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on Insurance Economics |
|
Issue of 2012‒06‒25
thirty papers chosen by Soumitra K Mallick Indian Institute of Social Welfare and Business Management |
| By: | Chang, Jow-Ran; Chen, Shu-Ling |
| Keywords: | Risk and Uncertainty, |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea12:125022&r=ias |
| By: | Pétraud, Jean Paul; Boucher, Stephen R.; Carter, Michael |
| Keywords: | Crop Production/Industries, Risk and Uncertainty, |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea12:124710&r=ias |
| By: | Dan Shane;; Pravin Trivedi; |
| Abstract: | This paper employs an econometric model to parse dierences in health care utilization attributable to private health insurance and differences due to self-selection into insurance status, with specifc interest in selection on unobservable traits such as insurance preference or attitude toward health risks. The model has two components, one component to model insurance outcome, the other to model demand for care measured as the annual number of doctor visits and prescriptions filled. Recognizing the endogeneity of health insurance, the model allows for correlated unobserved heterogeneity by assuming a latent factor structure. Values for these latent factors are drawn through simulation and the model is estimated using maximum simulated likelihood methods. For the observable characteristics that predict need for health services we find evidence of adverse selection. However, we also find evidence of advantageous selection on the unobservable characteristics common to insurance choice and utilization. In other words, unobserved heterogeneity that increases the chances of being uninsured isassociated with higher utilization. Given this selection decomposition, there is no inherent conflict in describing the influence of both adverse and advantageous selection in utilization comparisons. After controlling for selection, the insurance incentive effect (ex-post moral hazard) is positive and signifcant. For the average individual, switching from no coverage to full coverage would result in 2 additional visits to the doctor per year (+160%) and 8 additional prescriptions lled (+207%). |
| Keywords: | Health care; Health insurance; Adverse selection; Treatment eects model, Medical subsidy program |
| JEL: | I11 D82 C31 H51 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:yor:hectdg:12/09&r=ias |
| By: | Thede, Susanna (Department of Economics, Lund University) |
| Abstract: | We provide a simple model of trade, job task offshoring and social insurance to identify economic mechanisms through which the interplay between insurance design, (final-goods) trade and job task offshoring determine domestic producer conditions. A skill-abundant home country that may have more productive workers relocates low-skill job tasks to a labor-abundant foreign country. Only the home country provides social insurance to its citizens. Using a simple conceptualization of social insurance targeting the main mechanisms through which insurance design impacts on producer conditions, we formalize productivity, wage-restrictive, compensation, cost-enhancing, cost-redistributive and labor-supply effects of insurance. The home country’s labor productivity is superior if the health status of the labor force is improved by health insurance. Generous unemployment insurance trigger binding reservation wages, giving rise to labor-supply effects that lead to a domestic overspecialization of production in trade equilibrium. This tendency is stronger with an insurance design that incorporates a cost-coverage link. Offshoring can introduce, enhance or reduce unemployment in the unskilled labor market depending on a combination of market-related factors and insurance design. In particular, offshoring may give rise to a combination of market-related effects that offset unskilled worker dependency on generous unemployment insurance. An insurance regulation that provides generous unemployment benefits and stipulates cost-redistribution can give rise to a compensation effect through which offshoring generates a high-skill wage reduction. |
| Keywords: | Heckscher-Ohlin; Producer conditions; Labor-market adjustments; Insurance design |
| JEL: | F11 F16 I18 J65 |
| Date: | 2012–06–11 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:lunewp:2012_016&r=ias |
| By: | Sun, Baojing; Bell, Peter; van Kooten, G. Cornelis |
| Keywords: | Crop Production/Industries, Environmental Economics and Policy, Risk and Uncertainty, |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea12:124990&r=ias |
| By: | Masayoshi Hayashi (Graduate School of Economics, The University of Tokyo) |
| Abstract: | There are more than 1,700 municipalities serving as insurers in Japan’s system of National Health Insurance (NHI). The NHI has several institutional routes to buffer local premiums from abrupt changes in regional health demands that destabilize the NHI benefit expenditures. After briefly introducing the system of public health care in Japan, this study elaborates on the methods for quantifying the degree of stabilization of local public health care expenditures by critically evaluating the methods that have been utilized in the related literature and proposes a modified method appropriate for this study. It then quantifies the channels and degrees of stabilization using municipal NHI data in the 2000s. |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:cfi:fseres:cf280&r=ias |
