nep-ias New Economics Papers
on Insurance Economics
Issue of 2012‒05‒15
sixteen papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. The Impact of Crop Insurance on the Economic Performance of Hungarian Cropping Farms By Sporri, Martina; Barath, Lajos; Bokusheva, Raushan; Ferto, Imre
  2. Remedies for Sick Insurance By Daniel McFadden; Carlos Noton; Pau Olivella
  3. Coping with Systemic Risk in Index-based Crop Insurance By Shen, Zhiwei; Odening, Martin
  4. The Impact of State Children’s Health Insurance Program (SCHIP) Expansion on Health Insurance Coverage in Hawaii By Gerard Russo; Jaclyn R.K. Lindo; Sang-Hyop Lee; Rui Wang; Thamana Lekprichakul; Abdul Jabbar
  5. Policy for implementation of Index Based Weather Insurance revisited: the case of Nicaragua By Banerjee, Chirantan; Berg, Ernst
  6. Multidimensional Screening in a Monopolistic Insurance Market By Pau Olivella; Fred Schroyen
  7. Heterogeneity, Demand for Insurance and Adverse Selection By Johannes Spinnewijn
  8. Catastrophic crop insurance effectiveness: does it make a difference how yield losses are conditioned? By Bokusheva, Raushan; Conradt, Sarah
  9. Early interventions and disability insurance: experience from a field experiment By Engström, Per; Hägglund, Pathric; Johansson, Per
  10. How strong is the “natural hedge”? The effects of crop acreage and aggregation levels By Finger, Robert
  11. Direct payments, crop insurance and the volatility of farm income. Some evidence in France and in Italy By Enjolras, Geoffroy; Capitanio, Fabian; Aubert, Magali; Adinolfi, Felice
  12. Bio-economic modelling of decisions under yield and price risk for suckler cow farms By Briner, Simon; Finger, Robert
  13. Evaluation of an index-based risk management contract for agricultural activities By Weynants, S.; Gaspart, Frederic; Frahan, Bruno Henry de
  14. Selective hiring and welfare analysis in labor market models By Christian Merkl; Thijs van Rens
  15. Development of private insurance schemes as a means to reduce water overexploitation during drought events. A case study in Campo de Cartagena (Segura River Basin, Spain) By Perez Blanco, Carlos Dionisio; Gomez Gomez, Carlos Mario
  16. Economic analysis of resilience: a framework for local policy response based on new case studies By Regibeau, Pierre; Rockett, Katharine

  1. By: Sporri, Martina; Barath, Lajos; Bokusheva, Raushan; Ferto, Imre
    Abstract: Crop insurance products can improve and stabilize economic performance. However, due to insurance market imperfections, the use of insurance products often requires governmental support. This paper analyses the actual impact of insurance products on the economic performance of cropping farms by linking the economic performance model with the insurance demand model. For this analysis, a simultaneous equation system is solved. Our estimations show a negative impact of insurance on the economic performance indicators farm profit, labour productivity and land productivity. The analysis of the insurance demand side confirms financial limitations of many farms.
    Keywords: Hungary, Crop Insurance, 2SCML, Impact evaluation, Risk and Uncertainty, Q12, Q14, G22,
    Date: 2012–02–23
  2. By: Daniel McFadden; Carlos 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.
    Keywords: health insurance; adverse selection; health care reform; creditable coverage
    JEL: D4 D62 I18
    Date: 2012–03
  3. By: Shen, Zhiwei; Odening, Martin
    Abstract: The implementation of index-based crop insurance is often impeded by the existence of systemic risk of insured losses. We assess the effectiveness of two strategies for coping with systemic risk: regional diversification and securitization with catastrophe (CAT) bonds. The analysis is conducted in an equilibrium pricing framework which allows the optimal price of the insurance and the number of traded contracts to be determined. We also explore the role of basis risk and risk aversion of market agents. The model is applied to a hypothetical area yield insurance for rice producers in northeast China. If yields in two regions are positively correlated, we find that enlarging the insured area leads to an increasing insurance premium. Unless capital market investors are very risk averse, a CAT bond written on an area yield index outperforms regional diversification in terms of certainty equivalents of both farmers and insurers.
