nep-ias New Economics Papers
on Insurance Economics
Issue of 2011‒11‒01
ten papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Yield Protection Crop Insurance By Edwards, William M.
  2. Hail Damage Can Affect Crop Insurance Yields By Edwards, William M.
  3. Revenue Insurance for Livestock Producers By Edwards, William M.
  4. Firms’ moral hazard in sickness absences By René Böheim; Thomas Leoni
  5. Reinsuring the Poor: Group Microinsurance Design and Costly State Verification By Daniel J. Clarke
  6. Dynamic optimal insurance and lack of commitment By Alexander K. Karaivanov; Fernando M. Martin
  7. Exact and asymptotic results for insurance risk models with surplus-dependent premiums By Hansj\"org Albrecher; Corina Constantinescu; Zbigniew Palmowski; Georg Regensburger; Markus Rosenkranz
  8. A Theory of Rational Demand for Index Insurance By Daniel J. Clarke
  9. Moral hazard and lack of commitment in dynamic economies By Alexander K. Karaivanov; Fernando M. Martin
  10. Role Reversal in Global Finance By Prasad, Eswar

  1. By: Edwards, William M.
    Date: 2011–10–21
  2. By: Edwards, William M.
    Date: 2011–10–21
  3. By: Edwards, William M.
    Date: 2011–10–24
  4. By: René Böheim (Department of Economics, Johannes Kepler University Linz, Austria); Thomas Leoni (Österreichisches Institut für Wirtschaftsforschung (WIFO) (Austrian Institute of Economic Research))
    Abstract: Sick workers in many countries receive sick pay during their illness- related absences from the workplace. In several countries, the social security system insures firms against their workers’ sickness absences. However, this insurance may create moral hazard problems for firms, leading to the inefficient monitoring of absences or to an underinvestment in their prevention. In the present paper, we investigate firms’ moral hazard problems in sickness absences by analyzing a legislative change that took place in Austria in 2000. In September 2000, an insurance fund that refunded firms for the costs of their blue-collar workers’ sickness absences was abolished (firms did not receive a similar refund for their white-collar workers’ sickness absences). Before that time, small firms were fully refunded for the wage costs of blue- collar workers’ sickness absences. Large firms, by contrast, were refunded only 70% of the wages paid to sick blue-collar workers. Using a difference-in-differences-in-differences approach, we estimate the causal impact of refunding firms for their workers’ sickness absences. Our results indicate that the incidences of blue-collar workers’ sicknesses dropped by approximately 8% and sickness absences were almost 11% shorter following the removal of the refund. Several robustness checks confirm these results.
    Keywords: absenteeism, moral hazard, sickness insurance
    JEL: J22 I38
    Date: 2011–09
  5. By: Daniel J. Clarke
    Abstract: This paper analyses collusion-proof multilateral insurance contracts between a risk neutral insurer and multiple risk averse agents in an environment of asymmetric costly state verification. Optimal contracts involve the group of agents pooling uncertainty and the insurer acting as reinsurer to the group, auditing and paying a claim only when the group or a sub-group has incurred a large enough aggregate loss. We interpret our models as providing support for insurance contracts between insurance providers, such as microinsurers or governments, and groups of individuals who have access to cheap information about each other, such as extended families or members of close-knit communities. Such formal contracts complement, and could even crowd in, cheap nonmarket insurance arrangements.
    Keywords: Microinsurance, Group insurance, Costly state verification, Mechanism design
    JEL: D14 D82 G22 O16
    Date: 2011
  6. By: Alexander K. Karaivanov; Fernando M. Martin
    Abstract: This paper analyzes dynamic risk-sharing contracts between profit-maximizing insurers and risk-averse agents who face idiosyncratic income uncertainty and may self-insure through savings. We study Markov-perfect insurance contracts in which neither party can commit beyond the current period. We show that the limited commitment assumption on the insurer's side is only restrictive when he is endowed with a rate of return advantage and the agent has sufficiently large initial assets. In such a case, the consumption profile is distorted relative to the first-best. In a Markov-perfect equilibrium, the agent's asset holdings determine his period outside option and are thus, an integral part of insurance contracts, unlike the case when the insurer can commit. Whether the parties can contract on the agent's savings decisions or not affects the agreement as long as the insurer makes positive profits.
