nep-ias New Economics Papers
on Insurance Economics
Issue of 2010‒11‒06
six papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Quantitative Analysis of Health Insurance Reform: Separating Community Rating from Income Redistribution By Pashchenko, Svetlana; Porapakkarm, Ponpoje
  2. Microinsurance : a case study of the Indian rainfall index insurance market By Gine, Xavier; Menand, Lev; Townsend, Robert; Vickery, James
  3. Optimal investment policy and dividend payment strategy in an insurance company By Pablo Azcue; Nora Muler
  4. The Chrysler effect : the impact of the Chrysler bailout on borrowing costs By Anginer, Deniz; Warburton, A. Joseph
  5. Do tropical typhoons smash community ties? Theory and evidence from Vietnam By Yanos Zylberberg
  6. Consumption risk, technology adoption and poverty traps: evidence from Ethiopia.. By Dercon, Stefan; Christiaensen, Luc

  1. By: Pashchenko, Svetlana; Porapakkarm, Ponpoje
    Abstract: Two key components of the upcoming health reform are a reorganization of the individual health insurance market and an increase in income redistribution in the economy. Which component contributes more to the welfare outcome of the reform? We address this question by constructing a general equilibrium life cycle model that incorporates both medical expenses and labor income risks. We replicate the key features of the current health insurance system in the U.S. and calibrate the model using the Medical Expenditures Panel Survey dataset. We find that the reform decreases the number of uninsured more than four times. It also brings significant welfare gains equivalent to almost one percent of the annual consumption. However, these welfare gains mostly come from the redistributive measures embedded in the reform. If the reform only reorganizes the individual market, introduces individual mandates but does not include any income-based transfers, the welfare gains are much smaller. This result is mostly driven by the fact that most uninsured people have low income. High burdens of health insurance premiums for this group are relieved disproportionately more by income-based measures than by the new rules in the individual market.
    Keywords: health insurance; health reform; risk sharing; general equilibrium
    JEL: E65 D91 D52 E21 I10
    Date: 2010–10–23
  2. By: Gine, Xavier; Menand, Lev; Townsend, Robert; Vickery, James
    Abstract: Rainfall index insurance provides a payout based on measured local rainfall during key phases of the agricultural season, and in principle can help rural households diversify a key source of idiosyncratic risk. This paper describes basic features of rainfall insurance contracts offered in India since 2003, and documents stylized facts about market demand and the distribution of payouts. The authors summarize the results of previous research on this market, which provides evidence that price, liquidity constraints, and trust all present significant barriers to increased take-up. They also discuss potential future prospects for rainfall insurance and other index insurance products.
    Keywords: Climate Change Economics,Debt Markets,Financial Literacy,Emerging Markets,Banks&Banking Reform
    Date: 2010–10–01
  3. By: Pablo Azcue; Nora Muler
    Abstract: We consider in this paper the optimal dividend problem for an insurance company whose uncontrolled reserve process evolves as a classical Cram\'{e}r--Lundberg process. The firm has the option of investing part of the surplus in a Black--Scholes financial market. The objective is to find a strategy consisting of both investment and dividend payment policies which maximizes the cumulative expected discounted dividend pay-outs until the time of bankruptcy. We show that the optimal value function is the smallest viscosity solution of the associated second-order integro-differential Hamilton--Jacobi--Bellman equation. We study the regularity of the optimal value function. We show that the optimal dividend payment strategy has a band structure. We find a method to construct a candidate solution and obtain a verification result to check optimality. Finally, we give an example where the optimal dividend strategy is not barrier and the optimal value function is not twice continuously differentiable.
    Date: 2010–10
  4. By: Anginer, Deniz; Warburton, A. Joseph
    Abstract: Did the U.S. government's intervention in the Chrysler reorganization overturn bankruptcy law? Critics argue that the government-sponsored reorganization impermissibly elevated claims of the auto union over those of Chrysler's other creditors. If the critics are correct, businesses might suffer an increase in their cost of debt because creditors will perceive a new risk, that organized labor might leap-frog them in bankruptcy. This paper examines the financial market wherethis effect would be most detectible, the market for bonds of highly unionized companies. The authors find no evidence of a negative reaction to the Chrysler bailout by bondholders of unionized firms. They thus reject the notion that investors perceived a distortion of bankruptcy priorities. To the contrary, bondholders of unionized firms reacted positively to the Chrysler bailout. This evidence suggests that bondholders interpreted the Chrysler bailout as a signal that the government will stand behind unionized firms. The results are consistent with the notion that too-big-to-fail government policies generate moral hazard in the credit markets.
    Keywords: Debt Markets,Bankruptcy and Resolution of Financial Distress,Emerging Markets,Deposit Insurance,Access to Finance
    Date: 2010–10–01
  5. By: Yanos Zylberberg
    Abstract: Natural disasters trigger large inequalities between affected households and the rest of the community. The extent to which villages compensate for these shocks allegedly depends on the pressure imposed by the group of needy families. I model two major threats to redistribution - (i) the emergence of a coalition of winners willing to shy away from redistributing to their peers and (ii) the initial fractionalization of the community. Matching data on a wave of tropical typhoons with a panel household survey in Vietnam, I find less redistribution in villages where needy families are in the minority. Whereas 17 cents on average are covered through informal transfers for a relative income loss of $1, access to liquidity falls below 10 cents when heavily affected households are isolated in the commune. In line with the existing literature, minorities participate less in the resources reallocation. Despite these barriers to full insurance, risk-sharing through informal transfers is still economically significant. This result is related with the findings that communities having suffered important trauma show greater signs of resilience and cohesiveness.
    Date: 2010
  6. By: Dercon, Stefan; Christiaensen, Luc
    Abstract: Much has been written on the determinants of input and technology adoption in agriculture, with issues such as input availability, knowledge and education, risk preferences, profitability, and credit constraints receiving much attention. This paper focuses on a factor that has been less well documented: the differential ability of households to take on risky production technologies for fear of the welfare consequences if shocks result in poor harvests. Building on an explicit model, this is explored in panel data for Ethiopia. Historical rainfall distributions are used to identify the counterfactual consumption risk. Controlling for unobserved household and time-varying village characteristics, it emerges that not just exante credit constraints, but also the possibly low consumption outcomes when harvests fail, discourage the application of fertiliser. The lack of insurance causes inefficiency in production choices.
    JEL: O12 Q12 O33 Q16
    Date: 2010

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