nep-ias New Economics Papers
on Insurance Economics
Issue of 2012‒05‒08
ten papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Risk aversion influence on insurance market By Raduna, Daniela Viviana; Roman, Mihai Daniel
  2. Optimal insurance design of ambiguous risks By Gollier, Christian
  3. Optimal Social Insurance with Endogenous Health By Laun, Tobias
  4. Labour Supply as a Buffer: Evidence from UK Households By Benito, Andrew; Saleheen, Jumana
  5. Assurance et prévention des catastrophes naturelles et technologiques. By Grislain-Letrémy, Céline
  6. The Impact of Patient Cost-Sharing on the Poor: Evidence from Massachusetts By Amitabh Chandra; Jonathan Gruber; Robin McKnight
  7. Short-Time Compensation as a Tool to Mitigate Job Loss? Evidence on the U.S. Experience during the Recent Recession By Katharine G. Abraham; Susan N. Houseman
  8. The effects of unemployment benefits in Italy: evidence from an institutional change By Alfonso Rosolia; Paolo Sestito
  9. Does the insurance effect of public and private transfers favor financial deepening? evidence from rural Nicaragua By Hernandez-Hernandez, Emilio; Sam, Abdoul G.; Gonzalez-Vega, Claudio; Chen, Joyce J.
  10. Have Natural Disasters Become Deadlier? By Raghav Gaiha1; Kenneth Hill; Ganesh Thapa

  1. By: Raduna, Daniela Viviana; Roman, Mihai Daniel
    Abstract: Human behavior, rational or irrational one, influences one of the most complex markets worldwide: the insurance market. In most situations, insurance markets are not competitive and risk neutral insurers negotiate under asymmetric information with actors who exhibit risk aversion. In this paper we develop a game theory model that analyzes the negotiation of an insurance contract under risk aversion conditions (in static and dynamic approach). Risk aversion influence was introduced in the model by intermediary of a discount factor (the in equivalent to players’ patience) instead of using a utility function. The main conclusion is that the customer prefers to agree on a contract of insurance in the first stage of negotiation than having to wait for another round of negotiations, during which they could register various losses.
    Keywords: contract negotiations; model; insurance; dynamic game; risk aversion; discount factor
    JEL: C78 D81 G22 C73
    Date: 2011–11–13
  2. By: Gollier, Christian
    Abstract: We examine the characteristics of the optimal insurance contract under linear transaction cost and an ambiguous distribution of losses. Under the standard expected utility model, we know from Arrow (1965) that it contains a straight deductible. In this paper, we assume that the policyholder is ambiguity-averse in the sense of Klibanoff, Marinacci and Mukerji (2005). The optimal contract depends upon the structure of the ambiguity. For example, if the set of possible priors can be ranked according to the monotone likelihood ratio order, the optimal contract contains a disappearing deductible. We also show that the policyholder’s ambiguity aversion can reduce the optimal insurance coverage.
    Keywords: Deductible, risk-sharing, ambiguity, monotone likelihood ratio order
    JEL: D81 G22
    Date: 2012–05
  3. By: Laun, Tobias (Dept. of Economics, Stockholm School of Economics)
    Abstract: This paper analyzes optimal insurance against unemployment and disability in a private information economy with endogenous health and search effort. Individuals can reduce the probability of becoming disabled by exerting, so-called, prevention effort, which is costly in terms of utility. A healthy, i.e., not disabled, individual either works or is unemployed. An unemployed individual can exert search effort in order to increase the probability of finding a new job. I show that the optimal sequence of consumption is increasing for a working individual and constant for a disabled individual. During unemployment, decreasing benefits are not necessarily optimal in this setting. The prevention constraint implies increasing benefits over time while the search constraint demands decreasing benefits while being unemployed. However, if individuals respond sufficiently much to search incentives, the latter effect dominates the former and the optimal consumption sequence is decreasing during unemployment.
