nep-ias New Economics Papers
on Insurance Economics
Issue of 2011‒03‒19
ten papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Captive insurance companies and the management of non-conventional corporate risks By Lesourd, Jean-Baptiste; Schilizzi, Steven
  2. The dependence of health insurance availability on years left before Medicare By Ismail Saglam; Esra Eren Bayindir; Mehmet Yigit Gurdal
  3. Time to Revisit Crop Insurance Premium Subsidies? By Bruce A. Babcock
  4. Pricing of Drugs with Heterogeneous Health Insurance Coverage By Paul Missios; Ida Ferrara
  5. Employer-Provided Health Insurance and Labor Supply of Married Women By Merve Cebi
  6. Optimal Unemployment Insurance: How Important is the Demand Side? By Rune Vejlin
  7. Income Shocks and Household Risk-Coping Strategies: Evidence from Rural Vietnam By Carol Newman; Fiona Wainwright
  8. Income insurance and the determinants of income insurance via foreign asset revenues and foreign liability payments By Balli, Faruk; Basher, Syed Abul; Ozer-Balli, Hatice
  9. Statistiques des valeurs extrêmes dans le cas de lois discrètes By Borchani, Anis
  10. Understanding the Dynamics of Product Diversification on Microfinance Performance Outcomes: A Case Study in Barbados By Koen Rossel-Cambier

  1. By: Lesourd, Jean-Baptiste; Schilizzi, Steven
    Abstract: We examine under what conditions setting up a captive insurance company with reinsurance is an optimal solution for risk-averse firms when the insured firm, the insurer and the reinsurer do not know the probability distribution of some risks, and have conflicting estimates of this distribution.
    Keywords: corporate insurance, reinsurance, uncertainty, ambiguity, non-conventional risks, captive insurance companies, Risk and Uncertainty, D81, G22, Q2,
    Date: 2011–02–22
  2. By: Ismail Saglam (Department of Economics, TOBB University of Economics and Technology, Ankara); Esra Eren Bayindir; Mehmet Yigit Gurdal
    Abstract: We study the dependence of health insurance availability of near-elderly inpatients in the United States with respect to their ages. We show that the likelihood that near-elderly inpatients are uninsured continuously declines until the early ages of 60 but the trend is reversed for the last few years preceding Medicare coverage. In addition, compared to those covered by Medicaid or private insurance, the uninsured patients are more likely to be admitted into hospitals as emergency cases.
    Keywords: Health insurance; Medicare
    JEL: I11
    Date: 2011–03
  3. By: Bruce A. Babcock (Center for Agricultural and Rural Development (CARD))
    Abstract: In 2000, Congress decided to move away from a fixed-dollar-per-acre premium subsidy to a subsidy percentage that applies to any crop insurance product offered. This change reduced the cost to farmers of moving from yield insurance to revenue insurance by more than 50%. In addition, Congress decided to pay a large proportion of the additional premium for higher coverage levels, paying for more than half the cost of moving from the 65% to the 75% coverage level and about 25% of the additional cost of moving from 75% to 80% coverage. Not surprisingly, farmers responded to these lower costs by moving to more expensive revenue insurance policies and higher coverage levels. This response is part of the reason why the Congressional Budget Office projects that the cost of the crop insurance program exceeds $7 billion per year. The changes to the premium subsidy structure were made in an era of projected budget surpluses. Does this change still make sense now that federal deficits and overall debt levels are so high? How much could spending be reduced if the premium subsidy structure were changed back? This policy briefing paper provides insights into these questions. Congress has demonstrated repeatedly that it wants a large proportion of acres to be enrolled in the crop insurance program. The proven way to expand insured acreage is to subsidize farmers’ crop insurance premiums with either a “lump sum†subsidy that gives farmers a set amount to participate in the program or a proportional subsidy that pays a set fraction of a farmer’s premium. The added benefit to the crop insurance industry of a proportional subsidy is that it incentivizes farmers to buy higher coverage levels and more expensive revenue insurance. If Congress had decided in 2010 to move away from the current system of proportional subsidies to the amount of premium subsidy available for yield insurance, then the 2011 projected cost of the crop insurance program would have declined by about $1.4 billion from the direct savings in premium subsidies, and by another $300 million in lower underwriting gains as farmers moved away from expensive revenue insurance. Further savings would accrue if premium subsidies were fixed at a set dollar amount because this would remove the incentive for farmers to buy more crop insurance than they would buy if they were spending their own money rather than taxpayer dollars. Total savings approaching $2 billion would likely accrue by simply returning to the premium structure that we had before the Agricultural Risk Protection Act. Farmers would respond to this policy change by buying less revenue insurance and lower coverage levels. This would also reduce their out-of-pocket expenditures. Farm groups would undoubtedly oppose this change, but such opposition would be tempered if the choice were between this change and a reduction in a more valued program, such as direct payments. Underwriting gains to crop insurance companies would decline significantly. Both companies and agents would have the most to lose from this policy change so they would be expected to oppose it strongly. But in an era of tight budgets, the tax dollars spent on subsidies that incentivize farmers to buy more and different types of crop insurance than they would buy with their own dollars could fall under intense scrutiny.