    Keywords: crop insurance, systemic risk, risk pooling, securitization, Risk and Uncertainty, Q11, Q14,
    Date: 2012–02–23
  4. By: Gerard Russo (Department of Economics, University of Hawaii at Manoa); Jaclyn R.K. Lindo (Department of Economics, University of Hawaii at Manoa); Sang-Hyop Lee (Department of Economics, University of Hawaii at Manoa); Rui Wang; Thamana Lekprichakul; Abdul Jabbar
    Abstract: This study investigates the impact of the State Children’s Health Insurance Program (SCHIP) expansion in Hawaii on health insurance coverage among low-income children ages 0 to 18 using the Current Population Survey. We employ a difference-in-differences approach by construction of a control group for which SCHIP eligibility remained constant, and a treatment group for which SCHIP eligibility changed over the observation period. We find that the initial SCHIP implementation of July 1, 2000 resulted in a 20 percent increase in SCHIP beneficiaries, with 87 percent of these children drawn from the ranks of the privately insured. The presence of substantial crowd-out is likely the result of important factors unique to Hawaii’s health insurance environment and implies that the cost to state and federal taxpayers per newly insured child is much higher than the usual per-capita expense. Subsequent expansions to higher federal poverty line that occurred since initial SCHIP implementation also likely generated substantial crowd-out.
    Keywords: SCHIP; Medicaid; Crowd-out; Health Insurance
    JEL: I18 I19
    Date: 2012–05–09
  5. By: Banerjee, Chirantan; Berg, Ernst
    Abstract: International development organisations, through partnerships with local insurance companies, have been promoting weather index based insurance (WIBI) in developing countries. Due to lower operational costs, they expect shorter pay-off period, often overlooking high initial design costs. Experiences however show high post-pilot mortality of these programmes. Literatures report lack of insurance participation. We propose lack of push from insurance providers as an additional factor. To verify, cash flows of a Nicaraguan groundnut based WIBI and a comparable but hypothetical named peril insurance are simulated against 80 scenarios. Additionally, a test of stochastic dominance of their estimated Net Present Values show that WIBI take comparatively longer to pay-off yielding lower returns with considerable risk. WIBI, given its advantages is undoubtedly an efficient agricultural risk management tool. Therefore, to make it sustainable, long-term pilots and technical assistance is required until the product pays-off and yield profits for insurance providers.
    Keywords: Index based rainfall insurance, weather derivative, operational cost, Nicaragua, International Development, Risk and Uncertainty,
    Date: 2012–02–23
  6. By: Pau Olivella; Fred Schroyen
    Abstract: In this paper, we consider a population of individuals who differ in two dimensions: their risk type (expected loss) and their risk aversion. We solve for the profit maximizing menu of contracts that a monopolistic insurer puts out on the market. First, we find that it is never optimal to fully separate all the types. Second, if heterogeneity in risk aversion is sufficiently high, then some high-risk individuals (the risk-tolerant ones) will obtain lower coverage than some low-risk individuals (the risk-averse ones). Third, we show that when the average man and woman differ only in risk aversion, gender discrimination may lead to a Pareto improvement.
    Keywords: insurance markets, asymmetric information, screening, gender discrimination, positive correlation test
    JEL: D82 G22
    Date: 2012–02
  7. By: Johannes Spinnewijn
    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: Heterogeneity, adverse selection, risk perceptions, welfare and policy
    JEL: D60 D82 D83 G28
    Date: 2012–05
  8. By: Bokusheva, Raushan; Conradt, Sarah
    Abstract: The study evaluates the effectiveness of a catastrophic drought-index insurance developed by applying two alternative methods - the standard regression analysis and the copula approach. Most empirical analyses obtain estimates of the dependence of crop yields on weather by employing linear regression. By doing so, they assume that the sensitivity of yields to weather remains constant over the whole distribution of the weather variable and can be captured by the effect of the weather index on the yield conditional mean. In our study we evaluate, whether the prediction of farm yield losses can be done more accurately by conditioning yields on extreme realisations of a weather index. Therefore, we model the dependence structure between yields and weather by employing the copula approach. Our preliminary results suggests that the use of copulas might be a more adequate way to design and rate weather-based insurance against extreme events.
