nep-ias New Economics Papers
on Insurance Economics
Issue of 2011‒12‒19
five papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. The wrong shape of insurance? What cross-sectional distributions tell us about models of consumption-smoothing By Broer, Tobias
  2. Welfare costs of reclassification risk in the health insurance market By Pashchenko, Svetlana; Porapakkarm, Ponpoje
  3. Unemployment insurance and home production By Taskin, Temel
  4. Multidimensional screening in a monopolistic insurance market. By Olivella, Pau; Schroyen, Fred
  5. DYNAMIC MATURITY TRANSFORATION By Anatoli Segura; Javier Suarez

  1. By: Broer, Tobias
    Abstract: This paper shows how two standard models of consumption risk-sharing - self-insurance through borrowing and saving and limited commitment to insurance contracts - replicate similarly well the standard, second-moment measures of insurance observed in US micro-data. A non-parametric analysis, however, reveals strongly contrasting and counterfactual joint distributions of consumption, income and wealth. Method of moments estimation shows how measurement error in consumption eliminates excessive skewness and concentration of consumption growth. Moreover, counterfactual non-linearities disappear at high estimated risk-aversion under self-insurance, but are a robust feature of limited commitment. Its "shape of insurance" thus argues strongly in favour of the self-insurance model.
    Keywords: Limited Commitment; Risk Sharing; Wealth and Consumption Distribution
    JEL: D31 D52 E21 E44
    Date: 2011–12
  2. By: Pashchenko, Svetlana (Uppsala Center for Fiscal Studies); Porapakkarm, Ponpoje (University of Macau)
    Abstract: One of the major problems of the U.S. health insurance market is that it leaves individuals exposed to reclassification risk. Reclassification risk arises because the health conditions of individuals evolve over time, while a typical health insurance contract only lasts for one year. A change in the health status can lead to a significant change in the health insurance premium. We study how costly this reclassification risk is for the welfare of consumers. More specifically, we use a general equilibrium model to quantify the implications of introducing guaranteed renewable contracts into the economy calibrated to replicate the key features of the health insurance system in the U.S. Guaranteed renewable contracts are private insurance contracts that can provide protection against reclassification risk even in the absence of consumer commitment or government intervention. We find that though guaranteed renewable contracts provide a good insurance against reclassification risk, the welfare effects from introducing this type of contracts are small. In other words, the presence of reclassification risk does not impose large welfare losses on consumers. This happens because some institutional features in the current U.S. system substitute for the missing explicit contracts that insure reclassification risk. In particular, a good protection against reclassification risk is provided through employer-sponsored health insurance and government means-tested transfers.
    Keywords: health insurance; reclassification risk; dynamic insurance; guaranteed renewable contracts; general equilibrium
    JEL: D52 D58 D91 G22 I11
    Date: 2011–12–12
  3. By: Taskin, Temel
    Abstract: In this paper, we incorporate home production into a quantitative model of unemployment and show that realistic levels of home production have a significant impact on the optimal unemployment insurance rate. Motivated by recently documented empirical facts, we augment an incomplete markets model of unemployment with a home production technology, which allows unemployed workers to use their extra non-market time as partial insurance against the drop in income due to unemployment. In the benchmark model, we find that the optimal replacement rate in the presence of home production is roughly 40% of wages, which is 40% lower than the no home production model’s optimal replacement rate of 65%. The 40% optimal rate is also close to the estimated rate in practice. The fact that home production makes a significant difference in the optimal unemployment insurance rate is robust to a variety of parameterizations and alternative model environments.
    Keywords: Unemployment insurance; home production; incomplete markets; self-insurance
    JEL: D13 J65 E21
    Date: 2011–08–01
  4. By: Olivella, Pau (Universitat Autonóma de Barcelona); Schroyen, Fred (Dept. of Economics, Norwegian School of Economics and Business Administration)
    Abstract: In this paper, we consider a population of ndividuals who differ in two dimensions: their risk type (expected loss) and their risk aversion. We solve for the profit maximizing menu of contracts that a monopolistic insurer puts out on the market. First, we …nd that it is never optimal to fully separate all the types. Second, if heterogeneity in risk aversion is sufficiently high, then some high-risk individuals (the risk-tolerant ones) will obtain lower coverage than some low-risk individuals (the risk-averse ones). Third, we show that when the average man and woman differ only in risk aversion, gender discrimination may lead to a Pareto improvement.
    Keywords: insurance markets; asymmetric information; screening; gender discrimination; positive correlation test.
    JEL: D82 G22
    Date: 2011–11–02
  5. By: Anatoli Segura (CEMFI, Centro de Estudios Monetarios y Financieros); Javier Suarez (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: We develop an infinite horizon equilibrium model in which banks finance long term assets with non-tradable debt. Banks choose the amount of debt and its maturity taking into account investors’ preference for short maturities (which better accommodate their preference shocks) and the risk of systemic liquidity crises (during which refinancing is especially expensive). Unregulated debt maturities are inefficiently short due to pecuniary externalities in the market for funds during crises and their interaction with banks’ refinancing constraints. We show the possibility of improving welfare by means of limits to debt maturity, Pigovian taxes, and private and public liquidity insurance schemes.
    Keywords: Liquidity premium, maturity transformation, systemic crises, liquidity regulation, pecuniary externalities, liquidity insurance.
    JEL: G01 G21 G32
    Date: 2011–11

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