nep-ias New Economics Papers
on Insurance Economics
Issue of 2012‒05‒29
fifteen papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Private, social and self insurance for longterm care: a political economy analysis By De Donder, Philippe; Pestieau, Pierre
  2. Rational and mechanics of a peak risk variance swap for a property insurance portfolio By Zvezdov, Ivelin
  3. Black Swan Protection: an Experimental Investigation By Ozlem Ozdemir; Andrea Morone
  4. Optimal insurance design of ambiguous risks By Gollier, Christian
  5. Early Interventions and Disability Insurance: Experience from a Field Experiment By Engström, Per; Hägglund, Pathric; Johansson, Per
  6. Early interventions and disability insurance: Experience from a field experiment By Engström, Per; Hägglund, Pathric; Johansson, Per
  7. Optimal Unemployment Insurance for Older Workers By Jean-Olivier Hairault; François Langot; Sébastien Ménard; Thepthida Sopraseuth
  8. Optimal Extortion and Political Risk Insurance By Frédéric Koessler; Ariane Lambert-Mogiliansky
  9. Insurance portfolio risk aggregation and solvency capital computation with mathematical copula techniques By Zvezdov, Ivelin
  10. Age-Based Heterogeneity and Pricing Regulation on the Massachusetts Health Insurance Exchange By Keith M. Marzilli Ericson; Amanda Starc
  11. Measuring and managing the impact of risk on organizations: The Case of Kosovo By Govori, Arbiana
  12. What determines bank stock price synchronicity? Global evidence By Francis , Bill; Hasan, Iftekhar; Song, Liang; Yeung , Bernard
  13. Information or Insurance? On the Role of Loan Officer Discretion in Credit Assessment By Martin Brown; Matthias Schaller; Simone Westerfeld; Markus Heusler
  14. Challenges in implementation of the maternity leave in Kosovo By Ramosaj, Argjiro
  15. Sveriges socialförsäkringar i jämförande perspektiv En institutionell analys av sjuk-, arbetsskade- och arbetslöshetsförsäkringarna i 18 OECD-länder 1930 till 2010 By Palme, Joakim; Ferrarini, Tommy; Sjöberg, Ola; Nelson, Kenneth

  1. By: De Donder, Philippe (Toulouse School of Economics (GREMAQ-CNRS and IDEI)); Pestieau, Pierre
    Abstract: We analyze the determinants of the demand for social, private and self-insurance for long-term care in an environment where agents di¤er in income, probability of becoming dependent and of receiving family help. Uniform social benefits are financed with a proportional income tax and are thus redistributive, while private insurance is actuarially fair. We obtain a rich pattern of insights, depending on whether private insurance is available or not, on its loading factor, and on the correlation between, on the one hand, income and risk, and, on the other hand, income and family help. Although the availability of private insurance decreases the demand for social insurance, it only a¤ects a minority of agents so that the majority-chosen social insurance level remains una¤ected. Family support crowds out the demand for both private and social insurance, and may even suppress any demand for private insurance. Family help crowds out self-insurance only for agents whose demand for both social and private insurance is nil. A general increase in the probability of becoming dependent need not increase the demand for social insurance, since it decreases its return.
    Keywords: long-term care, social insurance, family help, correlation between risk and income, voting.
    JEL: H24 H31 H42 I11
    Date: 2011–12
  2. By: Zvezdov, Ivelin
    Abstract: In this technical report we explore the motivation, structuring and detailed mechanics of a variance swap contract adapted for a property insurance portfolio. We structure, price and test sensitivities of the swap contract using real event historical and modeled natural catastrophe loss data. Our key motivation is to propose an element of financial engineering innovation to insurance portfolio risk management to allow for constructing hedging strategies that may not be possible to achieve with traditional reinsurance treaties and contracts.
    Keywords: variance swap; peak catastrophe risk hedging; insurance portfolio risk management and risk transfer
    JEL: G22 G24
    Date: 2012–04–07
  3. By: Ozlem Ozdemir (Middle East Technical University, Department of Business Administration, Ankara, Turkey); Andrea Morone (Università degli Studi di Bari, Aldo Moro Dipartimento di Studi Aziendali e Giusprivatistici, Bari, Italy And Universitat Jaune I Departament d'Economia, Castellon, SpainAuthor-Name: David Skuse)
    Abstract: This experimental study investigates insurance decisions in low-probability, high-loss risk situations. Results indicate that subjects consider the probability of loss (loss size) when they make buying decisions (paying decisions). Most individuals are risk averse with no specific threshold probability.