| By: | Farrin, Katie |
| Abstract: | I present a dynamic expected utility model to explain farmers’ borrowing decisions and observed low demand for index-based agricultural insurance. Results indicate that, in the absence of insurance, only low- and medium-wealth households access credit for farming and consumption. Once insurance contracts become available, however, cases exist in which borrowing initially declines with wealth until a critical wealth level is reached, after which wealthier households take out loans in order to purchase insurance. Implications of simulations suggest that index-based products may not be tailored for the ultra-poor, who must borrow the maximum amount simply to meet consumption needs. As such, researchers piloting index-based insurance programs must seriously consider the effects of liquidity constraints on contract uptake. |
| Keywords: | Risk and Uncertainty, |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea12:124679&r=ias |
| By: | Ozaki, Vitor A.; Campos, Rogério C. |
| Keywords: | Agricultural Finance, Crop Production/Industries, Risk and Uncertainty, |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea12:124753&r=ias |
| By: | Du, Xiaodong; Hennessy, David A.; Feng, Hongli |
| Keywords: | Crop Production/Industries, Risk and Uncertainty, |
| Date: | 2012–05–31 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea12:124190&r=ias |
| By: | Colson, Gregory; Fu, Shengfei; Ramirez, Octavio A. |
| Keywords: | Agricultural Finance, Crop Production/Industries, Farm Management, |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea12:124739&r=ias |
| By: | Bulut, Harun; Collins, Keith J. |
| Keywords: | Risk and Uncertainty, |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea12:124828&r=ias |
| By: | Merwan Engineer (University of Victoria, Canada); Paul Schure (University of Victoria, Canada); Mark Gillis (Commonwealth Bank of Australia, Australia) |
| Abstract: | We consider the provision of deposit insurance as the outcome of a non-cooperative policy game between nations. Nations compete for deposits in order to protect their banking systems from the destabilizing impact of potential capital flight. Policies are chosen to attract depositors who optimally respond to the expected return to deposits, which depends on both stability and deposit insurance levels. We identify both defensive and beggar-thy-neighbour policies. The model sheds light on the European banking crisis of 2008 in which individual nations ratcheted up their deposit insurance levels. |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:29_12&r=ias |
| By: | Ifft, Jennifer; Wu, Shang; Kuethe, Todd H. |
| Keywords: | Agricultural and Food Policy, Agricultural Finance, Land Economics/Use, Risk and Uncertainty, |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea12:124317&r=ias |
| By: | Singerman, Ariel; Hart, Chad E.; Lence, Sergio H. |
| Abstract: | A framework is developed to examine organic crop insurance established by the Risk Management Agency (RMA). Given that RMA links organic and conventional crop prices, the model is calibrated to reflect both markets to illustrate the impacts that pricing has on insurance coverage. Findings indicate that at the 75% coverage level, RMA's fixed price factor implies an effective coverage ranging from 45% to 106% depending on the ratio of planting-time organic to conventional market prices. Results suggest RMA's program is likely to induce adverse selection, because the nominal coverage level is likely to substantially deviate from the effective coverage. |
| Keywords: | crop insurance, organic agriculture, Agricultural and Food Policy, Q18, |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea12:124370&r=ias |
| By: | Maureen Durnin (Independent Researcher, Guelph, Ontario); Michael Hoy (Department of Economics, University of Guelph); Michael Ruse (Department of Philosophy, Florida State University) |
| Abstract: | The debate on whether insurance companies should be allowed to use results of individuals’ genetic tests for underwriting purposes has been both lively and increasingly relevant over the past two decades. Yet there appears to be no widely agreed upon resolution regarding appropriate and effective regulation. There exists today a gamut of recommendations and actual practices addressing this phenomenon ranging from laissez faire to voluntary industry moratoria to strict legal prohibition. One obvious reason for such a variance in views and approaches is that there are competing norms for evaluating the outcomes of restricting insurers’ use of such information. For example, an outright ban on the use of genetic test results may seem the best method for protecting against unfair discrimination while allowing their use may seem to be the best way to foster efficiency in the market for insurance. However, there is also a lack of understanding about how restricting the use of genetic information would play out in the market through the so-called phenomenon of adverse selection. Using economic analysis, we discuss how the type of adverse selection that occurs