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on Insurance Economics |
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Issue of 2010‒10‒02
thirteen papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Business Management |
| By: | PESTIEAU, Pierre (Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium; CREPP, University of Liege, B-4000 Liège, Belgium and Paris School of Economics); PONTHIERE, Grégory (Paris School of Economics and Ecole Normale Supérieure, Paris, France.) |
| Abstract: | The purpose of this paper is to examine the alternative explanatory factors of the so-called long term care insurance puzzle, namely the fact that so few people purchase a long term care insurance whereas this would seem to be a rational conduct given the high probability of dependence and the high costs of long term care. For that purpose, we survey various theoretical and empirical studies of the demand and supply of long term care insurance. We discuss the vicious circle in which the long term care insurance market is stuck: that market is thin because most people find the existing insurance products too expensive, and, at the same time, the products supplied by insurance companies are too expensive because of the thinness of the market. Moreover, we also show that, whereas some explanations of the puzzle involve a perfect rationality of agents on the LTC insurance market, others rely, on the contrary, on various behavioral imperfections. |
| Keywords: | long term care insurance, dependence, annuity puzzle |
| JEL: | I18 J14 G22 |
| Date: | 2010–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:cor:louvco:2010023&r=ias |
| By: | Burnecki, Krzysztof; Weron, Rafal |
| Abstract: | This paper is intended as a guide to simulation of risk processes. A typical model for insurance risk, the so-called collective risk model, treats the aggregate loss as having a compound distribution with two main components: one characterizing the arrival of claims and another describing the severity (or size) of loss resulting from the occurrence of a claim. The collective risk model is often used in health insurance and in general insurance, whenever the main risk components are the number of insurance claims and the amount of the claims. It can also be used for modeling other non-insurance product risks, such as credit and operational risk. In this paper we present efficient simulation algorithms for several classes of claim arrival processes. |
| Keywords: | Risk process; Claim arrival process; Homogeneous Poisson process (HPP); Non-homogeneous Poisson process (NHPP); Mixed Poisson process; Cox process; Renewal process. |
| JEL: | C63 C24 G32 C15 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:25444&r=ias |
| By: | Kousky, Carolyn (Resources for the Future) |
| Abstract: | This paper surveys state-mandated programs designed to provide natural catastrophe insurance to property owners and businesses unable to find a policy in the private market. The paper provides an overview of the 10 state programs offering wind or earthquake coverage and outlines the motivation for establishing such programs. The implications of design and operation decisions, such as pricing strategies and contract options, are discussed, as well as how these programs interact with the private property insurance market. Finally, the paper examines whether such programs can handle a truly catastrophic loss year and the merits and drawbacks of federal support for the programs. |
| Keywords: | insurance, catastrophe, hurricane, earthquake, residual market mechanisms |
| JEL: | G22 H79 Q54 |
| Date: | 2010–09–22 |
| URL: | http://d.repec.org/n?u=RePEc:rff:dpaper:dp-10-30&r=ias |
| By: | Georges Dionne; Pierre-Carl Michaud; Maki Dahchour |
| Abstract: | The identification of information problems in different markets is a challenging issue in the economic literature. In this paper, we study the identification of moral hazard from adverse selection and learning within the context of a multi-period dynamic model. We extend the model of Abbring et al. (2003) to include learning and insurance coverage choice over time. We derive testable empirical implications for panel data. We then perform tests using longitudinal data from France during the period 1995-1997. We find evidence of moral hazard among a sub-group of policyholders with less driving experience (less than 15 years). Policyholders with less than 5 years of experience have a combination of learning and moral hazard, whereas no residual information problem is found for policyholders with more than 15 years of experience. |
| Keywords: | Moral hazard, adverse selection, learning, dynamic insurance contracting, panel data, empirical test |
| JEL: | D81 C22 C12 C33 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:1035&r=ias |
| By: | Magda Schiegl |
| Abstract: | Within the Solvency II framework the insurance industry requires a realistic modelling of the risk processes relevant for its business. Every insurance company should be capable of running a holistic risk management process to meet this challenge. For property and casualty (P&C) insurance companies the risk adequate modelling of the claim reserves is a very important topic as this liabilities determine up to 70% percent of the balance sum. We propose a three dimensional (3D) stochastic model for claim reserving. It delivers consistently the reserve's distribution function as well as the distributions of all parts of it that are needed for accounting and controlling. The calibration methods for the model are well known from data analysis and they are applicable in an practitioner environment. We evaluate the model numerically by the help of Monte Carlo (MC) simulation. Classical actuarial reserve models are