    Keywords: Black swan, Risk, Insurance, Low probability, High loss, Experiment
    JEL: C91 D81
    Date: 2012
  4. 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
  5. By: Engström, Per (Uppsala University); Hägglund, Pathric (SOFI, Stockholm University); Johansson, Per (IFAU)
    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, disability insurance, sickness insurances, unemployment insurance, randomized experiment
    JEL: C93 H51 H55 I18 J22
    Date: 2012–05
  6. By: Engström, Per (Uppsala Center for Labor Studies); Hägglund, Pathric (The Swedish Social Insurance Inspectorate); Johansson, Per (Uppsala Center for Labor Studies)
    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; disability insurance; sickness insurances; unemployemnt insurance; randomized experiment
    JEL: C93 H51 H55 I18 J22
    Date: 2012–04–18
  7. By: Jean-Olivier Hairault (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne, IZA - Institute for the Study of Labor); François Langot (IZA - Institute for the Study of Labor, GAINS-TEPP - Université du Mans, CEPREMAP - Centre pour la recherche économique et ses applications); Sébastien Ménard (GAINS - Université du Maine); Thepthida Sopraseuth (CEPREMAP - Centre pour la recherche économique et ses applications, GAINS-TEPP - Université du Maine)
    Abstract: This paper studies the optimal unemployment insurance for older workers in a repeated principal-agent model, where the search intensity of risk-averse workers (the agents) is not observed by the risk-neutral insurance agency (the principal). When unemployment benefits are the only available tool, the insurance agency is not able to induce older workers to search for a job. This is because of the short time-horizon of workers close to retirement. We propose to introduce a pension tax dependent on the length of the unemployment spell. We show that this device performs better than a wage tax after re-employment. First, it makes jobs more attractive, as they are free of tax. Second, because re-employment will be short-lived, a pension tax is a more powerful incentive than a wage tax, and provides more substantial fiscal gains to the agency. Finally, a pension tax allows those workers near retirement who still do not exercise job search to smooth their consumption during their unemployment spell, as if they could borrow against their future pension.
    Date: 2012–02–13
  8. By: Frédéric Koessler (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Ariane Lambert-Mogiliansky (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: We study the problem faced by firms that invest in a foreign country characterized by weak governance. Our focus is on extortion relying on the threat of expropriation and bureaucratic harassment. The bureaucrat's power is characterized by looking at a general extortion mechanism adapted from Myerson's (1981) optimal auction theory. This characterization is used to study the determinants of the quality of governance and whether and how political risk insurance of foreign direct investments improve upon it. We find that it does not always improve upon all governance indicators. It always decreases the bureaucrat's total revenue from corruption, but it may also increase the risk of expropriation and the extortion bribes paid by some firms.
    Keywords: Auctions ; Corruption ; Expropriation ; Extortion ; Governance ; Harassment ; Mechanism Design ; Political Constraints ; Political Risk Insurance
    Date: 2012–02
  9. By: Zvezdov, Ivelin
    Abstract: Contents 1. Portfolio structuring; risk factor category identification and mapping 2. Risk aggregation of single risk losses within each risk factor category a. Methodology identification and brief technical review b. SCR computation by risk factor category 3. The portfolio view and SCR. 4. Conclusion: coherence, stress testing and benchmarks
    Keywords: insurance portfolio risk aggregation; solvency capital requirement; mathematical copulas
    JEL: G11 G22 C15
    Date: 2012–02–07
  10. By: Keith M. Marzilli Ericson; Amanda Starc
    Abstract: Little is known about consumer behavior or insurer incentives in health insurance exchanges. We analyze choice on the Massachusetts exchange, using coarse insurer pricing strategies to identify price sensitivity. We find substantial age-based heterogeneity: younger individuals are more than twice as price sensitive as older individuals. Modified community rating regulations interact with price discrimination, as our results imply higher markups on older consumers. Age-based pricing regulations would bind even conditional on perfect risk adjustment, highlighting the importance of considering insurer incentives when regulating insurance markets. Changes in age-based pricing regulation can result in transfers of 8% of the purchase price.
    JEL: I11
    Date: 2012–05
  11. By: Govori, Arbiana
    Abstract: After the 2008 events that occurred in world financial markets, all organizations have increased interest in risk management. It is very clear that risk management brings benefits to the organization. By taking a proactive approach to risk and risk management, organizations will be able to manage to improve performance and results in the areas of the operations performance, the development of processes and projects, and the selection and implementation of alternative development strategies. Business firms in Kosovo have changed their approach to risk management in recent times. Reasons for that ‘approach evolution’ are based on recent losses in some of commercial banks, insurance companies, pension trust, and some negative trends in Kosovo real economy.
