and Private Health Insurance in Germany: The Ignored Risk Selection Problem By Martina Grunow; Robert Nuscheler
  4. Long-term care: a suitable case for social insurance. By Barr, Nicholas
  5. The Impact of an Individual Health Insurance Mandate on Hospital and Preventive Care: Evidence from Massachusetts By Kowalski, A.;; Kolstad, J.;
  6. The Link between Insurance and Banking Sectors: An International Cross-Section Analysis of Life Insurance Demand By Benjamin Lorent
  7. Pareto Optimal Insurance Policies in the Presence of Administrative Costs By Aase, Knut K.
  8. Payroll Taxes, Social Insurance and Business Cycles By Burda, Michael C.; Weder, Mark
  9. Employee State Insurance: For a handful of contribution, a bagful of benefits By M Gopinath; Hari Krishna
  10. Moral hazard and risk-sharing: risk-taking as an incentive tool By Mohamed Belhaj; Renaud Bourlès; Frédéric Deroïan
  11. Insurance Solvency Regulation: Regulatory Approaches Compared By Benjamin Lorent
  12. Testing Day’s Conjecture that More Nitrogen Decreases Crop Yield Skewness By Xiaodong Du; David A. Hennessy; Cindy L. Yu

  1. By: LI DONNI, P.;
    Abstract: We examined the relationship between unobserved risk preferences and four insurance purchase decisions: health Medigap insurance, long-term insurance, life insurance and annuity. Standard economic theory assumes that individuals take decision over a set of risky domains according to their own risk preferences which are stable across decision contexts. This assumption of context-invariant risk preference has caused debate in the literature concerning its validity. Using data from the Health and Retirement Study, we exploit latent class analysis to identify conditional on predicted and realized risk how heterogeneity in risk preferences affects multiple insurance demand. Our results provide evidence of the existence of domain general component of risk preferences, although non-preference factors - such as context specificity - play also an important role. JEL Classi_cation Numbers G11, Keywords
    Keywords: Risk Preferences; Multiple Demand for Insurance; Finite Mixture Model; Long-Term Care Insurance; Medigap; Annuity; Life Insurance;
    JEL: D82 G22 I11
    Date: 2010–07
  2. By: Trong-Ha Nguyen; Suiwah Leung
    Abstract: Vietnam is undertaking health financing reform in an attempt to achieve universal health insurance coverage by 2014. Changes in health insurance policies have doubled the overall coverage between 2004 and 2006. However, close examination of Vietnam Living Standard Surveys during this period reveals that about one fifth of the insured in 2004 dropped out of the health insurance system by 2006. This paper uses longitudinal data from VHLSS 2004 and 2006 to investigate the characteristics of those who joined and those who left the health insurance system. We model the static and dynamic health insurance choices allowing for heterogeneity of choices. The results from both static and dynamic models highlight the importance of income and education in determining the movement in or out of a particular scheme. The results from the static models of health insurance determinants show significant adverse selection in the current health insurance system where individuals with bad health are more likely to be insured. The findings from the dynamic models of health insurance ownership also suggest that the current health insurance system entails significant adverse selection where people with worse health are more likely to join or stay in and less likely to move out of the system. Some policy implications to increase coverage and to maintain financial sustainability of the health insurance system are drawn.
    Keywords: health insurance, adverse selection, Vietnam
    JEL: I11 D12 O12
    Date: 2010–08
  3. By: Martina Grunow (University of Augsburg, Department of Economics); Robert Nuscheler (University of Augsburg, Department of Economics)
    Abstract: While risk selection within the German public health insurance system has received considerable attention, risk selection between public and private health insurers has largely been ignored. This is surprising since – given the institutional structure – risk selection between systems is likely to be more pronounced. We find clear evidence for risk selection in favor of private insurers. While private insurers are unable to select the healthy upon enrollment they manage to dump high risk individuals who then end up in the public system. This gives private insurers an unjustified competitive advantage vis-à-vis public insurer. A risk adjusted compensation would mitigate this advantage.