two dimensional (2D). They lead to an estimation algorithm that is applied on a 2D matrix, the run off triangle. Those methods (for instance the Chain - Ladder or the Bornhuetter - Ferguson method) are widely used in practice nowadays and give rise to several problems: They estimate the reserves' expectation and some of them - under very restriction assumptions - the variance. They provide no information about the tail of the reserve's distribution, what would be most important for risk calculation, for assessing the insurance company's financial stability and economic situation. Additionally, due to the projection of the claim process into a two dimensional space the results are very often distorted and dependent on the kind of projection. Therefore we extend the classical 2D models to a 3D space because we find inconsistencies generated by inadequate projections into the 2D spaces. |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1009.4146&r=ias |
| By: | Bardey, David; Bourgeon, Jean Marc |
| Abstract: | We develop a model in which two insurers and two health care providers compete for a fixed mass of policyholders. Insurers compete in premium and offer coverage against financial consequences of health risk. They have the possibility to sign agreements with providers to establish a health care network. Providers, partially altruistic, are horizontally differentiated with respect to their physical address. They choose the health care quality and compete in price. First, we show that policyholders are better off under a competition between conventional insurance rather than under a competition between integrated insurers (Managed Care Organizations). Second, we reveal that the competition between a conventional insurer and a Managed Care Organization (MCO) leads to a similar equilibrium than the competition between two MCOs characterized by a different objective i.e. private versus mutual. Third, we point out that the ex ante providers' horizontal differentiation leads to an exclusionary equilibrium in which both insurers select one distinct provider. This result is in sharp contrast with frameworks that introduce the concept of option value to model the (ex post) horizontal differentiation between providers. |
| Keywords: | Health care network; horizontal differentiation; health care quality |
| JEL: | I11 L11 L14 L42 |
| Date: | 2010–08–11 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:23112&r=ias |
| By: | David Bardey; Jean-Marc Bourgeon |
| Abstract: | We develop a model in which two insurers and two health care providers compete for a fixed mass of policyholders. Insurers compete in premium and offer coverage against financial consequences of health risk. They have the possibility to sign agreements with providers to establish a health care network. Providers, partially altruistic, are horizontally differentiated with respect to their physical address. They choose the health care quality and compete in price. First, we show that policyholders are better off under a competition between conventional insurance rather than under a competition between integrated insurers (Managed Care Organizations). Second, we reveal that the competition between a conventional insurer and a Managed Care Organization (MCO) leads to a similar equilibrium than the competition between two MCOs characterized by a different objective i.e. private versus mutual. Third, we point out that the ex ante providers' horizontal differentiation leads to an exclusionary equilibrium in which both insurers select one distinct provider. This result is in sharp contrast with frameworks that introduce the concept of option value to model the (ex post) horizontal differentiation between providers. |
| Date: | 2010–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:col:000092:007457&r=ias |
| By: | Krebs, Tom; Scheffel, Martin |
| Abstract: | We develop a tractable macroeconomic model with employment risk and labor market search in order evaluate the effects of labor market reform on unemployment, growth, and welfare. The model has a large number of risk-averse households who can invest in risk-free physical capital and risky human capital. Unemployed households receive unemployment benefits and decide how much search effort to exert. We present a theoretical characterization result that facilitates the computation of equilibria substantially. We calibrate the model to German data and use the calibrated model economy to simulate the macroeconomic effects of the German labor market reforms of 2005 and 2006 (Hartz Reforms). We find that the 2005-reform had large employment effects: the equilibrium unemployment rate has been reduced by approximately 1.1 percentage points from 7.5 to 6.4 percent. Moreover, the drop in unemployment has led to substantial output gains. Finally, employed and short-term unemployed households experienced significant welfare gains, whereas the long-term unemployed have lost in welfare terms. The effects of the 2006-reform are qualitatively similar, but quantitatively much smaller. We also show that the social welfare maximizing replacement rate is lower than the current (post-reform) replacement rate in Germany. However, implementing the optimal unemployment benefit system generates only small welfare gains. -- |
| Keywords: | dynamic general equilibrium,heterogenous agents,human capital,labor market search,unemployment insurance,German labor market reform |
| JEL: | E24 E60 J64 J65 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:10050&r=ias |
| By: | Rosario Romera; Wolfgang Runggaldier |
