nep-ias New Economics Papers
on Insurance Economics
Issue of 2012‒08‒23
twenty-two papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Incentives that saved lives: Government regulation of accident insurance associations in Germany, 1884-1914 By Timothy W. Guinnane; Jochen Streb
  2. Pricing and Incentives in Publicly Subsidized Health Care Markets: the Case of Medicare Part D By Francesco Decarolis
  3. Insurance demand under ambiguity and conflict for extreme risks : Evidence from a large representative survey By Théodora Dupont-Courtade
  4. Flexicurity, wage dynamics and inequality over the life-cycle By Paul Bingley; Lorenzo Cappellari; Niels Westergård-Nielsen
  5. Unemployment insurance fraud and optimal monitoring By David L. Fuller; B. Ravikumar; Yuzhe Zhang
  6. Trust & Insurance Markets By Luigi Guiso
  7. Barriers to Household Risk Management: Evidence from India By Robert M. Townsend; Petia Topalova; Shawn Cole; Xavier Gine; Jeremy Tobacman; James Ian Vickery
  8. Medicare Advantage: Lessons for Medicare's Future. New England Journal of Medicine By Marsha Gold
  9. The Role of Federal and State Dependent Coverage Eligibility Policies on the Health Insurance Status of Young Adults By Joel C. Cantor; Alan C. Monheit; Derek DeLia; Kristen Lloyd
  10. Private Information and Insurance Rejections By Nathaniel Hendren
  11. The Cost of Financial Frictions for Life Insurers By Ralph S.J. Koijen; Motohiro Yogo
  12. Does Seeing the Doctor More Often Keep You Out of the Hospital? By Robert Kaestner; Anthony T. Lo Sasso
  13. Skills, social insurance, and changes in innovation investment after the onset of the financial crisis in Europe By Andrea Filippetti; Frederick Guy
  14. Social Support Substitution and the Earnings Rebound: Evidence from a Regression Discontinuity in Disability Insurance Reform By Lex Borghans; Anne C. Gielen; Erzo F.P. Luttmer
  15. Movement of Children Between Medicaid and CHIP, 2005 to 2007. Washington, DC: Mathematica Policy Research By John L. Czajka
  16. Measuring Systemic Liquidity Risk and the Cost of Liquidity Insurance By Tiago Severo
  17. IMFG Graduate Student Papers: (1) Development Charges across Canada: An Underutilized Growth Management Tool? (2) Preparing for the Costs of Extreme Weather in Canadian Cities: Issues, Tools, Ideas By Mia Baumeister; Cayley Burgess
  18. Saving Teens: Using a Policy Discontinuity to Estimate the Effects of Medicaid Eligibility By Bruce D. Meyer; Laura R. Wherry
  19. Systemic Banking Crises Database: An Update By Luc Laeven; Fabian Valencia
  20. Ambiguous Life Expectancy and the Demand for Annuities By Hippolyte D'Albis; Emmanuel Thibault
  21. Ambiguous Life Expectancy and the Demand for Annuities. By Hippolyte d'Albis; Emmanuel Thibault
  22. Where Have All the Good Jobs Gone? By John Schmitt; Janelle Jones

  1. By: Timothy W. Guinnane (Economics Department, Yale University); Jochen Streb (University of Mannheim)
    Abstract: The German government introduced compulsory accident insurance for industrial firms in 1884. This insurance scheme was one of the main pillars of Bismarck’s famous social insurance system. The accident-insurance system achieved only one of its intended goals: it successfully compensated workers and their survivors for losses due to accidents. The accident-insurance system was less successful in limiting the growth of work-related accidents, although that goal had been a reason for the system’s creation. We trace the failure to stem the growth of accidents to faulty incentives built into the 1884 legislation. The law created mutual insurance groups that used an experience-rating system that stressed group rather than firm experience, leaving firms with little hope of saving on insurance contributions by improving the safety of their own plants. The government regulator increasingly stressed the imposition of safety rules that would force all firms to adopt certain safety practices. Econometric analysis shows that even the flawed tools available to the insurance groups were powerful, and that more consistent use would have reduced industrial accidents earlier and more extensively.
    Keywords: Social insurance, accident insurance, workman’s compensation, regulation
    JEL: N33 G22 H55
    Date: 2012–08
  2. By: Francesco Decarolis (Department of Economics, University of Wisconsin-Madison)
    Abstract: In Medicare Part D, low income individuals receive subsidies to enroll into insurance plans. This paper studies how premiums are distorted by the combined effects of this subsidy and the default assignment of low income enrollees into plans. Removing this distortion could reduce the cost of the program without worsening consumers' welfare. Using data from the the first five years of the program, an econometric model is used to estimate consumers demand for plans and to compute what premiums would be without the subsidy distortion. Preliminary estimates suggest that the reduction in premiums of affected plans would be substantial.
