nep-ias New Economics Papers
on Insurance Economics
Issue of 2012‒04‒10
ten papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Selling Formal Insurance to the Informally Insured By Mobarak, A. Mushfiq; Rosenzweig, Mark
  2. Measuring the impacts of the national flood insurance program By Howard, II, James P.
  3. Remedies for Sick Insurance By Daniel L. McFadden; Carlos E. Noton; Pau Olivella
  4. Discrete time Non-homogeneous Semi-Markov Processes applied to Models for Disability Insurance By Guglielmo D’Amico; Montserrat Guillen; Raimondo Manca
  5. Children, support in old age and social insurance in rural China By Zhang, Chuanchuan
  6. Ordinal Classification Method for the Evaluation Of Thai Non-life Insurance Companies By Phaiboon Jhonpita; Sukree Sinthupinyo; Thitivadee Chaiyawat
  7. Crop Yield Skewness and the Normal Distribution By Hennessy, David A.
  8. Testing Day's Conjecture That More Nitrogen Decreases Crop Yield Skewness By Du, Xiaodong; Hennessy, David A.; Yu, Cindy
  9. Federal Reserve lending to troubled banks during the financial crisis, 2007-10 By R. Alton Gilbert; Kevin L. Kliesen; Andrew P. Meyer; David C. Wheelock
  10. Modeling Stochastic Crop Yield Expectations with a Limiting Beta Distribution By Hennessy, David A.

  1. By: Mobarak, A. Mushfiq (Yale University); Rosenzweig, Mark (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.
    JEL: O13 O16 O17
    Date: 2012–02
  2. By: Howard, II, James P.
    Abstract: The National Flood Insurance Program was established in 1968 as a federally administered insurance program to reduce costs to the federal government for flood recovery and allocate recovery costs among potential disaster relief beneficiaries. Participants purchase flood insurance through participating property insurance providers which receive a haircut of the premium for overhead costs and passes the remainder to the Federal Emergency Management Agency. This paper outlines a model to measure the net social benefits attributable to the insurance component of the NFIP. Development of this model provides the baseline for further economic and social analysis of the NFIP.
    Keywords: flood insurance; disaster management; benefit-cost analysis; social surplus; risk management
    JEL: D63 H43
    Date: 2012–03–22
  3. By: Daniel L. McFadden; Carlos E. Noton; Pau Olivella
    Abstract: This expository paper describes the factors that contribute to failure of health insurance markets, and the regulatory mechanisms that have been and can be used to combat these failures. Standardized contracts and creditable coverage mandates are discussed, along with premium support, enrollment mandates, guaranteed issue, and risk adjustment, as remedies for selection-related market damage. An overall conclusion of the paper is that the design and management of creditable coverage mandates are likely to be key determinants of the performance of the health insurance exchanges that are a core provision of the PPACA of 2010. Enrollment mandates, premium subsidies, and risk adjustment can improve the stability and relative efficiency of the exchanges, but with carefully designed creditable coverage mandates are not necessarily critical for their operation.
    JEL: D4 D62 I18
    Date: 2012–03
  4. By: Guglielmo D’Amico (Dipartimento di Scienze del Farmaco, Università G. D’Annunzio of Chieti-Pescara, Chieti, Italy); Montserrat Guillen (Departament d’Econometria, Estadistica I Economia Espanyola, RFA-IREA, Universitat de Barcelona, Spain); Raimondo Manca (Dipartimento di Metodi e Modelli per l’Economia, il Territorio e la Finanza, Università La Sapienza di Roma, Roma, Italy)
    Abstract: In this paper, we present a stochastic model for disability insurance contracts. The model is based on a discrete time non-homogeneous semi-Markov process (DTNHSMP) to which the backward recurrence time process is introduced. This permits a more exhaustive study of disability evolution and a more efficient approach to the duration problem. The use of semi-Markov reward processes facilitates the possibility of deriving equations of the prospective and retrospective mathematical reserves. The model is applied to a sample of contracts drawn at random from a mutual insurance company.
    Date: 2012–03
  5. By: Zhang, Chuanchuan
    Abstract: Most people in rural China have no plans for retirement other than the ingrained Chinese tradition that children care for old parents. Actually there are also no sources of social support such as social old-age insurance to rely on in rural people’ old age for a long time in China. In 1992, a social old-age insurance program, rural pension program, was initiated by the Chinese government to firstly establish a social security system in China’s rural area. The rural pension program experienced rapid development in the beginning years but grounded to halt after 1998. Since either children or pension program provides support for elderly, we expected that these two can be viewed as substitutes to some extent. Using data from China’s 2005 mini-census, we find that rural people who have at least one son are less likely to participate in pension program and each additional son and daughter both decreases their participation rate. Moreover, the effect of an additional son is much larger than that of an additional daughter. In addition, both evidence from mini-census and China Health and Retirement Longitudinal Study show that peasants accessing to pension are less likely to rely on their children for support in old age. These findings suggest that demand for children, especially for sons are partly driven by concerns relating to care in old age; children and formal social old-age insurance are substitutes for support in old age. We then expect that implementation of social old-age insurance may mitigate rural people’ demand for children, especially sons and thus correct China’s severe sex ratio bias to some extent. We test this hypothesis using the difference-in-differences strategy, and find that increase of sex ratio at the region level slowed down after the implementation of the rural pension program. Overall, our empirical analysis in this paper implies that sex ratio bias is partly due to demanding for sons for support in old age and carrying out social old-age insurance in rural China are helpful in mitigating demand for children and correcting sex ratio bias.