| Abstract: | A finite horizon insurance model is studied where the risk/reserve process can be controlled by reinsurance and investment in the financial market. Obtaining explicit optimal solutions for the minimizing ruin probability problem is a difficult task. Therefore, we consider an alternative method commonly used in ruin theory, which consists in deriving inequalities that can be used to obtain upper bounds for the ruin probabilities and then choose the control to minimize the bound. We finally specialize our results to the particular, but relevant, case of exponentially distributed claims and compare for this case our bounds with the classical Lundberg bound. |
| Keywords: | Risk process, Reinsurance and investment, Lundberg’s inequality, 91B30, 93E20, 60J28 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:cte:wsrepe:ws103721&r=ias |
| By: | Jessica Vistnes; Alice Zawacki; Kosali Simon; Amy Taylor |
| Abstract: | Even before the current economic downturn, rates of employer-sponsored insurance (ESI) declined substantially, falling six percentage points between 2000 and 2008 for nonelderly Americans. During a previously documented decline in ESI, from 1987 to 1996, the fall was found to be the result of a reduction in enrollment or ‘take-up’ of offered coverage and not a decline in employer offer/eligibility rates. In this paper, we investigate the components of the more recent decline in ESI coverage by firm size, using data from the MEPS-IC, a large nationally representative survey of employers. We examine changes in offer rates, eligibility rates and take-up rates for coverage, and include a new dimension, the availability of and enrollment in dependent coverage. We investigate how these components changed for employers of different sizes and find that declining coverage rates for small firms were due to declines in both offer and take-up rates while declining rates for large firms were due to declining enrollment in offered coverage. We also find a decrease in the availability of dependent coverage at small employers and a shift towards single coverage across employers of all sizes. Understanding the components of the decline in coverage for small and large firms is important for establishing the baseline for observing the effects of the current economic downturn and the implementation of health insurance reform. |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:cen:wpaper:10-23&r=ias |
| By: | Ghesquiere, Francis; Mahul, Olivier |
| Abstract: | This paper has been prepared for policy makers interested in establishing or strengthening financial strategies to increase the financial response capacity of governments of developing countries in the aftermath of natural disasters, while protecting their long-term fiscal balances. It analyzes various aspects of emergency financing, including the types of instruments available, their relative costs and disbursement speeds, and how these can be combined to provide cost-effective financing for the different phases that follow a disaster. The paper explains why governments are usually better served by retaining most of their natural disaster risk while using risk transfer mechanisms to manage the excess volatility of their budgets or access immediate liquidity after a disaster. Finally, it discusses innovative approaches to disaster risk financing and provides examples of strategies that developing countries have implemented in recent years. |
| Keywords: | Debt Markets,Hazard Risk Management,Natural Disasters,Banks&Banking Reform,Insurance&Risk Mitigation |
| Date: | 2010–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:5429&r=ias |
| By: | Llanto, Gilberto M.; Badiola, Jocelyn Alma R. |
| Abstract: | A recent publication of the UN Food and Agricultural Organization (FAO) has highlighted the food insecurity problem facing the globe: food production will have to increase by 70 percent in 2050 to keep up with a global population that is projected to grow from 6 billion to 9 billion. There has to be more investments in agriculture to improve productivity, which will be critical to the goal of achieving food security. There is scope for governments and the private sector cooperation in food production. The paper discusses innovative financing schemes geared to food production and identifies policy gaps, that is, areas where governments could intervene to enhance the workings of the market. |
| Keywords: | Philippines, innovative financing schemes, food insecurity, value chain financing, covariant risks, risk management tools, index-based insurance, warehouse receipts lending, trade finance |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:phd:dpaper:dp_2010-14&r=ias |
| By: | Carpena, Fenella; Cole, Shawn; Shapiro, Jeremy; Zia, Bilal |
| Abstract: | Microfinance, the provision of small individual and business loans, has witnessed dramatic growth, reaching over 150 million borrowers worldwide. Much of its success has been attributed to overcoming the challenges of information asymmetries in uncollateralized lending. Yet, very little is known about the optimal contract structure of such loans -- there is substantial variation across lenders, even within a particular setting. This paper exploits a plausibly exogenous change in the liability structure offered by a microfinance program in India, which shifted from individual to group liability lending. The analysis finds compelling evidence that contract structure matters: for the same borrower, required monthly loan installments are 6 percent less likely to be missed under the group liability setting, relative to individual liability. In addition, compulsory savings deposits are 19 percent less likely to be missed under group liability contracts. |
| Keywords: | Debt Markets,Bankruptcy and Resolution of Financial Distress,Access to Finance,Microfinance,Deposit Insurance |
| Date: | 2010–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:5427&r=ias |