nep-ias New Economics Papers
on Insurance Economics
Issue of 2012‒10‒27
fourteen papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. The Problem of the Uninsured By Ehrlich, Isaac; Yin, Yong
  2. Behavioral Hazard in Health Insurance By Katherine Baicker; Sendhil Mullainathan; Joshua Schwartzstein
  3. Agricultural Decisions after Relaxing Credit and Risk Constraints By Karlan, Dean S.; Osei, Robert; Osei-Akoto, Isaac; Udry, Christopher
  4. The Cost of Financial Frictions for Life Insurers By Motohiro Yogo; Ralph Koijen
  5. Suit the action to the word, the word to the action: Hypothetical choices and real decisions in Medicare Part D By Kesternich, Iris; Heiss, Florian; McFadden, Daniel; Winter, Joachim
  6. Dental Usage Under Changing Economic Conditions. Journal of Public Health Dentistry By Richard J. Manski; John F. Moeller; Haiyan Chen; Jody Schimmel; Patricia A. St. Clair; John V. Pepper
  7. Earthquake Risk Information and Risk Aversive Behavior: Evidence from a Survey of Residents in Tokyo Metropolitan Area By Yasuo Kawawaki
  8. How Targeted is Targeted Tax Relief? Evidence from the Unemployment Insurance Youth Hires Program By Matthew Webb; Arthur Sweetman; Casey Warman
  9. Cost Effectiveness Analysis and the Design of Cost-Sharing in Insurance: Solving a Puzzle By Mark Pauly
  10. Marriage as women's old age insurance : evidence from migration and land inheritance practices in rural Tanzania By Kudo, Yuya
  11. An introduction to particle integration methods: with applications to risk and insurance By P. Del Moral; G. W. Peters; Ch. Verg\'e
  12. A Note on Applications of Stochastic Ordering to Control Problems in Insurance and Finance By Nicole Bauerle; Erhan Bayraktar
  13. A Copula Based Bayesian Approach for Paid-Incurred Claims Models for Non-Life Insurance Reserving By Gareth W. Peters; Alice X. D. Dong; Robert Kohn
  14. Life-Cycle Portfolio Choice with Liquid and Illiquid Financial Assets By Claudio Campanale; Carolina Fugazza; Francisco Gomes

  1. By: Ehrlich, Isaac (University at Buffalo, SUNY); Yin, Yong (University at Buffalo, SUNY)
    Abstract: The problem of the uninsured – those eschewing the purchase of health insurance policies – cannot be fully understood without considering informal alternatives to market insurance called "self-insurance" and "self-protection", including the publicly and charitably-financed safety-net health care system. This paper tackles the problem of the uninsured by formulating a "full-insurance" paradigm that includes all 4 measures of insurance as interacting components, and analyzing their interdependencies. We apply both a baseline and extended versions of the model through calibrated simulations to estimate the degree to which these non-market alternatives can account for the fraction of the non-elderly adults who are uninsured, and estimate their behavioral and policy ramifications. Our results indicate that policy analyses that do not consider the role of self-efforts to avoid health losses can grossly distort the success of the ACA mandate to insure the uninsured and to improve the health and welfare outcomes of the previously uninsured.
    Keywords: health insurance, health care, uninsured, self-insurance, self-protection
    JEL: G22 H42 I28
    Date: 2012–10
  2. By: Katherine Baicker; Sendhil Mullainathan; Joshua Schwartzstein
    Abstract: This paper develops a model of health insurance that incorporates behavioral biases. In the traditional model, people who are insured overuse low value medical care because of moral hazard. There is ample evidence, though, of a different inefficiency: people underuse high value medical care because they make mistakes. Such “behavioral hazard” changes the fundamental tradeoff between insurance and incentives. With only moral hazard, raising copays increases the efficiency of demand by ameliorating overuse. With the addition of behavioral hazard, raising copays may reduce efficiency by exaggerating underuse. This means that estimating the demand response is no longer enough for setting optimal copays; the health response needs to be considered as well. This provides a theoretical foundation for value-based insurance design: for some high value treatments, for example, copays should be zero (or even negative). Empirically, this reinterpretation of demand proves important, since high value care is often as elastic as low value care. For example, calibration using data from a field experiment suggests that omitting behavioral hazard leads to welfare estimates that can be both wrong in sign and off by an order of magnitude. Optimally designed insurance can thus increase health care efficiency as well as provide financial protection, suggesting the potential for market failure when private insurers are not fully incentivized to counteract behavioral biases.