    Keywords: Medicare; prescription drugs; health insurance demand; auctions
    JEL: I11 I18 L22 D44 H57
    Date: 2012–06–30
  3. By: Théodora Dupont-Courtade (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: This paper investigates how the general public behaves when confronted with low probability events and ambiguity in an insurance context. It reports the results of a questionnaire completed by a large representative sample of the French population that aims at separating attitudes toward risk, imprecision and conflict and at determining if there is a demand for ambiguous and extreme event risks. The data show a strong distinction between two aspects of the problem : the decision of purchasing insurance and the willingness to pay. In the decision to insure, more than 25% of the respondents refuse to buy insurance and people are more willing to insure in a risky situation than in an ambiguous one. This certain taste for risk can be explained by the respondents' observable characteristics. In addition, it highlights a lack of confidence in the insurance markets. When it comes to willingness to pay, people exhibit ambiguity seeking behaviors. They are willing to pay more under risk than under ambiguity (embracing here imprecision and conflict), revealing that people consider ambiguous situations as inferior. Furthermore, respondents behave differently under imprecision and conflict. They exhibit a preference for consensual information and dislike conflicts. However, the willingness to pay is poorly correlated with observable characteristics.
    Keywords: Ambiguity; imprecision; conflict; decision making; extreme risk; insurance demand; willingness to pay
    Date: 2012–01
  4. By: Paul Bingley; Lorenzo Cappellari; Niels Westergård-Nielsen
    Abstract: We investigate the relationship between life-cycle wages and flexicurity in Denmark. We separate permanent from transitory wages and characterise flexicurity using membership of unemployment insurance funds. We find that flexicurity is associated with lower wage growth heterogeneity over the life-cycle and greater wage instability, changing the nature of wage inequality from permanent to transitory. While we are in general unable to formally test for moral hazard against adverse selection into unemployment insurance membership, robustness checks suggest that moral hazard is the relevant interpretation.
    Keywords: Unemployment insurance, wage dynamics, wage inequality, wage instability
    JEL: J31 J65
    Date: 2012–03
  5. By: David L. Fuller; B. Ravikumar; Yuzhe Zhang
    Abstract: The most prevalent incentive problem in the U.S. unemployment insurance system is that individuals collect unemployment benefits while being gainfully employed. We show how the unemployment insurance authority can efficiently use a combination of tax/subsidy and monitoring to prevent such fraud. The optimal policy monitors the unemployed at fixed intervals. Employment tax is nonmonotonic: it increases between verifications but decreases after a verification. Unemployment benefits are relatively flat between verifications but decrease sharply after a verification.
    Keywords: Unemployment ; Insurance
    Date: 2012
  6. By: Luigi Guiso (EIEF)
    Abstract: Trust is a key determinants of any financial transaction. Exchanges in insurance markets are a particular type of financial transaction where a current payment – the premium – is exchanged for a promise of a future, contingent payment – the indemnity due when the casualty occurs. We argue that trust is key in fostering these type of exchanges. Trust enters two ways: because it affects the willingness of the company to supply insurance when the insured can cheat by claiming indemnities that are not due. Because it discourages people from purchasing insurance if they do not trust the company's promise of readily paying the indemnity when due. We prove theoretically and empirically the relevance of trust in insurance exchanges and discuss policies to foster it.
    Date: 2012
  7. By: Robert M. Townsend; Petia Topalova; Shawn Cole; Xavier Gine; Jeremy Tobacman; James Ian Vickery
    Abstract: Why do many households remain exposed to large exogenous sources of non-systematic income risk? We use a series of randomized field experiments in rural India to test the importance of price and non-price factors in the adoption of an innovative rainfall insurance product. Demand is significantly price sensitive, but widespread take-up would not be achieved even if the product offered a payout ratio comparable to U.S. insurance contracts. We present evidence suggesting that lack of trust, liquidity constraints and limited salience are significant non-price frictions that constrain demand. We suggest contract design improvements to mitigate these frictions.
    Keywords: Demand , Household credit , Insurance , Risk management ,
    Date: 2012–07–27
  8. By: Marsha Gold
    Abstract: This article examines the lessons and limits of Medicare Advantage, private health plans, and market competition as proposed solutions to traditional Medicare's rising costs and growing eligibility rolls. Gold reviews Medicare's 30-year experience with voluntary private-plan enrollment—initially through HMOs and currently through Medicare Advantage plans—as an alternative to traditional Medicare.