    Keywords: crop insurance, premium subsidies, program costs, revenue insurance.
    Date: 2011–03
  4. By: Paul Missios (Department of Economics, Ryerson University, Toronto, Canada); Ida Ferrara (DEpartment of Economics, York University, Toronto, Canada)
    Abstract: In this paper, we examine the role of insurance coverage in explaining the generic competition paradox in a two-stage game involving a single producer of brand-name drugs and n quantity-competing producers of generic drugs. Independently of brand loyalty, which some studies rely upon to explain the paradox, we show that heterogene- ity in insurance coverage may result in higher prices of brand-name drugs following generic entry. With market segmentation based on insurance coverage present in both the pre- and post-entry stages, the paradox can arise when the two types of drugs are highly substitutable and the market is quite pro?table but does not have to arise when the two types of drugs are highly di¤erentiated. However, with market segmentation occuring only after generic entry, the paradox can arise when the two types of drugs are weakly substituables, provided, however, that the industry is not very pro?table. In both cases, that is, when market segmentation is present in the pre-entry stage and when it is not, the paradox becomes more likely to arise as the market expands and/or insurance companies decrease deductables applied on the purchase of generic drugs.
    Keywords: brand-name pricing; generic entry; generic competition paradox; health insurance; health economics.
    JEL: L11 L13 I12
    Date: 2010–10
  5. By: Merve Cebi (University of Massachusetts - Dartmouth; W.E. Upjohn Institute for Employment Research)
    Abstract: This work presents new evidence on the effect of husbands’ health insurance on wives’ labor supply. Previous cross-sectional studies have estimated a significant negative effect of spousal coverage on wives’ labor supply. However, these estimates potentially suffer from bias due to the simultaneity of wives’ labor supply and the health insurance status of their husbands. This paper attempts to obtain consistent estimates by using several panel data methods. In particular, the likely correlation between unobserved personal characteristics of husbands and wives—such as preferences for work—and potential joint job choice decisions can be controlled by using panel data on intact marriages. The findings, using data from the National Longitudinal Survey of Youth and the Current Population Survey, suggest that the negative effect of spousal coverage on labor supply found in cross-sections results mainly from spousal sorting and selection. Once unobserved heterogeneity is controlled for, a relatively smaller estimated effect of spousal coverage on wives’ labor supply remains.
    Keywords: Health insurance, Labor supply, Marriage, Panel data
    JEL: J22 J32 I18
    Date: 2011–03
  6. By: Rune Vejlin (School of Economics and Management, Aarhus University, Denmark)
    Abstract: I develop and simulate an equilibrium model of search with endogenous savings and search intensity. The wage offer distribution is endogenized by firms making vacancy and entry choices. This allows me to conduct a counterfactual analysis of the optimal unemployment insurance (UI) level. The provision of UI is motivated by the worker's inability to perfectly insure against income shocks, but at the same time UI introduces a distortion to the level of search intensity of the worker and vacancy intensity of firms. I find that equilibrium effects are important to take into account. Making policy from a partial model can introduce large welfare loses. It is also shown that different kinds of taxes have different implications on welfare.