    JEL: D01 D03 D8
    Date: 2012–10
  3. By: Karlan, Dean S.; Osei, Robert; Osei-Akoto, Isaac; Udry, Christopher
    Abstract: The investment decisions of small-scale farmers in developing countries are conditioned by their financial environment. Binding credit market constraints and incomplete insurance can reduce investment in activities with high expected profits. We conducted several experiments in northern Ghana in which farmers were randomly assigned to receive cash grants, grants of or opportunities to purchase rainfall index insurance, or a combination of the two. Demand for index insurance is strong, and insurance leads to significantly larger agricultural investment and riskier production choices in agriculture. The salient constraint to farmer investment is uninsured risk: when provided with insurance against the primary catastrophic risk they face, farmers are able to find resources to increase expenditure on their farms. Demand for insurance in subsequent years is strongly increasing in a farmer’s own receipt of insurance payouts, and with the receipt of payouts by others in the farmer’s social network. Both investment patterns and the demand for index insurance are consistent with the presence of important basis risk associated with the index insurance, and with imperfect trust that promised payouts will be delivered.
    Keywords: agriculture; credit markets; insurance markets; misallocation; risk; underinvestment
    JEL: C93 D24 D92 G22 O12 O13 O16 Q12 Q14
    Date: 2012–10
  4. By: Motohiro Yogo (Federal Reserve Bank of Minneapolis); Ralph Koijen (University of Chicago)
    Abstract: During the financial crisis, life insurers sold long-term insurance policies at firesale prices. In January 2009, the average markup, relative to actuarial value, 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 of raising a dollar of excess reserve was nearly \$5 for the average insurance company in January 2009.
    Date: 2012
  5. By: Kesternich, Iris; Heiss, Florian; McFadden, Daniel; Winter, Joachim
    Abstract: In recent years, consumer choice has become an important element of public policy. One reason is that consumers differ in their tastes and needs, which they can express most easily through their own choices. Elements that strengthen consumer choice feature prominently in the design of public insurance markets, for instance in the United States in the recent introduction of prescription drug coverage for older individuals via Medicare Part D. For policy makers who design such a market, an important practical question in the design phase of such a new program is how to deduce enrollment and plan selection preferences prior to its introduction. In this paper, we investigate whether hypothetical choice experiments can serve as a tool in this process. We combine data from hypothetical and real plan choices, elicited around the time of the introduction of Medicare Part D. We first analyze how well the hypothetical choice data predict willingness to pay and market shares at the aggregate level. We then analyze predictions at the individual level, in particular how insurance demand varies with observable characteristics. We also explore whether the extent of adverse selection can be predicted using hypothetical choice data alone.
    Keywords: Medicare; health insurance demand; hypothetical choice experiments
    JEL: I11 C25 D12 H51 I18
    Date: 2012–10
  6. By: Richard J. Manski; John F. Moeller; Haiyan Chen; Jody Schimmel; Patricia A. St. Clair; John V. Pepper
    Keywords: dental;utilization;dentistry, insurance;coverage, wealth, income;retirement
    JEL: I
    Date: 2012–09–21
  7. By: Yasuo Kawawaki (Visiting Professor, Osaka School of International Public Policy (OSIPP))
    Abstract: This paper analyzes the relationship between provision of earthquake risk information and residents' willingness to pay (WTP) for disaster risk reduction by the Contingent Valuation Method (CVM), using questionnaire survey data on the purchase of earthquake insurance in the Tokyo Metropolitan Area, Japan. Degree of disaster risk aversion and subjective probability of loss are estimated as parameters of expected utility function in a discrete choice model. The results suggest that when more precise and specific earthquake risk information is provided, residents of vulnerable houses are willing to pay more for disaster risk reduction, with larger subjective probability of loss, while those in safe houses are willing to pay slightly less, with a larger degree of risk aversion.