    Keywords: risk selection, public and private health insurance, risk adjustment
    JEL: C13 C23 I10 I18
    Date: 2010–08
  4. By: Barr, Nicholas
    Abstract: There are potentially large welfare gains if people can buy insurance that covers the costs of long-term care. However, technical problems - largely information problems - face both the providers of insurance and potential buyers. These problems on both the supply and demand sides of the market suggest that the actuarial mechanism is not well suited to addressing risks associated with long-term care. This line of argument underpins the article's main conclusion - that social insurance is a better fit
    Date: 2010–08
  5. By: Kowalski, A.;; Kolstad, J.;
    Abstract: In April 2006, the state of Massachusetts passed legislation aimed at achieving near universal health insurance coverage. A key provision of this legislation, and of the national legislation passed in March 2010, is an individual mandate to obtain health insurance. In this paper, we use hospital data to examine the impact of this legislation on insurance coverage, utilization patterns, and patient outcomes in Massachusetts. We use a difference-in-difference strategy that compares outcomes in Massachusetts after the reform to outcomes in Massachusetts before the reform and to outcomes in other states. We embed this strategy in an instrumental variable framework to examine the effect of insurance coverage on outcomes. Among the population discharged from the hospital in Massachusetts, the reform decreased uninsurance by 28% relative to its initial level. Increased coverage affected utilization patterns by decreasing length of stay and the number of inpatient admissions originating from the emergency room. We also find evidence that outpatient care reduced hospitalizations for preventable conditions. At the same time we find no evidence that the cost of hospital care increased. The reform affected nearly all age, gender, income, and race categories. We identify some populations for which insurance had the greatest direct impact on outcomes and others for which the impact on outcomes appears to have occurred through spillovers.
    Date: 2010–07
  6. By: Benjamin Lorent
    Abstract: Life insurance has become an increasingly important part of the financial sector. The past ten years have witnessed significant changes of the market conditions faced by the insurance industry. Two trends are especially crucial: the assimilation of banking-sector type activities by life insurers and the consolidation of financial services (e.g. bancassurance). This article identifies the factors determining consumption for life insurance products across 90 countries for the year 2005. We introduce new factors to account for the increased link between bank and insurance sectors. Using a larger dataset, our results confirm the existing literature by showing that countries with higher income, better developed financial system, better educated population and higher old ratio spend more money on life insurance products whereas life expectancy tends to decrease life insurance demand. Moreover, institutional, religious and legal factors are found to be important. The levels of inflation and interest rates, the young ratio and the size of the social security system appear to have no robust association with life insurance consumption. The set of new variables introduced: bancassurance and banking efficiency appear significant, with a negative impact on life insurance consumption. Restricting our sample to developed countries confirm previous results for banking efficiency and bancassurance. The results highlight that the increasing blurring of the boundaries between insurers and banks impact life insurance demand.
    Keywords: Life Insurance; Insurance Demand; Bancassurance; Cross-section Analysis
    JEL: G22 C31
    Date: 2010–08
  7. By: Aase, Knut K. (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    Abstract: In his classical article in The American Economic Review, Arthur Raviv (1979) examines Pareto optimal insurance contracts when there are ex-post insurance costs c induced by the indemnity I for loss x. Raviv’s main result is that a necessary and sufficient condition for the Pareto optimal deductible to be equal to zero is c'(I) = 0 for all I >= 0. We claim that another type of cost function is called for in household insurance, caused by frequent but relatively small claims. If a fixed cost is incurred each time a claim is made, we obtain a non-trivial Pareto optimal deductible even if the cost function does not vary with the indemnity. This implies that when the claims are relatively small, it is not optimal for the insured to get a compensation since the costs outweighs the benefits, and a deductible will naturally occur. We also discuss policies with an upper limit, and show that the insurer prefers such contracts, but the insured does not. In Raviv’s paper it was also shown that policies with upper limits are dominated by policies with no upper limit, when there are ex-post costs to insurance. We show that the result is right, but the proof is wrong.
    Keywords: Pareto optimal risk sharing; administrative costs in insurance; household insurance; XL-contracts
    JEL: G22
    Date: 2010–09–01
  8. By: Burda, Michael C. (Humboldt University, Berlin); Weder, Mark (University of Adelaide)
    Abstract: Payroll taxes represent a major distortionary influence of governments on labor markets. This paper examines the role of payroll taxation and the social safety net for cyclical fluctuations in a nonmonetary economy with labor market frictions and unemployment insurance, when the latter is only imperfectly related to search effort. A balanced social insurance budget renders gross wages more rigid over the cycle and, as a result, strengthens the model's endogenous propagation mechanism. For conventional calibrations, the model generates a negatively sloped Beveridge curve as well as substantial volatility and persistence of vacancies and unemployment.