    Keywords: children; rural pension; sex ratio
    JEL: I12 J38 I38
    Date: 2011
  6. By: Phaiboon Jhonpita; Sukree Sinthupinyo; Thitivadee Chaiyawat
    Abstract: This paper proposes a use of an ordinal classifier to evaluate the financial solidity of non-life insurance companies as strong, moderate, weak, and insolvency. This study constructed an efficient classification model that can be used by regulators to evaluate the financial solidity and to determine the priority of further examination as an early warning system. The proposed model is beneficial to policy-makers to create guidelines for the solvency regulations and roles of the government in protecting the public against insolvency.
    Date: 2012–03
  7. By: Hennessy, David A.
    Abstract: Empirical studies point to negative crop yield skewness, but the literature provides few clear insights as to why. This paper formalizes three points on the matter. Statistical laws on aggregates do not imply a normal distribution. Whenever the weather-conditioned mean yield has diminishing marginal product with respect to a weather-conditioning index, then there is a disposition toward negative yield skewness. This is because high marginal product in bad weather stretches out the yield distribution's left tail relative to that for weather. For disaggregated yields, unconditional skewness is decomposed into weather-conditioned skewness plus two other terms and each is studied in turn.
    Keywords: conditional distribution; crop insurance; negative skewness; normal distribution; statistical laws
    Date: 2012–03–29
  8. By: Du, Xiaodong; Hennessy, David A.; Yu, Cindy
    Abstract: While controversy surrounds skewness attributes of typical yield distributions, a better understanding is important for agricultural policy assessment and for crop-insurance rate setting. Day (1965) conjectured that crop yield skewness declines with an increase in nitrogen use at low levels but not at higher levels. Employing four corn yield experimental plot datasets, we investigate the conjecture by introducing (a) a flexible Bayesian extension of the Just–Pope technology to incorporate skewness and (b) a quantile-based measure of skewness shift. Bayesian estimation provides strong evidence in favor of negative skewness at commercial nitrogen rates and for Day’s conjecture. There was weaker evidence in favor of positively skewed cotton yield and little evidence in favor of the conjecture. The results are confirmed by the quantile-based measure. We also find evidence that skewness becomes more negative upon moving from corn-after-corn to corn-after-soybean.
    Keywords: crop insurance; Gibbs sampler; Just and Pope technology; negative skewness; quantile regression; rotation effect
    Date: 2012–03–29
  9. By: R. Alton Gilbert; Kevin L. Kliesen; Andrew P. Meyer; David C. Wheelock
    Abstract: Numerous commentaries have questioned both the legality and appropriateness of Federal Reserve lending to banks during the recent financial crisis. This article addresses two questions motivated by such commentary: 1) Did the Federal Reserve violate either the letter or spirit of the law by lending to undercapitalized banks? 2) Did Federal Reserve credit constitute a large fraction of the deposit liabilities of failed banks during their last year prior to failure? The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) imposed limits on the number of days that the Federal Reserve may lend to undercapitalized or critically undercapitalized depository institutions. We find no evidence that the Federal Reserve ever exceeded statutory limits during the recent financial crisis, recession and recovery periods. In most cases, the number of days that Federal Reserve credit was extended to an undercapitalized or critically undercapitalized depository institution was appreciably less than the number of days permitted under law. Furthermore, compared with patterns of Fed lending during 1985-90, we find that few banks that failed during 2008-10 borrowed from the Fed during their last year prior to failure, and only a few had outstanding Fed loans when they failed. Moreover, Federal Reserve loans averaged less than 1 percent of total deposit liabilities among nearly all banks that did borrow from the Fed during their last year. It is impossible to know whether the enactment of FDICIA explains differences in Federal Reserve lending practices during 2007-10 and the previous period of financial distress in the 1980s. However, it does seem clear that Federal Reserve lending to depository institutions during the recent episode was consistent with the Congressional intent of this legislation.
    Keywords: Financial crises ; Discount window ; Federal Deposit Insurance Corporation Improvement Act of 1991
    Date: 2012
  10. By: Hennessy, David A.
    Abstract: The use of plausible stochastic price processes in price risk analysis has allowed advances not seen in crop yield risk analysis. This study develops a stochastic process for yield modeling and risk management. The Pólya urn process is an internally consistent dynamic representation of yield expectations over a growing season that accommodates agronomic events such as growing degree days. The limiting distribution is the commonly used beta distribution. Binomial tree analysis of the process allows us to explore hedging decisions and crop valuation. The method is empirically flexible to accommodate alternative assumptions on the growing environment, such as intra-season input decisions.
    Keywords: crop insurance; crop abandonment; stochastic process; derivative analsysis; growing degree days
    Date: 2012–03–29

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