    Keywords: CVM, WTP, Earthquake Insurance, Risk Aversion, Subjective Probability of Loss
    JEL: D81 D83 R28
    Date: 2012–10
  8. By: Matthew Webb (Queen's University); Arthur Sweetman (McMaster University); Casey Warman (Dalhousie University)
    Abstract: Targeted employment subsidy programs are commonly employed by governments. This study examines one such initiative that rebated unemployment insurance premiums for net new insurable employment for youth aged 18 to 24. Using microdata from two datasets to estimate the labour market impacts of this program, in each we find statistically and economically significant impacts of various measures of employment for the targeted age group relative to older age groups. Neither dataset exhibits a concurrent change in unemployment; rather a reduction in those not in the labor force is observed. Oddly, no program impacts are observed for females; all of the effects are for males. Notably, we find evidence of displacement – substitution away from slightly older non-subsidized workers towards the younger subsidized group. These spillovers suggest that the aggregate impact of the program is less than that observed for the targeted group.
    Keywords: Unemployment Insurance, Targeted Program, Displacement, Employment, Youth Unemployment
    JEL: J64 J65 J68 C12
    Date: 2012–10
  9. By: Mark Pauly
    Abstract: The conventional model for the use of cost effectiveness analysis for health programs involves determining whether the cost per unit of effectiveness of the program is better than some socially determined maximum acceptable cost per unit of effectiveness. If a program is better, the policy implication is that it should be implemented by full coverage of its cost by insurance; if not, no coverage should be provided and the program should not be implemented. This paper examines the unanswered question of how cost effectiveness analysis should be performed and interpreted when insurance coverage can involve non-negligible cost sharing. It explores both the question of how cost effectiveness is affected by the presence of cost sharing, and the more fundamental question of cost effectiveness when cost sharing is itself set at the cost effective level. Both a benchmark model where only “societal” preferences (embodied in a threshold value of dollars per unit of health) matter and a model where individual willingness to pay can be combined with societal values are considered. A common view that cost sharing should vary inversely with program cost effectiveness is shown to be incorrect. A key issue in correct analysis is whether there is heterogeneity either in marginal effectiveness of care or marginal values of care that cannot be perceived by the social planner but is known by the demander. The cost effectiveness of a program is shown to depend upon the level of cost sharing; it is possible that some programs that would fail the social test at both zero coverage and full coverage will be acceptable with positive cost sharing. Combining individual and social preferences affects both the choice of programs and the extent of cost sharing.
    JEL: I11
    Date: 2012–10
  10. By: Kudo, Yuya
    Abstract: In a traditional system of exogamous and patrilocal marriage prevalent in much of Sub-Saharan Africa, when she marries, a rural woman typically leaves her kin to reside with her husband living outside her natal village. Since a village that allows a widow to inherit her late husband's land can provide her with old age security, single females living outside the village are more likely to marry into the village. Using a natural experimental setting, provided by the longitudinal household panel data drawn from rural Tanzania for the period from 1991 to 2004, during which several villages that initially banned a widow's land inheritance removed this discrimination, this study provides evidence in support of this view, whereby altering a customary land inheritance rules in a village in favor of widows increased the probability of males marrying in that village. This finding suggests that providing rural women with old age protection (e.g., insurance, livelihood protection) has remarkable spatial and temporal welfare effects by influencing their decision to marry.