    Keywords: Risk; returns; organization; operations; processes; strategy; rsik quantification; risk management; risk insurance
    JEL: D81 M1 D8 M2 G3
    Date: 2012–05–05
  12. By: Francis , Bill (Rensselaer Polytechnic Institute); Hasan, Iftekhar (Fordham University and Bank of Finland); Song, Liang (Michigan Technological University); Yeung , Bernard (National University of Singapore)
    Abstract: This paper examines what institutional and bank-specific factors determine bank stock price synchronicity. Using data on 37 countries from 1996–2007, we find that bank stocks are more aligned with the whole market (1) during the financial crisis; (2) in countries that have more credit provided by banks; (3) in countries that do not have explicit depository insurance; and (4) in countries that have lower bank-level disclosure. The results hold for both emerging and developed economy subsamples. Furthermore, in emerging economies, bank stocks in countries with higher degree of state-owned bank are more synchronized with the whole market, similarly, in developed markets, lower banking freedom enhances bank stock price synchronicity. Finally, the effects of state ownership, protection of property rights, and bank size are all more pronounced when determining bank stock price synchronicity during the financial crisis period.
    Keywords: stock price synchronicity; financial crisis; bank ownership; deposit insurance; banking freedom; bank disclosure
    JEL: G12 G14 G15 G21 G38 N20
    Date: 2012–04–18
  13. By: Martin Brown (University of St. Gallen); Matthias Schaller (University of St. Gallen); Simone Westerfeld (University of Applied Sciences Northwestern Switzerland); Markus Heusler (Risk Solution Network AG)
    Abstract: We employ a unique dataset of 6,669 credit assessments for 3,542 small businesses by nine banks using an identical rating model over the period 2006-2011 to examine (i) to what extent loan officers use their discretion to smooth credit ratings of their clients, and (ii) to assess whether this use of discretion is driven by information about the creditworthiness of the borrower or by the insurance of clients against fluctuations in lending conditions. Our results show that loan officers make extensive use of their discretion to smooth clients' credit ratings: One in five rating shocks induced by changes in the quantitative assessment of a client is reversed by the loan officer. This smoothing of credit ratings is prevalent across all rating classes, is independent of whether the borrower experiences a positive or a negative rating shock, and is independent of whether the shock is firm-specific or market-related. We find that discretionary rating changes have limited power in predicting future loan performance, indicating that the smoothing of credit ratings is only partially driven by information about creditworthiness. Instead, in line with the implicit contract view of credit relationships loan officers are more likely to smooth ratings when rating shocks have stronger implications for interest rates.
    Keywords: Asymmetric information, Credit rating, Implicit contracts, Relationship banking
    JEL: D82 G21 L14
    Date: 2012–05
  14. By: Ramosaj, Argjiro
    Abstract: This study aims to analyze the implementation of Labor Law in Kosovo, with a particular attention towards Article 49th which regulates the issue of maternity leave. Labor Law in Kosovo has been in force only for a year, and as such it has been a matter of discussion because of the challenges that have hampered its successful implementation. The study begins with an analysis of the chronological order of labor documents that aimed to regulate labor relationships in Kosovo. Moreover the analysis continues with the exploration of developments of the new Labor law and challenges that is facing while being implements in both public and private sector. Labor Law regulates the labor relationships in both private and public sector in Kosovo. Drafting of Labor Law in Kosovo has been considered a positive process towards establishing legal guidelines in order to ensure sustainable employment relationships in Kosovo. Moreover, the purpose of this law was to provide a legal document which would have the power to fill all the gaps that were left by the previous UNMIK regulation in regards to labor relationships. However, despite the positive expectations that were created towards this law, several challenges that are encountered during its implementation process have consequently produced negative effects in the society where we live. Therefore, when referring to the issue of maternity leave, there are several factors that are harming its successful implementation. Thus, the maternity leave system (6+3+3), together with the limited resources of labor inspectorate, lack of a health insurance fund, and weak judicial system are constantly affecting the success of this regulation in public and private sector in Kosovo. Moreover the confusion between the application of Labor Law and Civil Service law in terms of maternity leave has been another barrier of the proper implementation of this law. According to Article 49 of the labor law, women in Kosovo have the right of 12 months of maternity leave. While