nep-ias New Economics Papers
on Insurance Economics
Issue of 2012‒12‒10
five papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Analyzing the Effects of Insuring Health Risks: On the Trade-off between Short Run Insurance Benefits vs. Long Run Incentive Costs By Harold L. Cole; Soojin Kim; Dirk Krueger
  2. A Dynamic Inflation Hedging Trading Strategy Using a CPPI By Fulli-Lemaire, Nicolas
  3. Accounting for non-annuitization By Pashchenko, Svetlana
  4. Alternative Inflation Hedging Portfolio Strategies: Going Forward Under Immoderate Macroeconomics By Fulli-Lemaire, Nicolas
  5. Foreign investment in local currency bonds -- considerations for emerging market public debt managers By Sienaert, Alex

  1. By: Harold L. Cole (Department of Economics, University of Pennsylvania); Soojin Kim (Department of Economics, University of Pennsylvania); Dirk Krueger (Department of Economics, University of Pennsylvania)
    Abstract: This paper constructs a dynamic model of health insurance to evaluate the short- and long run effects of policies that prevent firms from conditioning wages on health conditions of their workers, and that prevent health insurance companies from charging individuals with adverse health conditions higher insurance premia. Our study is motivated by recent US legislation that has tightened regulations on wage discrimination against workers with poorer health status (Americans with Disability Act of 2009, ADA, and ADA Amendments Act of 2008, ADAAA) and that will prohibit health insurance companies from charging different premiums for workers of different health status starting in 2014 (Patient Protection and Affordable Care Act, PPACA). In the model, a trade-off arises between the static gains from better insurance against poor health induced by these policies and their adverse dynamic incentive effects on household efforts to lead a healthy life. Using household panel data from the PSID we estimate and calibrate the model and then use it to evaluate the static and dynamic consequences of no-wage discrimination and no-prior conditions laws for the evolution of the cross-sectional health and consumption distribution of a cohort of households, as well as ex-ante lifetime utility of a typical member of this cohort. In our quantitative analysis we find that although a combination of both policies is effective in providing full consumption insurance period by period, it is suboptimal to introduce both policies jointly since such policy innovation induces a more rapid deterioration of the cohort health distribution over time. This is due to the fact that combination of both laws severely undermines the incentives to lead healthier lives. The resulting negative effects on health outcomes in society more than offset the static gains from better consumption insurance so that expected discounted lifetime utility is lower under both policies, relative to only implementing wage nondiscrimination legislation.
    Keywords: Health, Insurance, Incentive
    JEL: E61 H31 I18
    Date: 2012–11–29
  2. By: Fulli-Lemaire, Nicolas
    Abstract: This article tries to solve the portfolio inflation hedging problem by introducing a new class of dynamic trading strategies derived from classic portfolio insurance techniques adapted to the real world. These strategies aim at yielding higher returns on a risk-adjusted basis than regular inflation hedging portfolio allocation while achieving a lower cost than comparable option-based guaranteed real value strategies.
    Keywords: ALM; Inflation Hedging; Portfolio Insurance; CPPI
    JEL: G1 C6 C5
    Date: 2012–01–02
  3. By: Pashchenko, Svetlana
    Abstract: Why don't people buy annuities? Several explanations have been provided by the previous literature: large fraction of preannuitized wealth in retirees' portfolios; adverse selection; bequest motives; and medical expense uncertainty. This paper uses a quantitative model to assess the importance of these impediments to annuitization and also studies three newer explanations: government safety net in terms of means-tested transfers; illiquidity of housing wealth; and restrictions on minimum amount of investment in annuities. This paper shows that quantitatively four explanations play a big role in reducing annuity demand: preannuitized wealth, minimum annuity purchase requirement, illiquidity of housing wealth, and bequest motives. The annuity purchase involves big upfront investment, especially if there is a minimum purchase restriction. This is binding for many, especially if housing is illiquid and part of wealth is preannuitized. While bequest motives significantly reduce the overall annuity demand, the model with a strong bequest motive cannot match the empirical fact that high-income people have the highest demand for annuities.
    Keywords: annuity puzzle; longevity insurance; adverse selection
    JEL: G11 G22 D91
    Date: 2012–11–19
  4. By: Fulli-Lemaire, Nicolas
    Abstract: Gone are the days when inflation fears had receded under years of 'Great Moderation' in macroeconomics. The US subprime financial crisis, the ensuing 'Great Recession' and the sovereign debt scares that spread throughout much of the industrialized world brought about a new order characterized by higher inflation volatility, severe commodity price shocks and uncertainty over sovereign bond creditworthiness to name just a few. All of which tend to put in jeopardy both conventional inflation protected strategies and nominal unhedged ones: from reduced issues of linkers to negative long-term real rates, they call into question the viability of current strategies. This paper investigates those game changing events and their asset liability management consequences for retail and institutional investors. Three alternative ways to achieve real value protection are proposed.
    Keywords: inflation hedging; portfolio allocation; alternative investment; commodities; real rates; core Inflation; global macro; inflation pass-through; strategic allocation; portfolio insurance; Great Recession
    JEL: G11 G2 E3
    Date: 2012–11–06
  5. By: Sienaert, Alex
    Abstract: Foreign investors are increasingly important participants in the local currency sovereign bond markets of developing countries. This note provides context on the overall growth of local currency sovereign debt markets in emerging markets and the growth of foreign investor participation in these markets, a short review of the relevant academic literature, and a summary of the sources of foreign demand. The note concludes with a discussion of the implications of growing foreign investor participation for the managers of public domestic debt in developing countries. The aim of the note is to provide a useful, practically-oriented primer for debt managers beginning to engage on this issue, and in particular to facilitate moving the dialogue beyond overly simple categorizations of countries as"emerging markets"and of investors as a homogeneous source of"hot money".
    Keywords: Debt Markets,Emerging Markets,Currencies and Exchange Rates,Deposit Insurance,Markets and Market Access
    Date: 2012–12–01

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