    Keywords: Tanzania, Social security, Women welfare, Land tenure, Aged, Migration, Demography, Gender empowerment, Land ownership, Social custom, Widowhood
    JEL: J12 J14 K11 Q15 R23
    Date: 2012–09
  11. By: P. Del Moral; G. W. Peters; Ch. Verg\'e
    Abstract: Interacting particle methods are increasingly used to sample from complex and high-dimensional distributions. These stochastic particle integration techniques can be interpreted as an universal acceptance-rejection sequential particle sampler equipped with adaptive and interacting recycling mechanisms. Practically, the particles evolve randomly around the space independently and to each particle is associated a positive potential function. Periodically, particles with high potentials duplicate at the expense of low potential particle which die. This natural genetic type selection scheme appears in numerous applications in applied probability, physics, Bayesian statistics, signal processing, biology, and information engineering. It is the intention of this paper to introduce them to risk modeling. From a purely mathematical point of view, these stochastic samplers can be interpreted as Feynman-Kac particle integration methods. These functional models are natural mathematical extensions of the traditional change of probability measures, commonly used to design an importance sampling strategy. In this article, we provide a brief introduction to the stochastic modeling and the theoretical analysis of these particle algorithms. Then we conclude with an illustration of a subset of such methods to resolve important risk measure and capital estimation in risk and insurance modelling.
    Date: 2012–10
  12. By: Nicole Bauerle; Erhan Bayraktar
    Abstract: We consider a controlled diffusion process $(X_t)_{t\ge 0}$ where the controller is allowed to choose the drift $\mu_t$ and the volatility $\sigma_t$ from a set $\K(x) \subset \R\times (0,\infty)$ when $X_t=x$. By choosing the largest $\frac{\mu}{\sigma^2}$ at every point in time an extremal process is constructed which is under suitable time changes stochastically larger than any other admissible process. This observation immediately leads to a very simple solution of problems where ruin or hitting probabilities have to be minimized. Under further conditions this extremal process also minimizes "drawdown" probabilities.
    Date: 2012–10
  13. By: Gareth W. Peters; Alice X. D. Dong; Robert Kohn
    Abstract: Our article considers the class of recently developed stochastic models that combine claims payments and incurred losses information into a coherent reserving methodology. In particular, we develop a family of Heirarchical Bayesian Paid-Incurred-Claims models, combining the claims reserving models of Hertig et al. (1985) and Gogol et al. (1993). In the process we extend the independent log-normal model of Merz et al. (2010) by incorporating different dependence structures using a Data-Augmented mixture Copula Paid-Incurred claims model. The utility and influence of incorporating both payment and incurred losses into estimating of the full predictive distribution of the outstanding loss liabilities and the resulting reserves is demonstrated in the following cases: (i) an independent payment (P) data model; (ii) the independent Payment-Incurred Claims (PIC) data model of Merz et al. (2010); (iii) a novel dependent lag-year telescoping block diagonal Gaussian Copula PIC data model incorporating conjugacy via transformation; (iv) a novel data-augmented mixture Archimedean copula dependent PIC data model. Inference in such models is developed via a class of adaptive Markov chain Monte Carlo sampling algorithms. These incorporate a data-augmentation framework utilized to efficiently evaluate the likelihood for the copula based PIC model in the loss reserving triangles. The adaptation strategy is based on representing a positive definite covariance matrix by the exponential of a symmetric matrix as proposed by Leonard et al. (1992).
    Date: 2012–10
  14. By: Claudio Campanale; Carolina Fugazza; Francisco Gomes
    Abstract: Traditionally quantitative models that have studied households' port- folio choice have focused exclusively on the different risk properties of alternative financial assets. In the present paper we take a different ap- proach and assume that assets also differ in their liquidity. We construct a model where agents face uninsurable idiosyncratic shocks to labor earn- ings. Earnings are paid in the form of a liquid asset that is needed to buy consumption goods. A second, risky asset, called stock is also available, however a fixed transaction cost is needed to buy or sell this asset. When the transaction cost is calibrated to match the observed infrequency in households' trading, the model generates patterns of portfolio stock allo- cations over age and wealth that are constant or moderately increasing, thus more in line with the empirical evidence compared to conventional models.
    Keywords: household portfolio choice, self-insurance, cash-in-advance, transaction cost.
    JEL: G11 D91 H55
    Date: 2012

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