in insurance markets affects various arguments both in favour and against an outright ban on insurers’ use of genetic tests for pricing insurance. We review arguments based on moral principles (i.e., a concern with unfair discrimination as well as welfarist analysis related to distributive justice). The practical concerns from the insurance industry based on actuarial principles and economic efficiency are also compared. Each perspective is shown to lead to a range of conflicting recommendations about how genetic information should be regulated and these conclusions depend critically on whether one conducts the analysis from the ex ante temporal perspective (i.e., before individuals know their risk type), from the interim temporal perspective (i.e., after individuals know their risk type but before they purchase their insurance policies), or from the ex post temporal perspective (i.e., after all uncertainty is resolved including the claims status of each policyholder). |
| Keywords: | insurance; genetic discrimination; regulation; privacy |
| JEL: | D82 D63 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:gue:guelph:2012-08.&r=ias |
| By: | Collier, Benjamin; Skees, Jerry R.; Miranda, Mario |
| Keywords: | Agricultural Finance, Financial Economics, |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea12:124663&r=ias |
| By: | Janzen, Sarah A.; Carter, Michael R.; Ikegami, Munenobu |
| Abstract: | Ample evidence exists to suggest that nonlinear asset dynamics can give rise to an environment of poverty traps. When dynamic asset thresholds matter, risk not only affects households ex post, but it also influences ex ante behavior. In this environment some house-holds may have much to gain from a productive safety net which prevents asset levels from dipping below the Micawber threshold. Insurance is a market-based mechanism that can act as a safety net, improving the risk management strategies available to vulnerable households. In this paper we use dynamic programming methods to assess whether vulnerable households will `self-select' into an asset insurance scheme. We show that while such households opti- mally insure at low levels, insurance serves to crowd in additional investment, causing a shift in the Micawber threshold. This investment comes from the hope of reduced vulnerability that insurance oers in the future. Finally, we use our model to make predictions about the value of index-based livestock insurance (IBLI) in Marsabit district of northern Kenya. Our results suggest that the behavioral changes brought about by insurance may result in decreased poverty levels over time. |
| Keywords: | Food Security and Poverty, Livestock Production/Industries, Risk and Uncertainty, |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea12:124805&r=ias |
| By: | Bozic, Marin; Newton, John; Thraen, Cameron S.; Gould, Brian W. |
| Abstract: | Livestock Gross Margin Insurance for Dairy Cattle (LGM-Dairy) is a recently introduced tool for protecting average income over feed cost margins in milk production. In this paper we examine the assumptions underpinning the rating method used to determine premiums charged for LGM-Dairy insurance contracts. The first test relates to the assumption of lognormality in terminal futures prices. Using high-frequency futures and options data for milk, corn and soybean meal we estimate implied densities with flexible higher moments. Simulations indicate there is no strong evidence that imposing lognormality introduces bias in LGM-Dairy premiums. The remainder of the paper is dedicated to examining dependency between milk and feed marginal distributions. The current LGM-Dairy rating method imposes the restriction of zero conditional correlation between milk and corn, as well as milk and soybean meal futures prices. Using futures data from 1998-2011 we find that allowing for non-zero milk-feed correlations considerably reduces LGM-Dairy premiums for insurance contracts with substantial declared feed amounts. Further examination of the nature of milk-feed dependencies reveals that Spearman’s correlation coefficient is mostly reflecting tail dependence. Using the empirical copula approach we find that non-parametric method of modeling milk-feed dependence decreases LGM-Dairy premiums more than a method that allows only for linear correlation. Unlike other situations in portfolio risk assessment where extremal dependence increases risk, in agricultural margins, tail dependence between feed and the Class III milk price may actually decrease insurance risk, and reduce actuarially fair premiums. |
| Keywords: | LGM-Dairy, margin insurance, generalized lambda distribution, tail dependence, empirical copula, Demand and Price Analysis, Livestock Production/Industries, Research and Development/Tech Change/Emerging Technologies, Risk and Uncertainty, |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea12:124718&r=ias |
| By: | Susan E. Chen (University of Alabama, Tuscaloosa) |
