nep-ias New Economics Papers
on Insurance Economics
Issue of 2012‒01‒25
four 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. Weather insurance design with optimal hedging effectiveness By Kapphan, Ines
  3. Is the Insurance Cost-of-Capital Fair? By Mathieu Gatumel
  4. Adaptation to climate change, Vulnerability and Micro- Insurance Business: A Study on Forest Dependent Communities in Drought prone areas of West Bengal, India By Jyotish Prakash Basu

  1. By: Martin B. Hackmann; Jonathan T. Kolstad; Amanda E. Kowalski
    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.
    JEL: H51 I18
    Date: 2012–01
  2. By: Kapphan, Ines
    Abstract: I construct index-based weather insurance contracts with optimal hedging effectiveness for the insured or maximal profits for the insurer. In contrast to earlier work, I refrain from imposing functional form assumptions on the stochastic relationship between weather and yield and from restricting attention to (piecewise) linear contracts. Instead, I derive the shape of the optimal weather insurance contracts empirically by non-parametrically estimating yield distributions conditional on weather. I find that the optimal pay-off structure is non-linear for the entire range of weather realizations. I measure risk reduction of optimal weather insurance contracts for different weather indices and levels of risk aversion. Considering profit-maximizing contracts, I find that at modest levels of risk aversion (coefficient of relative risk aversion around 2), a loading factor of 10% of the fair premium is possible such that the insurance contract remains attractive for the insured. With higher levels of risk aversion, loading of more than 50% becomes possible.
    Keywords: agricultural insurance; optimal insurance design; weather derivatives; weather risk; hedging effectiveness; loading of premium
    JEL: Q1 D81
    Date: 2011–06–01
  3. By: Mathieu Gatumel (CERAG - Centre d'études et de recherches appliquées à la gestion - CNRS : UMR5820 - Université Pierre Mendès-France - Grenoble II)
    Abstract: This paper aims at presenting the insurance cost-of-capital com- putation issue. It highlights two methodologies introduced by Chief Risk Of- ficer Forum (2008) to perform the cost-of-capital rate and which more or less justify the risk premium adopted by supervisory authorities. These strategies are based either on market return of insurance companies or on the modelling of insurance business profit and loss. We estimate a cost-of-capital rate corre- sponding to these basic methodologies and point out benefits and drawbacks of each method. We show that the risk premium adopted by the supervisory authorities is inside the interval confidence given either by market data or by the modelling : thus it would correspond to a fair cost-of-capital rate. In addi- tion to that we discuss the fact that this rate is quite low and allow to adopt a relative conservative strategy.
    Keywords: insurance; cost-of-capital; computation issue;
    Date: 2011
  4. By: Jyotish Prakash Basu (Associate Professor& Head, Dept. of Economics, West Bengal State University, Email:
    Abstract: There are two main responses to climate change. One is adaptation and other is mitigation. The adaptation process includes three essential stages i.e. vulnerability assessment, capacity building and implementation of adaptation measures. The fundamental goal of adaptation strategies is the reduction of the vulnerabilities to climate-induced change. In India 700 million rural populations directly depend on climate-sensitive sectors like agriculture, forest and fisheries and natural resources such as water, biodiversity, mangroves, coastal zones, and grass lands for their subsistence and livelihood. Forests are not just carbon stores. Forests are home to the people who are entirely or partly dependent on forests for their livelihood. In India about 300 million rural poor are dependent on forest for livelihood and more than half of them are tribal and depend on non-timber forest products (NTFPs). Forest as the vulnerable sector and constitute an integral part of social life of tribals and others living in and around forest areas and contribute substantially to the food supply and livelihood security of tribal populations in India. The objectives of the paper are four fold. First, the paper attempts to measure quantitative vulnerability assessment for the forest dependent communities where drought hazards are prevalent and to identify household adaptation strategies to reduce vulnerability due to climate change. Second, the paper tries to estimate the factors responsible for decisions of adaptation to climate change using probabilistic model of Heckman’s two-step process. Third, the paper tries to discuss how Security Diagram Approach and Fuzzy Inference system are used to measure drought vulnerability in India. Lastly, the paper also examines the development policies of the Government of India including the role of micro-insurance and weather-indexed insurance to enhance the resilience of climate change. The paper is an empirical study based on data collected through field survey. This study covers four villages- Rangakula, Khayarakura, Dhansimla and Bandhgaba, both are scheduled tribal based villages located in Sonamukhi forest area in the District of Bankura, one of the drought prone districts of West Bengal, consisting of 100 households in 2010. Socio-Economic Vulnerability Assessment for each village has been calculated. In this study, six factors i.e., public health facility, sanitation, educational status; live stock assets, food sufficiency from agriculture and awareness to climate change have been incorporated for socioeconomic vulnerability assessment of each village. Vulnerability Indices have been calculated using Three Categorized Ranking Method (TCR) assigning scores of 1 to 3, 1 being the least vulnerable. Besides, this paper has identified the households’ adaptation strategies like out-migration; formation of self-help group (SHGs), water harvesting, accessibility of non-timber forest products and livestock rearing. The paper has identified key vulnerabilities as education, health hygiene and food insufficiency. The socio-economic factors and climatic factors both affect the decisions of adaptations to climate change. Micro4 insurance and weather indexed insurance are providing services to marginalized section of the community in developing countries including India. The Government of India has undertaken little policy action to reduce climate-related vulnerability particularly in the drought- prone regions of West Bengal. This paper has important policy implications for poverty, livelihood vulnerability and migration.
    Keywords: vulnerability, adaptation, security diagram, socio-economic vulnerability assessment, fuzzy inference system, migration, micro-insurance
    JEL: Q54 O11 O13
    Date: 2011–11

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