    Keywords: Medicare Advantage, Health Care Costs, Eligibility Rolls, Insurance Coverage
    JEL: I
    Date: 2012–03–01
  9. By: Joel C. Cantor; Alan C. Monheit; Derek DeLia; Kristen Lloyd
    Abstract: This paper evaluates one of the first implemented provisions of the Patient Protection and Affordable Care Act (ACA) which permits young adults up to age 26 to enroll as dependents on a parent’s private health plan. The paper also considers how the interaction between prior state laws expanding dependent coverage to young adults and the ACA affected young adult coverage. Using data from the Current Population Survey for calendar years 2004-2010, we apply a difference-in-differences framework to estimate how these provisions affected coverage of eligible young adults compared to slightly older adults. Our findings indicate that controlling for state laws, early implementation of the ACA increased young adult dependent coverage by 5.3 percentage points and resulted in a 3.5 percentage point decline in their uninsured rate. The interaction between state laws and the ACA suggests that the increase in dependent coverage and decline in the uninsured rate may have been greater among young adults who were targeted by both the ACA and state laws.
    JEL: I18
    Date: 2012–07
  10. By: Nathaniel Hendren
    Abstract: Across a wide set of non-group insurance markets, applicants are rejected based on observable, often high-risk, characteristics. This paper argues private information, held by the potential applicant pool, explains rejections. I formulate this argument by developing and testing a model in which agents may have private information about their risk. I first derive a new no-trade result that theoretically explains how private information could cause rejections. I then develop a new empirical methodology to test whether this no-trade condition can explain rejections. The methodology uses subjective probability elicitations as noisy measures of agents beliefs. I apply this approach to three non-group markets: long-term care, disability, and life insurance. Consistent with the predictions of the theory, in all three settings I find significant amounts of private information held by those who would be rejected; I find generally more private information for those who would be rejected relative to those who can purchase insurance; and I show it is enough private information to explain a complete absence of trade for those who would be rejected. The results suggest private information prevents the existence of large segments of these three major insurance markets.
    JEL: H0 I11
    Date: 2012–08
  11. By: Ralph S.J. Koijen; Motohiro Yogo
    Abstract: During the financial crisis, life insurers sold long-term insurance policies at deep discounts relative to actuarial value. In January 2009, the average markup was -25 percent for 30-year term annuities as well as life annuities and -52 percent for universal life insurance. This extraordinary pricing behavior was a consequence of financial frictions and statutory reserve regulation that allowed life insurers to record far less than a dollar of reserve per dollar of future insurance liability. Using exogenous variation in required reserves across different types of policies, we identify the shadow cost of financial frictions for life insurers. The shadow cost was nearly $5 per dollar of excess reserve for the average insurance company in January 2009.
    JEL: G01 G22 G28
    Date: 2012–08
  12. By: Robert Kaestner; Anthony T. Lo Sasso
    Abstract: By exploiting a unique health insurance benefit design, we provide novel evidence on the causal association between outpatient and inpatient care. Our results indicate that greater outpatient spending was associated with more hospital admissions: a $100 increase in outpatient spending was associated with a 2.7% increase in the probability of having an inpatient event and a 4.6% increase in inpatient spending among enrollees in our sample. Moreover, we present evidence that the increase in hospital admissions associated with greater outpatient spending was for conditions in which it is plausible to argue that the physician and patient could exercise discretion.
    JEL: I12
    Date: 2012–07
  13. By: Andrea Filippetti (Department of Geography, London School of Economics); Frederick Guy (Department of Management, Birkbeck College University of London)
    Abstract: We find that firms in countries which have both high earnings replacement rates and high participation in vocational education and training were less likely to reduce investments in innovation following the onset of the financial crisis; countries with only one of these features were more likely to see reduced investment in innovation; job security appears to have no effect.
    Date: 2012–08
  14. By: Lex Borghans; Anne C. Gielen; Erzo F.P. Luttmer
    Abstract: In this paper, we exploit a cohort discontinuity in the stringency of the 1993 Dutch disability reforms to obtain causal estimates of the effects of decreased generosity of disability insurance (DI) on behavior of existing DI recipients. We find evidence of substantial “social support substitution”: individuals on average offset a euro of lost DI benefits by collecting 31 cents more from other social assistance programs. This benefit-substitution effect declines somewhat over time, but is still a significant 20% eight years later. Individuals also exhibit a strong rebound in earnings: labor earnings increase by 62 cents on average per euro of lost DI benefits. This is novel evidence of substantial remaining earnings capacity in a sample of long-term claimants of DI. On average, individuals make up for almost the entire DI benefit reduction through increases in other forms of social assistance and in labor earnings.