    Keywords: business cycles, labor markets, payroll taxes, unemployment, consumption-tightness puzzle
    JEL: E24 J64 E32
    Date: 2010–08
  9. By: M Gopinath; Hari Krishna
    Abstract: The Employee State Insurance Act, [ESIC] 1948, is a piece of social welfare legislation enacted primarily with the object of providing certain benefits to employees in case of sickness, maternity and employment injury and also to make provision for certain others matters incidental thereto. The Act in fact tries to attain the goal of socio-economic justice enshrined in the Directive principles of state policy under part 4 of our constitution, in particular articles 41, 42 and 43 which enjoin the state to make effective provision for securing, the right to work, to education and public assistance in cases of unemployment, old age, sickness and disablement. The act strives to materialise these avowed objects through only to a limited extent. [Working Paper No. 47]
    Keywords: Employee State Insurance Act, social welfare, legislation, socio-economic, justice, enshrined, materialise
    Date: 2010
  10. By: Mohamed Belhaj (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579); Renaud Bourlès (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579); Frédéric Deroïan (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579)
    Abstract: We examine how moral hazard impacts risk-sharing when risk-taking can be part of the mechanism design. In a two-agent model with binary effort, we show that moral hazard always increases risk-taking (that is the amount of wealth invested in a risky project) whereas the effect on risk-sharing (the amount of wealth transferred between agents) is ambiguous. Risk-taking therefore appears as a useful incentive tool. In particular, in the case of preferences exhibiting Constant Absolute Risk Aversion (CARA), moral hazard has no impact on risk-sharing and risk-taking is the unique mechanism used to solve moral hazard. Thus, risk-taking appears to be the prevailing incentive tool.
    Keywords: Risk-Taking, Informal Insurance, Moral Hazard
    Date: 2010–08–31
  11. By: Benjamin Lorent
    Abstract: In this paper we compare the main regulatory frameworks: American (US RBC, Risk-Based-Capital), Swiss (SST, Swiss Solvency Test) and European (Solvency II). We improve on the existing literature by focusing on technical aspects of regulation schemes, particularly the capital requirements’ calculation and by including latest quantitative and qualitative improvements of the Solvency II project. The comparison concludes that Swiss and European systems are advanced regulatory processes in comparison with American regulation although the latter system was perceived as a revolution some years ago. Even if the Swiss regime and the future European directive are quite similar, there are also some key differences to highlight. European approach to determine regulatory capital is mainly risk-sensitive, based on risk measures, whereas US RBC is mainly based on static factors and accounting data reported in the audited statutory annual statement. The three systems also differ with regards to the use of different risk measures, the consideration of operational and catastrophe risks, the use of internal models, the treatment of diversification effect, the limits imposed to investments, and the consideration of qualitative aspects.
    Keywords: Solvency II; Swiss Solvency Test; US RBC; Insurance Regulation
    JEL: G22 G28 G32 K23
    Date: 2010–08
  12. By: Xiaodong Du (Center for Agricultural and Rural Development (CARD); Food and Agricultural Policy Research Institute (FAPRI)); David A. Hennessy (Center for Agricultural and Rural Development (CARD)); Cindy L. Yu
    Abstract: While controversy surrounds skewness attributes of typical yield distributions, a better understanding is important for agricultural policy assessment and for crop insurance rate setting. Day (1965) conjectured that crop yield skewness declines with an increase in low levels of nitrogen use, but higher levels have no effect. In a theoretical model based on the law of the minimum (von Liebig) technology, we find conditions under which Day’s conjecture applies. Employing four experimental plot datasets, we investigate the conjecture by introducing (a) a flexible Bayesian extension of the Just-Pope technology to incorporate skewness, and (b) a quantile-based measure of skewness shift. For corn yields, the Bayesian estimation provides strong evidence in favor of negative skewness at commercial nitrogen rates and for Day’s conjecture. There was weaker evidence in favor of positively skewed cotton yield and little evidence in favor of the conjecture. The results are also confirmed by the quantile-based measure.
    Keywords: crop insurance, Gibbs sampler, Just and Pope technology, negative skewness, quantile regression.
    Date: 2010–08

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