    Keywords: Contracts ; Risk
    Date: 2011
  7. By: Hansj\"org Albrecher; Corina Constantinescu; Zbigniew Palmowski; Georg Regensburger; Markus Rosenkranz
    Abstract: In this paper we develop a symbolic technique to obtain asymptotic expressions for ruin probabilities and discounted penalty functions in renewal insurance risk models when the premium income depends on the present surplus of the insurance portfolio. The analysis is based on boundary problems for linear ordinary differential equations with variable coefficients. The algebraic structure of the Green's operators allows us to develop an intuitive way of tackling the asymptotic behavior of the solutions, leading to exponential-type expansions and Cram\'er-type asymptotics. Furthermore, we obtain closed-form solutions for more specific cases of premium functions in the compound Poisson risk model.
    Date: 2011–10
  8. By: Daniel J. Clarke
    Abstract: Rational demand for hedging products, where there is a risk of contractual nonperformance, is fundamentally different to that for indemnity insurance. In particular, optimal demand is zero for infinitely risk averse individuals, and is nonmonotonic in risk aversion, wealth and price. For commonly used families of utility functions, demand is hump-shaped in the degree of risk aversion when the price is actuarially unfair, first increasing then decreasing, and either decreasing or decreasing-increasing-decreasing in risk aversion when the price is actuarially favourable. For a given belief, upper bound are derived for the optimal demand from risk averse and decreasing absolute risk averse decision makers. The apparently low level of demand for consumer hedging instruments, particularly from the most risk averse, is explained as a rational response to deadweight costs and the risk of countractual nonperformance. A numerical example is presented for maize in a developing county which suggests that some unsubsidised weather derivatives, currently being designed for and marketed to poor farmers, may in fact be poor products, in that objective financial advice would recommend low or zero purchase from all risk averse expected utility maximisers.
    Keywords: Index insurance, Derivative, Basis risk, Hedge, Microinsurance
    JEL: D14 D81 G20 O16
    Date: 2011
  9. By: Alexander K. Karaivanov; Fernando M. Martin
    Abstract: We revisit the role of limited commitment in a dynamic risk-sharing setting with private information. We show that a Markov-perfect equilibrium, in which agent and insurer cannot commit beyond the current period, and an infinitely-long contract to which only the insurer can commit, implement identical consumption, effort and welfare outcomes. Unlike contracts with full commitment by the insurer, Markov-perfect contracts feature non-trivial and determinate asset dynamics. Numerically, we show that Markov-perfect contracts provide sizable insurance, especially at low asset levels, and are able to explain a significant part of wealth inequality beyond what can be explained by self-insurance. The welfare gains from resolving the commitment friction are larger than those from resolving the moral hazard problem at low asset levels, while the opposite holds for high asset levels.
    Keywords: Moral hazard ; Risk
    Date: 2011
  10. By: Prasad, Eswar (Cornell University)
    Abstract: I document that emerging markets have cast off their "original sin" – their external liabilities are no longer dominated by foreign-currency debt and have instead shifted sharply towards direct investment and portfolio equity. Their external assets are increasingly concentrated in foreign exchange reserves held in advanced economy government bonds. Given the enormous and rising public debt burdens of reserve currency economies, this means that the long-term risk on emerging markets' external balance sheets is shifting to the asset side. However, emerging markets continue to look for more insurance against balance of payments crises, even as self-insurance through reserve accumulation itself becomes riskier. I propose a mechanism for global liquidity insurance that would meet emerging markets' demand for insurance with fewer domestic policy distortions while facilitating a quicker adjustment of global imbalances. I also argue that emerging markets have become less dependent on foreign finance and more resilient to capital flow volatility. The main risk that increasing financial openness poses for these economies is that capital flows exacerbate vulnerabilities arising from weak domestic policies and institutions.
    Keywords: emerging markets, international investment positions, structure of external assets and liabilities, foreign exchange reserves, global liquidity insurance
    JEL: F3 F4
    Date: 2011–10

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