    Keywords: Unemployment insurance; Disability insurance; Optimal contracts
    JEL: D86 E24 H53 J65
    Date: 2012–03–09
  4. By: Benito, Andrew (Goldman Sachs); Saleheen, Jumana (Bank of England)
    Abstract: This paper examines labour supply adjustment – both hours worked and participation decisions. We focus on the response of each to financial shocks, employing data from the BHPS. Estimated responses are broadly consistent with models of self-insurance that incorporate labour supply flexibility. The shock reflects several factors including financial wealth and a partner's employment situation. The response is significantly larger for those who change job, consistent with the importance of hours constraints within jobs. The propensity to participate in the labour market also appears to respond to the financial shock but that is somewhat less robust than the hours response.
    Keywords: labour supply, self-insurance
    JEL: J22
    Date: 2012–04
  5. By: Grislain-Letrémy, Céline
    Abstract: Les catastrophes naturelles et industrielles sont des risques majeurs qui ont pour particularité commune d’avoir une forte empreinte géographique. Leur principale différence est que l’indemnisation des risques naturels repose sur la solidarité, alors que les risques industriels relèvent de la responsabilité privée de l’industriel. Cette thèse apporte des éléments d’évaluation des politiques publiques de prévention et de couverture des risques naturels et technologiques. Chacun des chapitres propose des éléments d’évaluation de ces politiques en analysant notamment les liens entre politiques d’assurance et d’urbanisme (chapitre 2), entre politiques d’assurance et de prévention collective (chapitre 3), entre politiques d’assurance et d’aides publiques (chapitre 4), entre politiques de prévention et immobilier (chapitre 5). Les différents chapitres prennent en compte les liens entre les politiques publiques nationales et locales.
    Abstract: Natural and industrial disasters are major risks with the common specificity of a strong geographic dimension. Their main difference is that compensation for natural disasters relies on solidarity, whereas industrial risks imply the liability of the industrialist. This thesis brings parts of assessment of prevention and coverage policies for natural and industrial risks. Each chapter provides some elements of policies assessment and analyzes in particular links between insurance and urbanism policies (Chapter 2), between insurance and collective prevention policies (Chapter 3), between insurance and assistance policies (Chapter 4), between prevention policies and real estate market (Chapter 5). Interaction between national and local public policies is addressed in each chapter.
    Keywords: natural disasters; industrial disasters; insurance; prevention; public assistance; catastrophes naturelles; catastrophes industrielles; assurance; prévention; aides publiques;
    JEL: R52 Q54 G22 H23
    Date: 2012
  6. By: Amitabh Chandra; Jonathan Gruber; Robin McKnight
    Abstract: Greater patient cost-sharing could help reduce the fiscal pressures associated with insurance expansion by reducing the scope for moral hazard. But it is possible that low-income recipients are unable to cut back on utilization wisely and that, as a result, higher cost-sharing will lead to worse health and higher downstream costs through hospitalizations. We use exogenous variation in the copayments faced by low-income enrollees in the Massachusetts’ Commonwealth Care program to study these effects. We estimate separate price elasticities of demand by type of service (hospital care, drugs, outpatient care). Overall, we find price elasticities of about -0.15 for this low-income population — fairly similar to elasticities calculated for higher-income populations in other settings. These elasticities are somewhat larger for the chronically sick and older enrollees. A substantial portion of the decline in utilization comes from some patients cutting back on use completely, but we find no (detectable) evidence of offsetting increases in hospitalizations or emergency department visits in response to the higher copayments, either overall or for the chronically ill in particular.
    Date: 2012–04
  7. By: Katharine G. Abraham (University of Maryland); Susan N. Houseman (W.E. Upjohn Institute for Employment Research)
    Abstract: During the recent recession, workers were eligible for UI benefits only if they were laid off in most states. At the start of the recent recession only 17 states offered short-time compensation (STC)—pro-rated unemployment benefits for workers whose hours are temporarily reduced for economic reasons. The severity of the recession, however, has sparked interest in STC as a tool for mitigating unemployment during downturns. New federal legislation enacted in 2012 will encourage more states to adopt STC programs and will promote greater use of work sharing among all states. In this paper we review arguments concerning the desirability of expanding STC programs in the United States and present new evidence on the use of these programs during the recent recession. Our evidence indicates that jobs saved as a consequence of STC could have been significant in sectors like manufacturing that made extensive use of the program. We conclude, however, that, with the possible exception of Rhode Island, the overall scale of the STC program operating in the 17 states was too small to have substantially mitigated the aggregate job losses these states experienced in the recent recession. Expansion of the program within STC states as well as to states without the program is necessary for STC to be an effective countercyclical tool in the future.
