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on Insurance Economics |
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Issue of 2012‒03‒21
fourteen papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Business Management |
| By: | Ahmed Mushfiq Mobarak (Economic Growth Center, Yale University); Mark Rosenzweig (Economic Growth Center, Yale University) |
| Abstract: | Unpredictable rainfall is an important risk for agricultural activity, and farmers in developing countries often receive incomplete insurance from informal risk-sharing networks. We study the demand for, and effects of, offering formal index-based rainfall insurance through a randomized experiment in an environment where the informal risk sharing network can be readily identified and richly characterized: sub-castes in rural India. A model allowing for both idiosyncratic and aggregate risk shows that informal networks lower the demand for formal insurance only if the network indemnifies against aggregate risk, but not if its primary role is to insure against farmer-specific losses. When formal insurance carries basis risk (mismatches between payouts and actual losses due to the remote location of the rainfall gauge), informal risk sharing that covers idiosyncratic losses enhance the benefits of index insurance. Formal index insurance enables households to take more risk even in the presence of informal insurance. We find substantial empirical support of these nuanced predictions of the model by conducting the experiment (randomizing both index insurance offers, and the locations of rainfall gauges) on castes for whom we have a rich history of group responsiveness to household and aggregate rainfall shocks. |
| Keywords: | index insurance, risk sharing, basis risk |
| JEL: | O17 O13 O16 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:egc:wpaper:1007&r=ias |
| By: | Clarke, Daniel J.; Mahul, Olivier; Verma, Niraj |
| Abstract: | Designing and rating insurance products requires both science and judgment. In developing and emerging economies, actuarial procedures must be robust and implementable, as well as offering a sufficient degree of transparency and flexibility so as to allow expert judgment to be incorporated. This paper outlines an approach to designing and rating a portfolio of index insurance products that uses both temporal and spatial aspects of the data to increase the efficiency of statistical estimates. The approach has formed the basis for the design and ratemaking methodology implemented by the Agriculture Insurance Company of India for the modified National Agricultural Insurance Scheme, which was initiated by the Government of India in late 2010. |
| Keywords: | Insurance&Risk Mitigation,Debt Markets,Hazard Risk Management,Emerging Markets,Bankruptcy and Resolution of Financial Distress |
| Date: | 2012–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:5986&r=ias |
| By: | Hendrik Schmitz; Nicolas R. Ziebarth |
| Abstract: | Health Plan Choice Abstract: This paper provides field evidence on (a) how price framing affects consumers’ decision to switch health insurance plans and (b) how the price elasticity of demand for health insurance can be influenced by policymakers through simple regulatory efforts. In 2009, in order to foster competition among health insurance companies, German federal regulation required health insurance companies to express price differences between health plans in absolute Euro values rather than percentage point payroll tax differences. Using individual-level panel data, as well as aggregated health plan-level panel data, we find that the reform led to a sixfold increase in an individual’s switching probability and a threefold demand elasticity increase. |
| Keywords: | Health insurance; health plan switching; price competition; price elasticity; SOEP |
| JEL: | H51 I11 I18 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0304&r=ias |
| By: | Clarke, Daniel J.; Mahul, Olivier; Rao, Kolli N.; Verma, Niraj |
| Abstract: | The weather index insurance market in India is the world's largest, having transitioned from small-scale and scattered pilots to a large-scale weather based crop insurance program covering more than 9 million farmers. This paper provides a critical overview of this market, including a review of indices used for insurance purposes and a description and analysis of common approaches to design and ratemaking. Products should be designed based on sound agronomic principles and further investments are needed both in quantifying the level of basis risk in existing products, and developing enhanced products with lower basis risk. In addition to pure weather indexed products, hybrid products that combine both area yield and weather indices seem promising, with the potential to combine the strengths of the individual indices. A portfolio approach to pricing products, such as that offered by Empirical Bayes Credibility Theory, can be significantly more efficient than the standalone pricing approaches typically employed in the Indian market. Legislation for index insurance products, including consumer protection legislation, should be further enhanced, for example by requiring disclosure of claim payments that each product would have made in the last ten years. The market structure for weather based crop insurance products could better reward long-term development of improved product designs through product standardization, longer term contracts, or separating the roles of product design and delivery. |
| Keywords: | Climate Change Economics,Debt Markets,Insurance&Risk Mitigation,Bankruptcy and Resolution of Financial Distress,Hazard Risk Management |
| Date: | 2012–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:5985&r=ias |
