nep-ias New Economics Papers
on Insurance Economics
Issue of 2012‒01‒18
eight papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Health Reform, Health Insurance, and Selection: Estimating Selection into Health Insurance Using the Massachusetts Health Reform By Martin B. Hackmann; Jonathan T. Kolstad; Amanda E. Kowalski
  2. Insurance Demand and Prospect Theory By Ulrich Schmidt
  3. Agricultural insurances based on meteorological indices: realizations, methods and research challenges By Antoine Leblois; Philippe Quirion
  4. Saving and portfolio allocation before and after job loss By Christoph Basten, Andreas Fagereng and Kjetil Telle
  5. Bank competition and stability: cross-country heterogeneity By T. BECK; O. DE JONGHE; G. SCHEPENS
  6. Understanding the Incentives of Commissions Motivated Agents: Theory and Evidence from the Indian Life Insurance Market By Santosh Anagol; Shawn Cole; Shayak Sarkar
  7. A Regulatory approach to financial product advice and distribution By M. Sahoo; Renuka Sane
  8. Trend Shocks, Risk Sharing and Cross-Country Portfolio Holdings By Yavuz Arslan; Gursu Keles; Mustafa Kilinc

  1. By: Martin B. Hackmann (Dept. of Economics, Yale University); Jonathan T. Kolstad (Wharton School, University of Pennsylvania); Amanda E. Kowalski (Cowles Foundation, Yale University)
    Abstract: We implement an empirical test for selection into health insurance using changes in coverage induced by the introduction of mandated health insurance in Massachusetts. Our test examines changes in the cost of the newly insured relative to those who were insured prior to the reform. We find that counties with larger increases in insurance coverage over the reform period face the smallest increase in average hospital costs for the insured population, consistent with adverse selection into insurance before the reform. Additional results, incorporating cross-state variation and data on health measures, provide further evidence for adverse selection.
    Keywords: Adverse selection, Massachusetts, Health reform
    JEL: H51 I18
    Date: 2012–01
  2. By: Ulrich Schmidt
    Abstract: Empirical evidence has shown that people are unwilling to insure rare losses at subsidized premiums and at the same time take-up insurance for moderate risks at highly loaded premiums. This paper explores whether prospect theory, in particular diminishing sensitivity and loss aversion, can accommodate this evidence. A crucial factor for applying prospect theory to insurance problems is the choice of the reference point. We motivate and explore two possible reference points, state-dependent initial wealth and final wealth after buying full insurance. It turns out that particularly the latter reference point seems to provide a realistic explanation of the empirical evidence
    Keywords: insurance demand, prospect theory, flood insurance, diminishing sensitivity, loss aversion
    JEL: D14 D81 G21
    Date: 2012–01
  3. By: Antoine Leblois (CIRED - Centre international de recherches en environnement et en développement - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR8568 - AgroParisTech - ENPC); Philippe Quirion (CIRED - Centre international de recherches en environnement et en développement - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR8568 - AgroParisTech - ENPC, LMD-IPSL - Laboratoire de météorologie dynamique - CNRS : UMR8539)
    Abstract: In many low-income countries, agriculture is mostly rainfed and crop yield depends highly on climatic factors. Furthermore, farmers have little access to traditional crop insurance, which suffers from high information asymmetry and transaction costs. Insurances based on meteorological indices could fill this gap since they do not face such drawbacks. However, a full-scale implementation has been slow so far. In this article, the most advanced projects that have taken place in developing countries using these types of crop insurances are described. Following this, the methodology that has been used to design such projects in order to choose the meteorological index, the indemnity schedule and the insurance premium, is described. Finally the main research issues are discussed. In particular, more research is needed on implementation, assessment of benefits, how to deal with climate change, spatial variability of weather and interactions with other hedging methods.
    Keywords: agriculture; insurance; climatic risk
    Date: 2011–10–06
  4. By: Christoph Basten, Andreas Fagereng and Kjetil Telle (Statistics Norway)
    Abstract: Using administrative panel data from Norway, we investigate the development of household labor income, financial wealth and asset holdings over a nine-year period surrounding job loss. Consistent with a simple theoretical model, the data show precautionary saving and a shift toward safer assets in the years leading up to unemployment, and depletion of savings during unemployment. This suggests that at least some households can foresee and prepare for upcoming unemployment, which indicates that private savings can complement publicly provided unemployment insurance.