    JEL: H53 I38 J22
    Date: 2012–07
  15. By: John L. Czajka
    Abstract: This report uses Medicaid administrative records rather than survey data to examine children's movement between Medicaid and the Children's Health Insurance Program from 2005 through 2007. These data capture true changes in eligibility and provide a better source for estimating how often enrollment changes over time in a population of program participants.
    Keywords: M-CHIP, S-CHIP , Children's Health Insurance Program, Medicaid expansion program, Medicaid Statistical Information System, MSIS, MAX, Medicaid Analytic Extract
    JEL: I
    Date: 2012–01–31
  16. By: Tiago Severo
    Abstract: I construct a systemic liquidity risk index (SLRI) from data on violations of arbitrage relationships across several asset classes between 2004 and 2010. Then I test whether the equity returns of 53 global banks were exposed to this liquidity risk factor. Results show that the level of bank returns is not directly affected by the SLRI, but their volatility increases when liquidity conditions deteriorate. I do not find a strong association between bank size and exposure to the SLRI - measured as the sensitivity of volatility to the index. Surprisingly, exposure to systemic liquidity risk is positively associated with the Net Stable Funding Ratio (NSFR). The link between equity volatility and the SLRI allows me to calculate the cost that would be borne by public authorities for providing liquidity support to the financial sector. I use this information to estimate a liquidity insurance premium that could be paid by individual banks in order to cover for that social cost.
    Date: 2012–07–27
  17. By: Mia Baumeister (R.E. Millward Associates Ltd.); Cayley Burgess (Ontario Office of the Budget and Treasury Board)
    Abstract: (1) Increasingly, compact and sustainable development has become a priority for Canadian municipalities. In order to realize these growth objectives, it is possible to look not only to conventional land use and growth management policies, but also to fiscal instruments to achieve planning goals. Existing literature suggests that development charges, which are financial tools used by municipalities in several Canadian provinces to pay for the growth-related capital costs associated with new development or redevelopment, can influence how land resources are consumed and developments are designed. Drawing on information from the literature and interviews with key informants, this research analyzed how development charges are used in British Columbia, Alberta, and Ontario, as well as the Halifax Regional Municipality, to understand how jurisdictions employ development charges and what role these charges currently play in achieving growth objectives. The research found that few municipalities use their development charges proactively to meet planning goals. Moreover, the research revealed a divide among practitioners, with some maintaining that development charges were a revenueraising tool and a poor mechanism by which to achieve planning objectives. Others recognized that development charges could be—and were being—used as a tool to encourage compact growth, but identified several barriers to more effective and widespread use as a planning tool. Suggested recommendations for policy changes include more flexibility within legislation to collect for transit and other services, ongoing support from provincial officials to assist municipalities in designing development charge programs with policy goals in mind, and further exploration of how fiscal tools can best be used as planning tools. (2) This paper reviews the risks to Canadian municipal finance from extreme weather and analyzes the financial tools that cities can use to prepare for extreme weather events: insurance, weather reserves, weather derivatives, and budget provision. Despite the threat of climate change, Canadian cities are not substantially increasing their use of these tools. However, improvements could be made to accounting procedures and disaster assistance regulations, and amalgamating smaller cities could improve their ability to manage risk, all of which will ameliorate the financial impacts of extreme weather. The paper proposes reasons why Canadian cities have failed to fully adapt their infrastructure to extreme weather: lack of information, low fiscal capacity, externalities, moral hazard in disaster assistance arrangements, and poor program design. It concludes by discussing how these arrangements may be overhauled to better prepare Canadian municipalities for extreme weather, including new provincial legislation and the creation of a federal infrastructure fund modelled on the United States’ Pre-Disaster Mitigation program.