| By: | Mahul, Olivier; Verma, Niraj; Clarke, Daniel J. |
| Abstract: | India's crop insurance program is the world's largest with 25 million farmers insured. However, issues in design, particularly related to delays in claims settlement, have led to 95 million farmer households not being covered, despite significant government subsidy. To address this and other problems, the Government of India is piloting a modified National Agricultural Insurance Scheme, a market-based scheme with involvement from the private sector. Compared with the existing scheme, the new program has a design that can offer more timely, claim settlement, less distortion in the allocation of government subsidies and cross-subsidies between farmer groups, and reduced basis risk. Implementation and technical challenges lie ahead which can be addressed but will require a comprehensive strategy, innovative solutions, and timely roll out. This paper describes and analyzes both programs, and discusses lessons learned in developing and implementing the new program. |
| Keywords: | Climate Change Economics,Insurance&Risk Mitigation,Hazard Risk Management,Debt Markets,Emerging Markets |
| Date: | 2012–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:5987&r=ias |
| By: | Jean-Marc Bourgeon (Institut National de la Recherche Agronomique - INRA, Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X); Pierre Picard (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X) |
| Abstract: | Insurance fraud is a major source of inefficiency in insurance markets. A self-justification of fraudulent behavior is that insurers are bad payers who start nitpicking if an opportunity arises, even in circum- stances where the good-faith of policyholders is not in dispute. We relate this nitpicking activity to the inability of insurers to commit to their auditing strategy. Reducing the indemnity payments acts as an incentive device for the insurer since auditing is profitable even if the claim is not fraudulent. We show that optimal indemnity cuts are bounded above and that nitpicking remains optimal even if it induces adverse effects on policyholders' moral standards. |
| Keywords: | Insurance Fraud, audit, no-commitment, nitpicking. |
| Date: | 2012–02–29 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00675106&r=ias |
| By: | Hanming Fang; Edward Kung |
| Abstract: | Previous research has shown that the reasons for lapsation have important implications regarding the effects of the emerging life settlement market on consumer welfare. We present and empirically implement a dynamic discrete choice model of life insurance decisions to assess the importance of various factors in explaining life insurance lapsations. In order to explain some key features in the data, our model incorporates serially correlated unobservable state variables which we deal with using posterior distributions of the unobservables simulated from Sequential Monte Carlo (SMC) method. We estimate the model using the life insurance holding information from the Health and Retirement Study (HRS) data. Counterfactual simulations using the estimates of our model suggest that a large fraction of life insurance lapsations are driven by i.i.d choice specific shocks, particularly when policyholders are relatively young. But as the remaining policyholders get older, the role of such i.i.d. shocks gets smaller, and more of their lapsations are driven either by income, health or bequest motive shocks. Income and health shocks are relatively more important than bequest motive shocks in explaining lapsations when policyholders are young, but as they age, the bequest motive shocks play a more important role. We also suggest the implications of these findings regarding the effects of the emerging life settlement market on consumer welfare. |
| JEL: | G22 H31 L11 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17899&r=ias |
| By: | Laun, Tobias (Dept. of Economics, Stockholm School of Economics); Wallenius, Johanna (Dept. of Economics, Stockholm School of Economics) |
| Abstract: | In this paper we develop a life cycle model of labor supply and retirement to study the interactions between health and the labor supply behavior of older workers, in particular disability insurance and pension claiming. In our framework, individuals choose when to stop working and, given eligibility criteria, when/if to apply for disability and pension benefits. Individuals care about their health and can partially insure against health shocks by investing in health. We use the model to study the labor supply implications of the recent Swedish pension reform. We find that the new pension system creates big incentives for the continued employment of older workers. In particular, the model predicts an increase in the average retirement age of more than two years. |
| Keywords: | life cycle; retirement; pension reform; disability insurance; health |
| JEL: | E24 J22 J26 |
| Date: | 2012–03–06 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:hastef:0741&r=ias |
| By: | Bas Jacobs (Erasmus School of Economics, Erasmus University Rotterdam, The Netherlands); Dirk Schindler (Department of Economics, University of Konstanz, Germany) |
| Abstract: | This paper analyzes optimal linear taxes on labor income and savings in a two-period life cycle model with ex ante identical households, endogenous leisure demands in both periods, and general processes of skill shocks over the life cycle. We demonstrate that the Atkinson-Stiglitz theorem breaks down under risk. Capital taxes are employed besides labor income taxes for two distinct reasons: i) capital taxes reduce labor supply distortions on second-period labor supply, since second-period labor supply and saving are substitutes, ii) capital taxes insure first-period income risk, although this benefit is partially off-set because first-period labor supply and saving are complements. Our results imply that (retirement) saving should not be actuarially fair. |