| Abstract: | Disability is a permanent unexpected shock to labor supply which according to the theory of the added worker effect should induce a large spousal labor supply response. The Disability Insurance (DI) program is designed to mitigate the income lost due to disability. To the extent that it does this, it can crowd out the spousal labor supply response predicted by the added worker effect theory. Using a unique data that matches administrative data combining worker’s earnings histories and disability insurance applications, this study finds that DI crowds out spousal labor force participation by 6 percent and the displacement spans multiple years. The estimated crowd-out effects are also larger for younger wife cohorts and cohorts with particular types of impairments such as musculoskeletal disease. |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:mrr:papers:wp261&r=ias |
| By: | SAITO Yukiko; KOUNO Toshiaki |
| Abstract: | Using a novel dataset compiled from Japanese health insurance societies covering about 1,500 firms and 15 million employees in total, we examine wage inequality within and between firms. Employing the mean log deviation approach to decompose wage inequality into within-firm and between-firm inequality, we find that it increased among male employees during the period we examined (FY2003-2007). Moreover, even after controlling for changes in the compositional structure of firms' employees, an increase in wage inequality within firms can be observed, greatly contributing to the increase in overall wage inequality, which likely reflects the growing prevalence of performance-based wage systems. |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:12039&r=ias |
| By: | Dominic Ho (School of Risk and Actuarial Studies, Australian School of Business, University of New South Wales); Michael Sherris (School of Risk and Actuarial Studies and ARC Centre of Excellence in Population Ageing Research, Australian School of Business, University of New South Wales) |
| Abstract: | The insurance linked securities (ILS) market is an increasingly important alternative asset class for which risk and return analysis differs from other asset classes. Measures of portfolio risk and return for an ILS portfolio are based on the expected losses and expected excess returns over the risk free rate. Multiple criteria decision making (MCDM) has found successful applications to many real world decision problems. This paper examines the application of two popular MCDM methods, Analytical Hierarchy Process (AHP) and ELECTRE III, to ILS portfolios. These methods are used to screen the securities before constructing portfolios using linear optimisation with constraints. The objective function is to minimise the portfolio expected loss for a given level of expected excess return. Upper and lower bounds are also placed on the investment in each individual ILS. The results demonstrate the benefits from applying MCDM to ILS portfolio selection. |
| Keywords: | Portfolio selection, insurance linked securities, multiple criteria decision making, Analytical Hierarchy Process, ELECTRE |
| JEL: | G11 C61 G22 G32 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:asb:wpaper:201203&r=ias |
| By: | Florian Heiss; Adam Leive; Daniel McFadden; Joachim Winter |
| Abstract: | We study the Medicare Part D prescription drug insurance program as a bellwether for designs of private, non-mandatory health insurance markets, focusing on the ability of consumers to evaluate and optimize their choices of plans. Our analysis of administrative data on medical claims in Medicare Part D suggests that less than 10 percent of individuals enroll in plans that are ex post optimal with respect to total cost (premiums and co-payments). Relative to the benchmark of a static decision rule, similar to the Plan Finder provided by the Medicare administration, that conditions next year’s plan choice only on the drugs consumed in the current year, enrollees lost on average about $300 per year. These numbers are hard to reconcile with decision costs alone; it appears that unless a sizeable fraction of consumers value plan features other than cost, they are not optimizing effectively. |
| JEL: | C25 D12 H51 I11 I18 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18166&r=ias |
| By: | Elena Veprauskaite (School of Management, University of Bath); Michael Sherris (School of Risk and Actuarial Studies and ARC Centre of Excellence in Population Ageing Research, Australian School of Business, University of New South Wales) |
| Abstract: | This paper considers optimal reinsurance based on an assessment of the reinsurance arrangements for a large life insurer. The objective is to determine the reinsurance structure, based on actual insurer data, using a modified mean-variance criteria that maximises the retained premiums and minimizes the variance of retained claims while keeping the retained risk exposure constant, assuming a given level of risk appetite. The portfolio of life and disability policies use quota-share, surplus and a combination of both quota-share and surplus reinsurance. Alternative reinsurance arrangements are compared using the modified mean-variance criteria to assess the optimal reinsurance strategy. The analysis takes into account recent claims experience as well as actual premiums paid by insured lives and to the reinsurers. Optimal reinsurance cover depends on many factors including retention levels, premiums and the variance of sum insured values (and therefore claims), as a result an insurer should assess the tradeoff between retained premiums and the variance of retained claims based on its own experience and risk appetite. |