    Keywords: (1) development charges, smart growth, compact growth, sustainable development, transit (2) climate change, extreme weather, insurance, budgeting, disaster assistance, risk management
    JEL: H23 H27 D81 G22 H29
    Date: 2012–07
  18. By: Bruce D. Meyer; Laura R. Wherry
    Abstract: This paper uses a policy discontinuity to identify the immediate and long-term effects of public health insurance coverage during childhood. Our identification strategy exploits a unique feature of several early Medicaid expansions that extended eligibility only to children born after September 30, 1983. This feature resulted in a large discontinuity in the lifetime years of Medicaid eligibility of children at this birthdate cutoff. Those with family incomes at or just below the poverty line had close to five more years of eligibility if they were born just after the cutoff than if they were born just before. We use this discontinuity in eligibility to measure the impact of public health insurance on mortality by following cohorts of children born on either side of this cutoff from childhood through early adulthood. We examine changes in rates of mortality by the underlying causes of death, distinguishing between deaths due to internal and external causes. We also examine outcomes separately for black and white children. Our analysis shows that black children were more likely to be affected by the Medicaid expansions and gained twice the amount of eligibility as white children. We find a substantial effect of public eligibility during childhood on the later life mortality of black children at ages 15-18. The estimates indicate a 13-18 percent decrease in the internal mortality rate of black teens born after September 30, 1983. We find no evidence of an improvement in the mortality of white children under the expansions.
    JEL: I14
    Date: 2012–08
  19. By: Luc Laeven; Fabian Valencia
    Abstract: We update the widely used banking crises database by Laeven and Valencia (2008, 2010) with new information on recent and ongoing crises, including updated information on policy responses and outcomes (i.e. fiscal costs, output losses, and increases in public debt). We also update our dating of sovereign debt and currency crises. The database includes all systemic banking, currency, and sovereign debt crises during the period 1970-2011. The data show some striking differences in policy responses between advanced and emerging economies as well as many similarities between past and ongoing crises.
    Keywords: Banking crisis , Databases , Deposit insurance , Developed countries , Emerging markets , Financial crisis , Fiscal policy , Monetary policy , Sovereign debt ,
    Date: 2012–06–22
  20. By: Hippolyte D'Albis (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); Emmanuel Thibault (Toulouse School of Economics - TSE, CDED - Université de Perpignan, IDEI - Université Toulouse I Capitole)
    Abstract: In this paper, ambiguity aversion to uncertain survival probabilities is introduced in a life-cycle model with a bequest motive to study the optimal demand for annuities. Provided that annuities return is sufficiently large, and notably when it is fair, positive annuitization is known to be optimal strategy of ambiguity neutral individuals. Conversely, we show that the demand for annuities decreases with ambiguity aversion and that there exists a finite degree of aversion above which the demand is non positive : the optimal strategy is then to either sell annuities short or to hold zero annuities if the former option is not available. To conclude, ambiguity aversion appears as a relevant candidate for explaining the annuity puzzle.
    Keywords: Demand for annuities; uncertain survival probabilities; ambiguity aversion
    Date: 2012–07
  21. By: Hippolyte d'Albis (Centre d'Economie de la Sorbonne - Paris School of Economics); Emmanuel Thibault (Toulouse School of Economics - Université de Perpignan, CDED and IDEI)
    Abstract: In this paper, ambiguity aversion to uncertain survival probabilities is introduced in a life-cycle model with a bequest motive to study the optimal demand for annuities. Provided that annuities return is sufficiently large, and notably when it is fair, positive annuitization is known to be optimal strategy of ambiguity neutral individuals. Conversely, we show that the demand for annuities decreases with ambiguity aversion and that there exists a finite degree of aversion above which the demand is non positive : the optimal strategy is then to either sell annuities short or to hold zero annuities if the former option is not available. To conclude, ambiguity aversion appears as a relevant candidate for explaining the annuity puzzle.
    Keywords: Demand for annuities, uncertain survival probabilities, ambiguity aversion.
    JEL: D11 D81 G11 G22
    Date: 2012–07
  22. By: John Schmitt; Janelle Jones
    Abstract: The U.S. workforce is substantially older and better-educated than it was at the end of the 1970s. The typical worker in 2010 was seven years older than in 1979. In 2010, over one-third of US workers had a four-year college degree or more, up from just one-fifth in 1979. Given that older and better-educated workers generally receive higher pay and better benefits, we would have expected the share of “good jobs” in the economy to have increased in line with improvements in the quality of workforce. Instead, the share of “good jobs” in the U.S. economy has actually fallen. The estimates in this paper, which control for increases in age and education of the population, suggest that relative to 1979 the economy has lost about one-third (28 to 38 percent) of its capacity to generate good jobs. The data show only minor differences between 2007, before the Great Recession began, and 2010, the low point for the labor market. The deterioration in the economy's ability to generate good jobs reflects long-run changes in the U.S. economy, not short-run factors related to the recession or recent economic policy.
    Keywords: good jobs, retirement, pensions, health insurance, wages, labor, education
    JEL: J J3 J31 J32 J38 J5 J1 J11 J15 I I2 I24 I25
    Date: 2012–07

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