    Keywords: short-time compensation, work sharing, unemployment insurance, manufacturing
    JEL: J65 J08 J20
    Date: 2012–03
  8. By: Alfonso Rosolia (Bank of Italy); Paolo Sestito (Bank of Italy)
    Abstract: We document the effects of a change in the Italian Ordinary Unemployment Benefits Scheme on the job search process. As of January 2001, the replacement rate was raised from 30% to 40% and benefits’ duration extended from 6 to 9 months for workers aged 50 or more. Our results show that (a) the average duration of benefits' collection increased by around one month for individuals entitled to 3 additional months, while it did not change significantly for those only exposed to higher replacement rates; (b) the pace of re-employment is never found to be statistically different across regimes, although point estimates for those exposed to a longer duration consistently indicate a 2 to 4 percentage points lower probability of re-employment at several horizons. Graphical evidence suggests that job-separation rates did not change with the new regime, while take-up apparently did, although the clear cyclical pattern could bias the picture. We conclude that, if any, the behavioural response induced by the change, must have been modest in economic terms. We discuss the reasons why the response may have been so subdued.
    Keywords: unemployment insurance, unemployment duration, replacement rate.
    JEL: J64 J65
    Date: 2012–03
  9. By: Hernandez-Hernandez, Emilio; Sam, Abdoul G.; Gonzalez-Vega, Claudio; Chen, Joyce J.
    Abstract: The literature suggests Conditional Cash Transfers (CCT) and remittances may protect poor households from income risk. We present a theoretical framework that explores how this ‘insurance’ effect can change households’ decision to apply for a loan via changes in credit demand and supply. Empirical evidence from poor rural households in Nicaragua shows CCTs did not affect loan requests while remittances increased them. The risk protection provided by remittances seems stronger, relative to CCTs, such that improvements on borrowers’ expected marginal returns to a loan or on creditworthiness more than offset decreasing returns to additional income. This suggests those transfers that best protect households from income risk favor financial deepening in the context of segmented markets.
    Keywords: Credit markets; migration; conditional cash transfers; Nicaragua
    JEL: F22 O15 D14
    Date: 2012–02–13
  10. By: Raghav Gaiha1; Kenneth Hill; Ganesh Thapa
    Abstract: The present study seeks to build on earlier work by identifying the factors associated with the frequency of natural disasters and the resulting mortality. Drawing together the main findings, some observations are made from a policy perspective to focus on key elements of a disaster reduction strategy. Countries that were prone to natural disasters in the previous decade (1970-79) continued to be so in the next two decades. Geophysical factors (e.g. whether landlocked, distance to coast) had an important role in explaining inter-country variation in the occurrence of natural disasters. However, income did not have any effect. Deaths varied with the number of disasters; they also varied with (lagged) deaths in the previous decade, pointing to (presumably) persistent government failures in preventing deaths where the deaths were high; poor countries suffered more deaths, controlling for these and other effects; larger countries suffered more deaths. The pay-off from learning from past experience is high, as reflected in the elasticity of deaths to disasters. Even moderate learning can save a large number of deaths (e.g. through early warning systems, better coordination between governments and communities likely to be affected). Growth acceleration would also help avert deaths through more resources for disaster prevention and mitigation capabilities. A combination of the two-learning from past experience and more resources for disaster prevention and mitigation-would of course result in a massive reduction in deaths from disasters. Attention is drawn to segmented and shallow disaster insurance markets; the Samaritan's dilemma in providing emergency assistance to poor countries that neglect investment in protective measures; need for mainstreaming of disaster prevention and mitigation among multilateral development agencies and governments, as also growth acceleration ; why short-term relief must be combined with rebuilding of livelihoods and reconstruction, and the potential for public-private partnerships; and, above all, the need for building ownership of local communities and preservation of social networks. A challenge for development assistance is to combine growth acceleration with speedy relief and durable reduction in vulnerability to natural disasters.
    Keywords: disasters, deaths, vulnerability, insurance, reconstruction
    JEL: Q54 Q57 I
    Date: 2012

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