| Keywords: | Life insurance, optimal reinsurance, proportional reinsurance, mean-variance criteria |
| JEL: | G22 G32 L21 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:asb:wpaper:201204&r=ias |
| By: | Satyajit Chatterjee; Felicia Ionescu |
| Abstract: | Participants in student loan programs must repay loans in full regardless of whether they complete college. But many students who take out a loan do not earn a degree (the dropout rate among college students is between 33 to 50 percent). We examine whether insurance, in the form of loan forgiveness in the event of failure to complete college, can be offered, taking into account moral hazard and adverse selection. To do so, we develop a model that accounts for college enrollment and graduation rates among recent US high school graduates. In our model students may fail to earn a degree because they either fail college or choose to leave voluntarily. We find that if loan forgiveness is offered only when a student fails college, average welfare increases by 2.40 percent (in consumption equivalent units) without much effect on either enrollment or graduation rates. If loan forgiveness is offered against both failure and voluntarily departure, welfare increases by 2.15 percent and both enrollment and graduation are higher. |
| Keywords: | Student loans ; Insurance |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:12-15&r=ias |
| By: | Fraser, Rob W. |
| Abstract: | Motivated by recent EC proposals to “strengthen risk management tools” in the CAP in relation to farmers’ increased exposure to market price risk, this paper draws attention to a potential negative consequence of such a change in the CAP – an associated increase in cheating behaviour by farmers in the context of environmental stewardship. A theoretical framework for this policy problem is developed and used not just to illustrate the problem, but also to propose a solution – specifically to combine the introduction of CAP-supported policy changes which reduce farmers’ exposure to market-based risk with changes in environmental stewardship policies which increase the riskiness of cheating and thereby discourage such behaviour. |
| Keywords: | Demand and Price Analysis, Environmental Economics and Policy, Risk and Uncertainty, |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aare12:124305&r=ias |
| By: | Dhanireddy, Pavan Kumar Reddy; George Frisvold |
| Abstract: | This research examined factors influencing farmer purchase of crop insurance and receipt of disaster assistance payments using survey data for more than 13,000 farms across 27 U.S. states. Using a bivariate probit model some main findings are as follows. The probability of participating in federal crop insurance programs is (a) lower for farmers more than 65 years of age; (b) increasing with farmer education and farm sales; (c) lower for farms where farm income is a small share of household income; and (d) higher in states with higher average temperatures and lower average precipitation. The probability of receiving disaster payments (a) increases as farms depend more on farm income for their total household income; (b)increases with sales in peanut farming and cattle ranching; (c) greater in states experiencing drier or wetter than normal hydrologic conditions; and (d) greater in states experiencing warmer than normal temperatures. In addition, previous research using state-level data found agricultural disaster payments were higher in states with congressional representation on subcommittees overseeing USDA’s direct disaster payment program. The farm-level analysis of this thesis supports this earlier finding. Farmers in states with such representation had higher probabilities of receiving disaster payments, controlling for other factors. |
| Keywords: | Agricultural Finance, Crop Production/Industries, Farm Management, Risk and Uncertainty, |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea12:124720&r=ias |
| By: | Beyene, Berhe Mekonnen (Dept. of Economics, University of Oslo) |
| Abstract: | The paper studies the link between international remittances and interhousehold transfers. Using a simple insurance model, it is shown that households transfer a large fraction of the remittance they receive from relatives abroad to other households. The effect of remittances on interhousehold transfers is empirically investigated using an urban household survey from Ethiopia. Consistent with the prediction of the model, remittance has a strong positive effect on the amount of transfer given, controlling for total household income and other covariates. |
| Keywords: | international remittances; interhousehold transfers; mutual insurance; Ethiopia |
| JEL: | D19 F24 I30 R20 |
| Date: | 2012–03–15 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:osloec:2012_014&r=ias |
| By: | Maathumai Nirmalendran (Finity Consulting); Michael Sherris (School of Risk and Actuarial Studies and ARC Centre of Excellence in Population Ageing Research, Australian School of Business, University of New South Wales); Katja Hanewald (School of Risk and Actuarial Studies and ARC Centre of Excellence in Population Ageing Research, Australian School of Business, University of New South Wales) |
