nep-ias New Economics Papers
on Insurance Economics
Issue of 2011‒06‒11
four papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Investment risk taking by institutional investors By Janko Gorter; Jacob A. Bikker
  2. Long Dated Life Insurance and Pension Contracts By Aase, Knut K.
  3. The Efficiency of a Group-Specific Mandated Benefit Revisited: The Effect of Infertility Mandates By Joanna N. Lahey
  4. Informal Insurance with Endogenous Group Size By Stéphanie Weynants

  1. By: Janko Gorter; Jacob A. Bikker
    Abstract: This paper is the first that formally compares investment risk taking by pension funds and insurance firms. Using a unique and extended dataset that covers the volatile investment period 1995-2009, we find that, in the Netherlands, insurers take substantially less investment risk than pension funds, even though a market risk capital charge for insurers is yet absent. This result can be explained from financial distress costs, which only insurers face. We also find that institutional investors’ risk taking is determined by their risk bearing capacity, where this risk bearing capacity depends on capital, size, reinsurance, underwriting risk and human and financial wealth per pension plan participant. Finally, and in line with the ownership structure hypothesis, stock insurers are found to take significantly more investment risk than mutual insurers.
    Keywords: Portfolio Choice; Insurance Companies; Pension Funds; Ownership Structure
    JEL: G11 G22 G23 G32
    Date: 2011–04
  2. By: Aase, Knut K. (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    Abstract: We discuss the "life cycle model" by first introducing a credit market with only biometric risk, and then market risk is introduced via risky securities. This framework enables us to find optimal pension plans and life insurance contracts where the benefits are state dependent. We compare these solutions both to the ones of standard actuarial theory, and to policies offered in practice. Two related portfolio choice puzzles are discussed in the light of recent research, one is the horizon problem, the other is related to the aggregate market data of the last century, where theory and practice diverge. Finally we present some comments on longevity risk and cohort risk.
    Keywords: The life cycle model; pension insurance; optimal life insurance; longevity risk; the horizon problem; equity premium puzzle
    JEL: G00
    Date: 2011–05–30
  3. By: Joanna N. Lahey (Texas A & M University)
    Abstract: This paper examines the labor market effects of state health insurance mandates that increase the cost of employing a demographically identifiable group. State mandates requiring that health insurance plans cover infertility treatment raise the relative cost of insuring older women of child-bearing age. Empirically, wages in this group are unaffected, but their total labor input decreases. Workers do not value infertility mandates at cost, and so will not take wage cuts in exchange, leading employers to decrease their demand for this affected and identifiable group. Differences in the empirical effects of mandates found in the literature are explained by a model including variations in the elasticity of demand, moral hazard, ability to identify a group, and adverse selection.
    Keywords: labor supply, infertility, health insurance, health insurance mandates
    JEL: I18 J23 J13
    Date: 2011–05
  4. By: Stéphanie Weynants (Earth and Life Institute, Université Catholique de Louvain)
    Abstract: We present a theory of endogenous formation of insurance groups which combines heterogeneity on agents? risk aversion under asymmetric information and lack of enforceability of contracts. Income sharing inside the group is decided by majority voting and the size of the group adjusts to this decision through participation constraints. At equilibrium, all group members agree on the same imperfect level of income sharing, which yields a constrained-e¢ cient equilibrium. Comparative statics on the risk faced by the community provide interesting results. A mean preserving spread of income implies more income sharing and a larger group size. New members, and possibly even old members may be better o¤, while non-members are worse-o¤. These results have relevant policy implications.
    Date: 2011–05

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