    Keywords: catastrophic insurance, weather-based insurance, copula, Risk and Uncertainty, C18, Q14,
    Date: 2012–04–10
  9. By: Engström, Per (Department of Economics, Uppsala University); Hägglund, Pathric (The Swedish Social Insurance Inspectorate (ISF)); Johansson, Per (IFAU - Institute for Evaluation of Labour Market and Education Policy)
    Abstract: This paper estimates the effects of early interventions in the Swedish sickness insurance system. The aim of the interventions is to screen and, further to, rehabilitate sick listed individuals. We find that the early interventions – in contrast to what is expected – increase the inflow into disability benefits by around 20 percent. In order to explain the results, we develop a simple theoretical model based on asymmetric information of the health status. The model predicts that the treatment effect is larger for individuals with low incentives to return to work. In order to test this prediction we estimate effects for sick listed employed and unemployed separately. Consistent with the model’s prediction, we find that the effect is larger for the unemployed than for the employed.
    Keywords: Monitoring; screening; vocation rehabilitation; disbility insurance; sickness insurances; unemployment insurance; randomized experiment
    JEL: C93 H51 H55 I18 J22
    Date: 2012–04–24
  10. By: Finger, Robert
    Abstract: The level of natural hedge, i.e. the (negative) correlation between price and yield levels, is an important determinant for farmers’ income risks and their demand for risk management instruments. The natural hedge is often approximated with correlations observed at more aggregated levels, e.g. the county level. This induces biases because the natural hedge at the farm-level is smaller than on more aggregated levels. In this paper, we put this idea one step forward and investigate the empirical relationship between price-yield correlations and the underlying crop acreage, using farm-level data for 5 crops in Switzerland. We find that, for instance, a 1% increase in area under maize and intensive barley leads to a change in the correlation by -0.02 and -0.08, respectively. Thus, larger farms have a stronger natural hedge. Using a revenue insurance example, we show that this information can be used to adjust insurance premiums for each farm.
    Keywords: price-yield correlation, aggregation bias, crop insurance, Risk and Uncertainty, Q1, G2,
    Date: 2012–02–23
  11. By: Enjolras, Geoffroy; Capitanio, Fabian; Aubert, Magali; Adinolfi, Felice
    Abstract: Volatility of farm income represents a major challenge for farm management and the design of public policies. This paper measures the extent to which risk management tools, especially direct payments and crop insurance, can significantly reduce crop income volatility in France and in Italy. We use an original dataset of 9,555 farms for the period 2003-2007 drawn up from the Farm Accountancy Data Network (FADN) and three different econometric models to explain the volatility of crop income. The results are contrasted between the specialization of the farms and the two countries: Italian farms use management tools (CAP payments and crop insurance) so as to improve their income and to reduce its volatility (crop insurance, inputs). French farms use the same instruments to increase their income and therefore its volatility while they tend to substitute CAP payments to production. These results question the efficiency of structural policies aimed at stabilizing the farmers' income.
    Keywords: Volatility, Direct payments, Insurance, France, Italy, FADN, Risk and Uncertainty, G22, Q14, Q18,
    Date: 2012–02–23
  12. By: Briner, Simon; Finger, Robert
    Abstract: Applying a bio-economic whole farm model we assess the impact of price and weather risk as well as different risk management strategies on the variability of the income in Swiss suckler cow production. We consider different on-farm risk management strategies such as the flexible adjustment of herd size, fodder composition and feed stocks, as well as an income insurance. Our results show that without any risk-management income variability is rather high, with coefficient of variation (CV) of income ranging from 26% to 31%. Taking on-farm risk management strategies into account it is possible to reduce income variability significantly (CV 12-15%), but causes only low reductions of mean income levels. Our results also indicate that income insurance is not attractive for farmers Our results thus suggest that in particular promoting better access to markets for feed stuff provides an valuable opportunities for farmers to manage income risks.
