nep-ias New Economics Papers
on Insurance Economics
Issue of 2012‒03‒28
thirteen papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Price Analysis, Risk Assessment, and Insurance for Organic Crops By Singerman, Ariel; Hart, Chad E.; Lence, Sergio H.
  2. Heterogeneity, Demand for Insurance and Adverse Selection By Spinnewijn, Johannes
  3. Consumption partial insurance of Spanish households By Jose Maria Casado
  4. Unemployment Insurance and Job Search in the Great Recession By Rothstein, Jesse
  5. Social Security Generosity, Budgetary Deficits and Reforms in North Cyprus By Hasan U. Altiok; Glenn Jenkins
  6. The three worlds of welfare capitalism revisited By Sarah Brockhoff; Stéphane Rossignol; Emmanuelle Taugourdeau
  7. Price Search, Consumption Inequality, and Expenditure Inequality over the Life Cycle By Yavuz Arslan; Temel Taskin
  8. On the Distributional Implications of Social Protection Reforms in Latin America By Barrientos, Armando
  9. U.S. Health Care and Real Health in Comparative Perspective: Lessons from Abroad By Wilensky, Harold L.
  10. Mandate-Based Health Reform and the Labor Market:  Evidence from the Massachusetts Reform By Jonathan T. Kolstad; Amanda E. Kowalski
  11. Cheering Up the Dismal Theorem By Ross McKitrick
  12. Risk Pooling, Risk Preferences, and Social Networks. By Garance Genicot, Orazio Attanasio, Abigail Barr, Juan Camilo Cardenas and Costas Meghir
  13. Mega-Banks' Self-Insurance with Cocos: A Work in Progress By George M. von Furstenberg

  1. By: Singerman, Ariel; Hart, Chad E.; Lence, Sergio H.
    Abstract: The Agricultural Risk Protection Act of 2000 recognized organic farming as a“good farming practice,†making federal crop insurance coverage available for organiccrops, and taking into account the idiosyncrasies of the organic production system. Inaddition to the production risks covered for conventional producers, organic farmerswho sign up for coverage are compensated for production losses from damage due toinsects, disease, and/or weeds. However, the incorporation of organic production intothe crop insurance rating structure has been limited. Organic producers are charged anarbitrary 5% premium surcharge over conventional crop insurance. The actuarialfairness of this premium is, at least, questionable. In addition, in the case of crop failure,organic farmers receive compensation based on the prices of conventionally producedcrops. Thus, price premiums that organic producers are able to obtain in the market arenot compensated for under the current insurance policy structure.The Food, Conservation and Energy Act of 2008, which amends part of theFederal Crop Insurance Act, was written to investigate some of these claims, requiringthe U.S. Department of Agriculture to examine the currently offered federal cropinsurance coverage for organic crops as described in the organic policy provisions of theAct (Title XII). Such provisions established the need to review, among other things, theunderwriting risk and loss experience of organic crops; determine whether significant,consistent, or systematic variations in loss history exist between organic and nonorganicproduction; and modify the coverage for organic crops in accordance with the results.Here we present the major findings of three analyses we performed on keyelements of the insurance of organic crops—prices, yields, and revenue—in an effort tocontribute to the design of an organic crop insurance policy that covers organicproducers according to their idiosyncratic risks.
    Keywords: crop insurance; organic agriculture
    JEL: Q11 Q12
    Date: 2011–08–21
  2. By: Spinnewijn, Johannes
    Abstract: Recent empirical work finds that surprisingly little variation in the demand for insurance is explained by heterogeneity in risks. I distinguish between heterogeneity in risk preferences and risk perceptions underlying the unexplained variation. Heterogeneous risk perceptions induce a systematic difference between the revealed and actual value of insurance as a function of the insurance price. Using a sufficient statistics approach that accounts for this alternative source of heterogeneity, I find that the welfare conclusions regarding adversely selected markets are substantially different. The source of heterogeneity is also essential for the evaluation of different interventions intended to correct inefficiencies due to adverse selection like insurance subsidies and mandates, risk-adjusted pricing and information policies.
    Keywords: adverse selection; heterogeneity; risk perceptions; welfare and policy
    JEL: D60 D82 D83 G28
    Date: 2012–02
  3. By: Jose Maria Casado (Banco de España)
    Abstract: This paper measures how households smooth changes in consumption when incomes are shifted by permanent or transitory shocks at country and regional level. I compute insurance capacity using the Spanish Continuous Family Expenditure Survey skipping the imputation methods used by the previous literature to mitigate the significant lack of income and consumption panel data information. I find some partial insurance for permanent shocks and a downward bias when imputed data are used. There is significant sensitivity for the youngest and primary educated cohorts that becomes more relevant in some regions. I obtain that durable purchases are a source of insurance with respect to transitory shocks and the effect of family income transfers is almost negligible.