| Abstract: | This paper provides a detailed quantitative assessment of the impact of solvency capital requirements on product pricing and shareholder value for a life insurer. A multi-period firm value maximization model for a life annuity provider, allowing for stochastic mortality and asset returns, imperfectly elastic product demand, as well as frictional costs, is used to derive optimal capital and pricing strategies for a range of solvency levels reflecting differences in regulatory regimes. The model is calibrated using realistic assumptions and the sensitivity of results assessed. The results show that value-maximizing insurers should target higher solvency levels than the Solvency II regulatory 99.5% under assumptions of reasonable levels of policyholder's aversion to insolvency risk. Even in the case of less restrictive solvency regulation, policyholder price elasticity and solvency preferences are shown to be important factors for a life insurer's profit maximizing strategy. |
| Keywords: | Life annuity, insurance regulation, solvency, longevity risk |
| JEL: | G22 G23 G28 G32 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:asb:wpaper:201213&r=ias |
| By: | Jonathan Ziveyi (School of Risk and Actuarial Studies, University of New South Wales); Craig Blackburn (School of Risk and Actuarial Studies and ARC Centre of Excellence in Population Ageing Research, Australian School of Business, University of New South Wales); Michael Sherris (School of Risk and Actuarial Studies and ARC Centre of Excellence in Population Ageing Research, Australian School of Business, University of New South Wales) |
| Abstract: | This paper considers the pricing of European call options written on pure endowment and deferred life annuity contracts, also known as guaranteed annuity options. These contracts provide a guarantee value at maturity of the option. The contract valuation is dependent on stochastic interest rate and mortality processes. We assume single-factor stochastic squareroot processes for both interest rate and mortality intensity, with mortality being a timeinhomogeneous process. We then derive the pricing partial differential equation (PDE) and the corresponding transition density PDE for options written on deferred contracts. The general solution of the pricing PDE is derived as a function of the transition density function. We solve the transition density PDE by first transforming it to a system of characteristic PDEs using Laplace transform techniques and then applying the method of characteristics. Once an explicit expression for the density function is found, we then use sparse grid quadrature techniques to generate European call option prices on deferred insurance products. This approach can easily be generalised to other contracts which are driven by similar stochastic processes presented in this paper. We test the sensitivity of the option prices by varying independent parameters in our model. As option maturity increases, the corresponding option prices significantly increase. The effect of miss-pricing the guaranteed annuity value is analysed, as is the benefit of replacing the whole-life annuity with a term annuity to remove volatility of the old age population. |
| Keywords: | Mortality risk, Deferred insurance products, European options, Laplace Transforms |
| JEL: | C63 G22 G13 G12 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:asb:wpaper:201202&r=ias |
| By: | Flory, Jeffrey A. |
| Abstract: | This paper uses a randomized field experiment to identify the spillover effects of increased formal savings-use on non-farm business activity and production decisions of non-savers in villages. A panel analysis of 2,006 households in Central Malawi shows that a randomly assigned formal savings encouragement exogenously increases adoption of high-liquidity formal savings accounts in village communities. This increases receipts of cash assistance by non-saving households in the middle wealth-stratum, who may be on the margins for deciding to operate a non-farm business, or start growing cash crops or high-yielding crop varieties (HYVs). The hypothesized channel of effects is that expanded formal savings-use increases liquidity and decreases transaction costs, lowers the cost of making transfers, and thus increases receipts of cash aid even by non-saving households. Increased cash assistance is then linked among these households to increased probability of operating a non-farm enterprise or switching to HYVs or cash crops. This may result from a perception of increased security, which causes households to be more willing to take on higher-risk, higher-reward production activities. To date, little is known about how microfinance affects pre-existing informal insurance practices, and whether the production choices among those who utilize informal practices change as safety nets based on inter-household transfers strengthen or weaken when financial markets expand. This paper helps fill that gap. |
| Keywords: | Microfinance, formal savings, indirect effects, micro-enterprise, informal insurance, HYVs adoption, Agricultural Finance, Consumer/Household Economics, Crop Production/Industries, Production Economics, |
| Date: | 2012–06–04 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea12:125013&r=ias |