| Keywords: | Optimal Capital Taxation, Risk, Atkinson-Stiglitz theorem |
| JEL: | H21 D80 |
| Date: | 2012–01–23 |
| URL: | http://d.repec.org/n?u=RePEc:knz:dpteco:1202&r=ias |
| By: | Martin Koudstaal (Double Effect); Sweder van Wijnbergen (Unversity of Amsterdam) |
| Abstract: | This paper deals with the relation between excessive risk taking and capital structure in banks. Examining a quarterly dataset of U.S. banks between 1993 and 2010, we find that equity is valued higher when more risky portfolios are chosen when leverage is high, and that more risk taking has a negative impact on valuation of the debt of highly leveraged banks. We find no evidence that deposit insurance is encouraging risk taking behaviour. We do find that banks with a more troubled loan portfolio take on more risk. Banks whose share price has slumped tend to gamble for resurrection by increasing the riskiness of their asset portfolios. The results suggest that incentives embedded in the capital structure of banks contribute to systemic fragility, and so support the Basel III proposals towards less leverage and higher loss absorption capacity of capital. |
| Keywords: | bank fragility; risk shifting; deposit insurance; gambles for resurrection |
| JEL: | G21 G28 G32 |
| Date: | 2012–03–12 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20120022&r=ias |
| By: | Phaiboon Jhongpita; Sukree Sinthupinyo; Thitivadee Chaiyawat |
| Abstract: | This paper introduces a Decision Tree Learner as an early warning system for classification of the non-life insurance companies according to their financial solid as strong, moderate, weak, or insolvency. In this study, we ran several experiments to show that the proposed model can achieve a good result using standard 10 fold crossvalidation, split train and test data set, and separated test set. The results show that the method is effective and can accurately classify the solvency position. |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1203.3031&r=ias |
| By: | Kjell Erik Lommerud (Department of Economics, University of Bergen, Norway); Odd Rune Straume (Universidade do Minho - NIPE and University of Bergen (Health Economics Bergen, Department of Economics), Norway); Steinar Vagstad (Department of Economics, University of Bergen, Norway) |
| Abstract: | We analyse the effects of different labour market policies - employment protection, unemployment benefits and payroll taxes - on job creation and technology choices in a model where firms are randomly matched with workers of different productivity and wages are determined by ex-post bargaining. In this setting, unemployment benefits are unambiguously detrimental both to job creation and technology adoption while the effects of employment protection are mixed, as higher firing costs stifle job creation but stimulate technology investments. This suggests that a 'flexicurity' policy, with low employment protection and high unemployment benefits, might have the adverse effect of slowing down technological progress and job growth. Indeed, our analysis of the optimal policy solution suggests that flexicurity is often not optimal, and may be optimal only in conjunction with payroll subsidies. |
| Keywords: | Technology adoption; job creation; employment protection; unemployment insurance. |
| JEL: | H21 J38 J65 O31 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:nip:nipewp:03/2012&r=ias |
| By: | Michio Naoi (Tokyo University of Marine Science and Technology); Miki Seko (Keio University); Takuya Ishino (Keio University) |
| Abstract: | The Great East Japan Earthquake and subsequent tsunami on March 11 were a reminder of Japan's huge earthquake risk and need for preparedness. The northeastern part of the country witnessed devastating human suffering and physical damage. The destructive impact of the earthquake has enhanced consumer's earthquake preparedness even in unaffected areas. This paper uses unique survey data collected after the earthquake to study how consumers reacted to this catastrophic event. We find that self-reported, perceived preparedness for natural disasters has significantly improved even among low-income households after March 11, but that post-quake intentions for more specific risk mitigation activities were systematically associated with household income and wealth levels. High income households are more likely to plan purchase of earthquake insurance or to conduct seismic retrofitting following the March 11th earthquake, indicating that the recent events might have widened the gap in disaster preparedness between rich and poor. |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:kei:dpaper:2011-036&r=ias |
| By: | Sarah Brockhoff (Bielefed University and University of Freiburg); Stéphane Rossignol (LED - Université Paris 8); Emmanuelle Taugourdeau (Centre d'Economie de la Sorbonne) |
| Abstract: | We introduce a new way to model the Bismarckian social insuance system, stressing its corporatist dimension. Comparing the Beveridgean, Bismarckian and Liberal systems according to the majority voting rule, we show that for a given distribution of risks inside society, the Liberal system wins if the inequality of income is low, and the Beveridgean system wins if the inequality of income is high. Using a utilitarian criterion, the Beveridgean system always dominates and the Bismarckian system is preferred to the Liberal one. |
| Keywords: | Social insurance systems, political economy, Bismarck, Beveridge, inequality, redistributions. |
| JEL: | D63 D72 H53 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:12018&r=ias |