    Keywords: Consumption, income, insurance
    JEL: D12 D91 I30
    Date: 2012–03
  4. By: Rothstein, Jesse
    Abstract: Nearly two years after the official end of the "Great Recession," the labor marketremains historically weak. One candidate explanation is supply-side effects driven bydramatic expansions of Unemployment Insurance (UI) benefit durations, to as many as 99 weeks. This paper investigates the effect of these UI extensions on job search and reemployment. I use the longitudinal structure of the Current Population Survey toconstruct unemployment exit hazards that vary across states, over time, and betweenindividuals with differing unemployment durations. I then use these hazards to explore a variety of comparisons intended to distinguish the effects of UI extensions from other determinants of employment outcomes. The various specifications yield quite similar results. UI extensions had significantbut small negative effects on the probability that the eligible unemployed would exitunemployment, concentrated among the long-term unemployed. The estimates implythat UI benefit extensions raised the unemployment rate in early 2011 by only about 0.1–0.5 percentage points, much less than is implied by previous analyses, with at least half of this effect attributable to reduced labor force exit among the unemployed rather than to the changes in reemployment rates that are of greater policy concern.
    Keywords: Hospitality Administration/Management, Economics, Other, Unemployment Insurance, Great Recession
    Date: 2011–10–16
  5. By: Hasan U. Altiok (Eastern Mediterranean University, Cyprus); Glenn Jenkins (Queen's University, Canada and Eastern Mediterranean University, Cyprus)
    Abstract: This paper estimates the fiscal burden of the Pay-As-You-Go (PAYGO) Social Insurance Pension System that was closed in 2008 to new members, and analyzes the appropriateness of the 2008 reforms that introduced the new Social Security Pension System in the TRNC. To calculate the overall deficit, estimates are made from the difference between the present values of future contributions and the pension benefits. The magnitude of the unfunded cost makes any marginal policy reform ineffective in eliminating the excessive fiscal burden on the current and future taxpayers for the next three decades. Major structural reforms will be required.
    Keywords: pay-as-you-go, social insurance, social security, pension liabilities, implicit pension debt, pension indexing
    JEL: H55 H68
    Date: 2012–01
  6. By: Sarah Brockhoff (Bielefeld University - Bielefeld Graduate School of Economics and Management, University of Freiburg - Institute for Public Finance II,); Stéphane Rossignol (UP8 LED - Laboratoire d'économie dyonisien - Université Paris VIII - Vincennes Saint-Denis : EA3391); Emmanuelle Taugourdeau (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon 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, redistribution.
    Date: 2012–03
  7. By: Yavuz Arslan; Temel Taskin
    Abstract: In this paper, we incorporate a price search decision into an incomplete markets model and differentiate consumption from expenditure. In our model, consumers are allowed to allocate part of their time on searching for low prices which leads to an endogenous price dispersion. A plausibly calibrated version of the model predicts that the cross-sectional variance of consumption is, on average, 15% smaller than the cross-sectional variance of expenditure throughout the life cycle. Price search has an alternative productive activity role and provides a partial insurance mechanism against bad income shocks. We also discuss some policy implications.
    Keywords: Consumption inequality, price search, incomplete markets, life cycle models, partial insurance
    JEL: D10 D91 E21
    Date: 2012
  8. By: Barrientos, Armando
    Abstract: The paper tracks recent changes in the components of social protection in Latin America, the reforms to social insurance in the 1990s and the growth of social assistance in the 2000s, and assesses their effects on poverty and inequality and implications for welfare institutions in the region. The analysis focuses on public subsidies to social protection and their rebalancing. The paper concludes that the expansion of social assistance in the region will result in social protection institutions which are more comprehensive and distributionally progressive.
    Keywords: Latin America, social insurance, social assistance, social protection, poverty, inequality
    Date: 2011
  9. By: Wilensky, Harold L.
    Abstract: Among the 19 rich democracies I have studied for the past 40 years, the United States is odd-man-out in its health-care spending, organization, and results. The Obama administration might therefore find lessons from abroad helpful as it moves toward national health insurance. In the past hundred years, with the exception of the U.S., the currently rich democracies have all converged in the broad outlines of health care. They all developed central control of budgets with financing from compulsory individual and employer contributions and/or government revenues. All have permitted the insured to supplement government services with additional care, privately purchased. All, including the United States, have rationed health care. All have experienced a growth in doctor density and the ratio of specialists to primary-care personnel. All evidence a trend toward public funding. Our deviance consists of no national health insurance, a huge private sector, a very high ratio of specialists to primary-care physicians and nurses, and a uniquely expensive (non)system with a poor cost-benefit ratio. The cure: increase the public share to more than 65% from its present level of 45%. In regards to funding the transition cost and the permanent cost of guaranteed universal coverage: no rich democracy has funded national health insurance without relying on mass taxes, especially payroll and consumption taxes. Whatever we do to begin, broad-based taxes will be the outcome. Three explanations of "why no national health insurance in the U.S.?" are examined.