analyzing the legal provisions of this regulation, the 12 month period which is prescribed by law ranks Kosovo among countries with the highest maternity leave period. However, the most challenging part of this regulation remains the compensation plan which is divided between the employer and the Government of Kosovo. According to the compensation plan (6+3+3) the first 6 months are paid by the employer with the compensation of 70% of basic salary, and the following 3 months are paid by the government with the compensation of 50% of the average salary in Kosovo. This formula seems to be the root of many problems. Employees in this case are the ones that feel that are discriminated by such a regulation by paying 70 % of the basic salary. Moreover, at the same time they incur additional costs when implementing this regulation, since replacement of the worker who receives maternity should also be paid as well. Taking into consideration all these concerns, majority of businesses have decided to be very selective while hiring people, consequently violating the rights of women. As such, double contracts, contracts with an undetermined period, and other illegal forms are used in order to discourage women that are pregnant to continue working. On the other hand, labor inspectorate which has the authority to supervise the implementation process of the labor law lacks the necessary resources to do so. Some of the barriers that are preventing labor inspectorate to perform their job are: limited number of labor inspectors, insufficient budget, and limited technical resources. Moreover, another challenge it is considered the low capacity of the Municipal Court of Prishtina to deal with cases from all regions of Kosovo that derive from labor relationships. Thus, in the end of the study, further recommendations are presented which need to be implemented in the short-run in order to ensure the successful implementation of labor law. Thus, increase in awareness about the labor law and its regulations in Kosovo should be done in order for employers and employees to be better informed ; creation of the health insurance fund is an urgent need and as such the success story of Albania and other countries in the region are taken into consideration; Strengthening monitoring mechanism that control the implementation of the labor law in private and public sector is needed; and finally the creation of labor courts is considered essential for the successful implementation of the labor law and maternity leave in Kosovo.
    Keywords: Maternity leave; labor law; regulation; implementation; monitoring; employment relationships; health insurance
    JEL: J13 K3 J01 K31 J16 J08 I18 J00 J0 I1
    Date: 2012–03–11
  15. By: Palme, Joakim (Uppsala Center for Labor Studies); Ferrarini, Tommy (Institutet för social forskning); Sjöberg, Ola (Institutet för social forskning); Nelson, Kenneth (Institutet för social forskning)
    Abstract: Den parlamentariska socialförsäkringsutredningen ska enligt regeringens direktiv se över de allmänna försäkringarna vid sjukdom och arbetslöshet. Kommittén ska överväga förändringar som kan leda till mer hållbara sjuk- och arbetslöshetsförsäkringar. De förändringar som kan bli aktuella ska bidra till ökad sysselsättning och hållbara statsfinanser på lång sikt. Med syfte att inbjuda till bred debatt och för att skapa ett mångfacetterat underlag inför kommitténs betänkanden har en rad underlagsrapporter beställts från forskare, myndigheter och andra aktörer med kunskaper om sjuk- och arbetslöshetsförsäkringarna. Analyser, slutsatser och rekommendationer i dessa underlagsrapporter står för respektive författare och delas nödvändigtvis inte av den parlamentariska kommittén. I denna rapport analyseras utvecklingen av sjuk-, arbetsskadeoch arbetslöshetsförsäkringarna i Sverige i ett internationellt perspektiv. I rapporten redovisas både långsiktiga trender och skillnader mellan länder i dessa tre socialförsäkringars ersättningsnivåer, ersättningstak, varaktighet, karensdagar och kvalificeringsvillkor. Författarna visar att de faktiska ersättningsnivåerna har sjunkit i Sverige i samtliga tre socialförsäkringar. Detta är delvis en följd av sänkta formella ersättningsnivåer men beror även på att de nominella ersättningstaken eller de högsta ersättningsbeloppen har släpat efter löneutvecklingen. Inte minst är detta tydligt i den inkomstrelaterade arbetslöshetsförsäkringen där den faktiska ersättningsnivån för en genomsnittlig industriarbetare har sjunkit under 60 procent av lönen. Rapporten visar även att arbetslöshetsförsäkringens ersättningsnivå i Sverige i dag ligger under genomsnittet för OECD-länderna. Mot denna bakgrund menar författarna att om ersättningarna i framtiden inte räknas upp med reallöneutvecklingen innebär det ett avsteg från den modell som via lagstiftning tidigare gett inkomstbortfallsskydd för de allra flesta heltidsarbetande. Rapporten är skriven av Tommy Ferrarini, Kenneth Nelson, Ola Sjöberg verksamma vid Institutet för social forskning (SOFI),Stockholms universitet och Joakim Palme, statsvetenskapliga institutionen vid Uppsala universitet.
    Keywords: Social; insurance;
    JEL: H50
    Date: 2012–05–01

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