    Keywords: unemployment; precautionary saving; consumption smoothing; household portfolios; portfolio allocation; optimal unemployment insurance
    JEL: D12 E21 E24 G11 J65
    Date: 2012–01
    Abstract: This paper documents a large cross-country variation in the relationship between bank competition and stability and explores market, regulatory and institutional features that can explain this heterogeneity. Combining insights from the competition-stability and regulation-stability literatures, we develop a unied framework to assess how regulation, supervision and other institutional factors may make it more likely that the data favor the charter-value paradigm or the risk-shifting paradigm. We show that an increase in competition will have a larger impact on banks’ risk taking incentives in countries with stricter activity restrictions, more homogenous market structures, more generous deposit insurance and more effective systems of credit information sharing.
    Keywords: Competition, Stability, Banking, Herding, Deposit Insurance, Information Sharing, Risk Shifting
    JEL: G21 G28 L51
    Date: 2011–08
  6. By: Santosh Anagol (Wharton School of Business, University of Pennsylvania); Shawn Cole (Harvard Business School, Finance Unit); Shayak Sarkar (Harvard University)
    Abstract: We conduct a series of field experiments to evaluate two competing views of the role of financial service intermediaries in providing product recommendations to potentially uninformed consumers. One view argues intermediaries provide valuable product education, and guide consumers towards suitable products. Consumers understand how commissions affect agents' incentives, and make optimal product choices. The second view argues that intermediaries recommend and sell products that maximize the agents' well-being, with little or no regard for the customer. Audit studies in the Indian life insurance market find evidence supporting the second view: in 60-80% of visits, agents recommend unsuitable (strictly dominated) products that provide high commissions to the agents. Customers who specifically express interest in a suitable product are more likely to receive an appropriate recommendation, though most still receive bad advice. Agents cater to the beliefs of uninformed consumers, even when those beliefs are wrong. We then test how regulation and market structure affect advice. A natural experiment that required agents to describe commissions for a specific product caused agents to shift recommendations to an alternative product, which had even higher commissions but no disclosure requirement. We do find some scope for market discipline to generate debiasing: when auditors express inconsistent beliefs about the product suitable from them, and mention they have received advice from another seller of insurance, they are more likely to receive suitable advice. Agents provide better advice to more sophisticated consumers. Finally, we describe a model in which dominated products survive in equilibrium, even with competition.
    Date: 2012–01
  7. By: M. Sahoo (Indira Gandhi Institute of Development Research); Renuka Sane (Indira Gandhi Institute of Development ResearchInstitute of Economic Growth)
    Abstract: Financial distribution, where the distributor is the agent of both the product provider and the customer has been found to inherently work against the interests of customers, in the form of high service fees and perverse incentives in sales practices. This paper proposes segregation of financial advice from financial distribution. It proposes a Financial Advisers Bill, 2012, to promote the development of a market for advice. The Bill suggests that financial advisers be recognised as professionals and be regulated under a new statutory body called the Institute of Financial Advisers of India. The paper suggests that regulation of distributors continue to remain under the purview of product regulators. It outlines alternative models in which the distribution market may be organised. It also points out that the Ministry of Finance and the Financial Stability and Development Council need to play an active role in co-ordinating the setting of common standards for distribution across all product regulators.
    Keywords: Consumer Protection; distribution regulation; mutual funds; insurance; pensions; investment advice
    JEL: G2 G28 D14 D18
    Date: 2011–12
  8. By: Yavuz Arslan; Gursu Keles; Mustafa Kilinc
    Abstract: This paper analyzes the dynamics of risk premia, real exchange rates and portfolio movements in a two-country, two-good, two-bond model. We use an asymmetric set-up in the model, where one of the countries is emerging and the other one is developed and both countries issue bonds in domestic currency. The emerging country di¤ers from the developed country in that it is subject to trend shocks and it is more risk averse. We find that the trend shocks produce strong wealth e¤ects for the emerging country, and as a result, the terms of trade and the real exchange rate appreciate. Appreciation of the terms of trade breaks the hedging opportunities coming from international trade in goods. In contrast, the appreciation of the real exchange rate generates new hedging opportunities in international financial markets for both countries. Therefore, our model can endogenously generate large portfolio holdings. And di¤erences in the risk aversion across countries lead to net positive foreign asset positions and signi?cant risk premia in the emerging country. Moreover, the relative volatilities and cyclicalities of risk premia and real exchange rates improve significantly and move closer to the observed values in the data and our model can account for the lack of international risk sharing.
    Keywords: Risk sharing, Risk premium, Exchange rates, Trend shocks, Portfolio movements
    JEL: F34 F41 F44 G15
    Date: 2012

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