    Keywords: Political Science
    Date: 2011–05–01
  10. By: Jonathan T. Kolstad (Wharton School, University of Pennsylvania); Amanda E. Kowalski (Cowles Foundation, Yale University)
    Abstract: We model the labor market impact of the three key provisions of the recent Massachusetts and national “mandate-based" health reforms: individual and employer mandates and expansions in publicly-subsidized coverage. Using our model, we characterize the compensating differential for employer-sponsored health insurance (ESHI) -- the causal change in wages associated with gaining ESHI. We also characterize the welfare impact of the labor market distortion induced by health reform. We show that the welfare impact depends on a small number of sufficient statistics" that can be recovered from labor market outcomes. Relying on the reform implemented in Massachusetts in 2006, we estimate the empirical analog of our model. We find that jobs with ESHI pay wages that are lower by an average of $6,058 annually, indicating that the compensating differential for ESHI is only slightly smaller in magnitude than the average cost of ESHI to employers. Because the newly-insured in Massachusetts valued ESHI, they were willing to accept lower wages, and the deadweight loss of mandate-based health reform was less than 5% of what it would have been if the government had instead provided health insurance by levying a tax on wages.
    Keywords: Individual mandate, Employer mandate, Health reform, Labor market
    JEL: I11 I28
    Date: 2012–03
  11. By: Ross McKitrick (Department of Economics,University of Guelph)
    Abstract: The Weitzman Dismal Theorem (DT) suggests agents today should be willing to pay an unbounded amount to insure against fat-tailed risks of catastrophes such as climate change. The DT has been criticized for its assumption that marginal utility (MU) goes to negative infinite faster than the rate at which the probability of catastrophe goes to zero, and for the absence of learning and optimal policy. Also, it has been pointed out that if transfers to future generations are non-infinitesimal, the insurance pricing kernel must be bounded from above, making the DT rather irrelevant in practice. Herein I present a more basic criticism of the DT having to do with its mathematical derivation. The structure of the model requires use of ln(C) as an approximate measure of the change in consumption in order to introduce an ex term and thereby put the pricing kernel into the form of a moment generating function. But ln(C) is an inaccurate approximation in the model’s own context. Use of the exact measure completely changes the pricing model such that the resulting insurance contract is plausibly small, and cannot be unbounded regardless of the distribution of the assumed climate sensitivity. .
    Keywords: climate change; insurance; catastrophe
    JEL: Q2 Q3 Q4
    Date: 2012
  12. By: Garance Genicot, Orazio Attanasio, Abigail Barr, Juan Camilo Cardenas and Costas Meghir (Department of Economics, Georgetown University)
    Abstract: Using data from an experiment conducted in 70 Colombian communities, we investigate who pools risk with whom when trust is crucial to enforce risk pooling arrangements. We explore the roles played by risk attitudes and social networks. Both theoretically and empirically, we nd that close friends and relatives group assortatively on risk attitudes and are more likely to join the same risk pooling group, while unfamiliar participants group less and rarely assort. These ndings indicate that where there are advantages to grouping assortatively on risk attitudes those advantages may be inaccessible when trust is absent or low.
    Keywords: Field experiment; risk sharing; social sanctions; insurance; group formation; matching.
    Date: 2011–01–05
  13. By: George M. von Furstenberg (Indiana University and Hong Kong Institute for Monetary Research)
    Abstract: When contingently convertible debt securities trigger and convert into common equity well before the capital ratio of a financial institution has reached its regulatory minimum, they are known as going-concern or go-cocos. Their objective is to recapitalize an institution under stress and not to facilitate its resolution as would be the task of low-trigger goner-cocos. Because cocos are an "infant instrument" that grew out of the 2007-2009 crisis, few of their design features, their tax treatment or role in bond indexes are settled. Their portfolio fit with unsecured senior non-contingent debt on the one hand and common equity on the other is also an open question. Its resolution has much to do with how adding go-cocos may affect debt overhang in a firm. This paper attempts to clarify such underexposed open issues. Its chief contribution, however, lies in sifting through the experience with cocos triggers and conversion methods in order to link both actual, and one proposed, conversion methods to the recovery rates on cocos likely to be obtained from the common shares received by conversion. Experimenting with sparsely parameterized survival patterns that reach specified survival-rate levels after 10-years, and with the implied hazard rates and default rates conditional on survival, then allows a schedule of CDS premiums to be derived. These provide insight into the competitiveness of pricing the loss-of-value risk in go-cocos, instead of in the common-equity premium, over AAA-rated bonds.
    Date: 2012–03

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