    Keywords: Weather risk, Bio-economic whole farm model, Suckler cow, Income insurance, Farm Management, Risk and Uncertainty, Q12, Q18,
    Date: 2012–02–23
  13. By: Weynants, S.; Gaspart, Frederic; Frahan, Bruno Henry de
    Abstract: This paper proposes and evaluates area index-based financial contracts for specific farm activities. These financial contracts allow not only for removing moral hazard and adverse selection as index insurances do, but also for adding more flexibility and, hence, better risk protection. The evaluation of these financial contracts uses FADN farm data of Belgium from 1990 to 2007. Area indexes based on yield and yield-in-value perform well in stabilising revenues from some farm activities, but badly from some others. The variation in the estimated actuarially fair premiums across agricultural area shows the importance of designing those financial contracts according to homogenous agricultural area.
    Keywords: agricultural risk management, index insurance, financial contract, Belgium, Risk and Uncertainty, D81, Q12, Q18,
    Date: 2012–02–23
  14. By: Christian Merkl; Thijs van Rens
    Abstract: Firms select not only how many, but also which workers to hire. Yet, in standard labor market models, all workers have the same probability of being hired. We argue that selective hiring crucially affects welfare analysis. Our model is isomorphic to a standard search and matching model under random hiring but allows for selective hiring. With selective hiring, the positive predictions of the model change very little, but the welfare costs of unemployment are much larger because unemployment risk is distributed unequally across workers. As a result, optimal unemployment insurance may be higher and welfare is lower if hiring is selective.
    Keywords: labor market models, welfare, optimal unemployment insurance
    JEL: E24 J65
    Date: 2012–09
  15. By: Perez Blanco, Carlos Dionisio; Gomez Gomez, Carlos Mario
    Abstract: Water is a key input in the production of many goods and services and under certain conditions can become a critical limiting factor with significant impacts on regional development. This is the case of many agricultural European Mediterranean basins, where water deficit during drought events is partially covered by illegal abstractions, mostly from aquifers, which are tolerated by the authorities. Groundwater overexploitation for irrigation has created in these areas an unprecedented environmental catastrophe that threatens ecosystems sustainability, urban water supply and the current model of development. Market-based drought insurance systems have the potential to introduce the necessary incentives to reduce overexploitation during drought events and remove the high costs of the drought indemnity paid by the government. This paper develops a methodology to obtain the optimum risk premium based on concatenated stochastic models. The methodology is applied to the agricultural district of Campo de Cartagena (Segura River Basin, Spain). Results show that the prices in a hypothetic competitive private drought insurance market would be reasonable and the expected environmental outcomes significant.
    Keywords: Drought insurance, stochastic models, groundwater, agriculture, Risk and Uncertainty, Q15, Q18, Q25, Q51, Q58,
    Date: 2012–02–23
  16. By: Regibeau, Pierre; Rockett, Katharine
    Abstract: A recent set of case studies on resilience of ecocultures forms the basis for our review of and comment on the resilience literature. We note the diversity of definitions of resilience and the confusion this creates in implementing resilience studies. We develop a synthesis view that establishes a framework for defining resilience in an implementable way. This framework emphasises the importance of defining the source of and magnitude of shocks. Next, we outline measurement issues, including a variety of performance measures. We argue that self-determination and local ownership of resources is supported in the cases, and review the effectiveness of the informal insurance arrangements that are observed. We close with the variables suggested by the case studies to include in a resilience index and lessons for regional goverments developing resilience policy.
    Keywords: resilience; sustainability; ecoculture; governance; insurance; methodology
    JEL: R58 Z1 Q56 R11
    Date: 2011–10–01

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