    Keywords: Equilibrium Search Model, Optimal Unemployment Insurance, Endogenous Saving
    JEL: D3 D9 E2 E61 J6
    Date: 2011–03–11
  7. By: Carol Newman (Institute for International Integration Studies, Trinity College Dublin; Department of Economics, Trinity College Dublin); Fiona Wainwright (Department of Economics, Trinity College Dublin)
    Abstract: This paper considers the various strategies rural households employ to avoid consumption shortfalls caused by realizations of adverse income shocks. First, we develop an ex post theoretical model within an inter-temporal utility maximizing framework which we use to explain households’ decisions to insure against idiosyncratic risk and save to protect against uninsurable spatially covariant risk. In the theoretical model we show that the latter can take a variety of different asset forms depending on the absolute level of risk aversion of the household and the variability in asset returns. Second, using household level panel data from Vietnam we test the extent to which households’ smooth consumption over time and how this depends on the presence of insurance and saving instruments. Third, we consider savings and liquid asset holdings as a form of self-insurance or precautionary savings against spatially covariant shocks. Overall, our results suggest that households deplete their stock of total liquid assets in the event of exposure to both exogenous and idiosyncratic income shocks. The ability of households to cope is also dependent on their receipt of public and private transfers in the event of an exogenous natural shock with insurance claims serving to alleviate the depletion of livestock holdings in the event of insurable idiosyncratic income shocks. These results are particularly pronounced for low and middle wealth groups.
    Keywords: Insurance, precautionary savings, risk-coping, income shocks
    JEL: D14 D91 O12 O16
    Date: 2011–02
  8. By: Balli, Faruk; Basher, Syed Abul; Ozer-Balli, Hatice
    Abstract: We document that the net factor income smoothing channel in OECD countries is primarily driven by net financial asset income, while the other two sub-components (net compensation of employees, net taxes on imports) turn out to be ineffective. Once factor income inflows are distinguished from outflows, empirical evidence suggests a non-significant effect of inflows in terms of income smoothing as opposed to a positive and significant role of factor income outflows (18 percent for the EMU and 16 percent for the EU). Factor income outflows also appear robust with respect to positive output shocks, while neither factor income inflows nor factor income outflows provide insurance against negative output shocks. In terms of the determinants of income smoothing, results indicate that an increase in foreign equity and debt liabilities positively affect the extent of smoothing via factor income outflows. Whereas, contrary to the current literature, an increase in foreign assets holding does not have a positive impact on smoothing via factor income inflows. The tendency of European investors' in allocating a sizeable portion of their assets within the Euro zone is shown to undermine income smoothing.
    Keywords: Factor income flows; Consumption smoothing; Income smoothing; International portfolio diversification.
    JEL: F36
    Date: 2011–02–13
  9. By: Borchani, Anis (ESSAI (Ecole Supérieure de la Statistique et de l’Analyse de l’Informatio), Tunis)
    Abstract: We propose a method to generate a warning system for the early detection of time clusters in discrete time series. Two approaches are developed, one using an approximation of the return period of an extreme event, independently of the nature of the data, the other using an estimation of the return period via standard EVT tools after a smoothing of our discrete data into continuous ones. This method allows us to define a surveillance and prediction system which is applied to finance and public health surveillance
    Keywords: applications in insurance and finance; clusters; epidemiology; Extreme Value Theory; extreme quantile; outbreak detection; return level; return period; surveillance
    JEL: C22 I10
    Date: 2010–12
  10. By: Koen Rossel-Cambier
    Abstract: This paper aims at gaining deeper understanding of the possible effects of combined microfinance (CMF) on social and economic performance outcomes. By means of a case-study on the City of Bridgetown (COB), one of the leading credit unions in Barbados, it explores the possible limits, challenges and economies of scope of CMF. This case-study suggests that CMF, especially the combination credit-savings, may enhance the cost-efficiency of loan delivery and that it can generate economies of scope for marketing purposes. Savings is at the heart of the growth strategy of the credit union and has contributed to its current large breadth of outreach. The paper observes that more female than male clients participate in insurance schemes, highlighting gender differences. The case-study suggests that CMF can also lead to a number of combined and additional costs and financial risks, which need to be taken into account. The nature of product diversification can lead to additional access barriers for unbankable clients, especially related to financial costs and information asymmetry.
    Keywords: microfinance; combined microfinance; microinsurance; microcredit; microsavings; poverty; social inclusion; Caribbean
    JEL: C12 G21 G22 L31 O54
    Date: 2011–03

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