nep-ias New Economics Papers
on Insurance Economics
Issue of 2013‒05‒19
sixteen papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Do Hypothetical Experiences Affect Real Financial Decisions? Evidence from Insurance Take-up By Cai, Jing; Song, Changcheng
  2. Do Work Decisions among Young Adults Respond to Extended Dependent Coverage? By Youjin Hahn; Hee-Seung Yang
  3. Can Risk Adjustment prevent Risk Selection in a Competitive Long-Term Care Insurance Market? By Piet Bakx; Erik Schut; Eddy van Doorslaer
  4. The Impact of Insurance Provision on Households’ Production and Financial Decisions By Cai, Jing
  5. The Social Dilemma of Microinsurance: A Framed Field Experiment on Free-Riding and Coordination By Wendy Janssens
  6. Social Networks and the Decision to Insure By Cai, Jing; de Janvry, Alain; Sadoulet, Elisabeth
  7. Regulation of Road Accident Externalities when Insurance Companies have Market Power By Maria Dementyeva; Paul R. Koster; Erik T. Verhoef
  8. Gender Differences in Sickness Absence and the Gender Division of Family Responsibilities By Angelov, Nikolay; Johansson, Per; Lindahl, Erica
  9. Access to Social Insurance in Urban China: A Comparative Study of Rural-Urban and Urban-Urban Migrants in Beijing By Zhiming Cheng; Ingrid Nielsen; Russell Smyth
  10. How Financial Incentives Induce Disability Insurance Recipients to Return to Work By Andreas Ravndal Kostøl; Magne Mogstad
  11. The Economic Impact of Envy: Evidence from a Multi-Period Game with Attacks and Insurance By Philip J. Grossman; Mana Komai
  12. Effects of NCMS Coverage on Access to Care and Financial Protection in China By Zhiyuan Hou; Ellen Van de Poel; Eddy Van Doorslaer; Baorong Yua; Qingyue Menge
  13. Demand Side Cost-Sharing and Prescription Drugs Utilization: Evidence From a Quasi-Natural Experiment By Eva Hromadkova; Michal Zdenek
  14. On Risk, Leverage and Banks: Do highly Leveraged Banks take on Excessive Risk? By Martin Koudstaal; Sweder van Wijnbergen
  15. An Overview of Agricultural Credit and Crop Insurance in Bihar By Singh, R.K.P.; Singh, K.M.
  16. "Is Elderly Care Socialized in Japan? Analyzing the Effects of the 2006 Amendment to the LTCI on the Female Labor Supply" By Shinya Sugawara; Jiro Nakamura

  1. By: Cai, Jing; Song, Changcheng
    Abstract: This paper uses a novel experimental design to study the effect of hypothetical personal experience on the adoption of a new insurance product in rural China. Specifically, we conduct a set of insurance games with a random subset of farmers. Our findings show that playing insurance games improves insurance take-up in real life by 48%. Exploring the mechanism behind this effect, we show that the effect is not driven by changes in risk attitudes, changes in perceived probability of disasters, or learning of insurance benefits, but is driven mainly by the experience acquired in playing the insurance game. Moreover, we find that, compared with experience with real disasters in the previous year, the hypothetical experience gained in the insurance game has a stronger effect on insurance take-up, implying that the impact of personal experience displays a strong recency effect.
    Keywords: Insurance, Take-up, Game, Experience, Learning
    JEL: D03 D14 G22 M31 O16 O33 Q12
    Date: 2013–05–09
  2. By: Youjin Hahn; Hee-Seung Yang
    Abstract: Young adults aged 19-24 are significantly less likely to have health insurance since most family insurance policies cut off dependents when they turn 19 or finish college. In recent years, several states in the United States have expanded eligibility to allow young adults to remain covered under their parents' employer-provided health insurance. For those who qualify for these benefits, the expansion of parental dependent coverage partially reduces the value of being employed by a firm that provides health insurance or of working full-time, as adult children can now obtain health insurance through another channel. In this study, we employ quasi-experimental variation in the timing and generosity of states' eligibility rules to identify the effect of the policy change on young adults' labor market choices. Our results suggest that the expansion of dependent coverage increases the group dependent coverage rate and reduces labor supply among young adults, particularly in full-time employment. The results are robust to a variety of empirical specifications and sample selection.
    Keywords: Young adults; Health insurance; Group dependent coverage; Labor force participation; Full- time employment
    JEL: H75 I18 J21
    Date: 2013–05
  3. By: Piet Bakx (Erasmus University Rotterdam); Erik Schut (Erasmus University Rotterdam); Eddy van Doorslaer (Erasmus University Rotterdam)
    Abstract: When public long-term care (LTC) insurance is provided by insurers, they typically lack incentives for purchasing cost-effective LTC. Providing insurers with appropriate incentives for efficiency without jeopardizing access for high-risk individuals requires, among other things, an adequate system of risk adjustment. While risk adjustment is now widely adopted in health insurance, it is unclear whether adequate risk adjustment is feasible for LTC because of its specific features. We examine the feasibility of risk adjustment for LTC insurance using a rich set of linked nationwide Dutch administrative data. Prior LTC use and demographic information are found to explain much of the variation, while prior health care expenditures are important in reducing predicted losses for subgroups of health care users. Nevertheless, incentives for risk selection against some easily identifiable subgroups persist. Moreover, using prior utilization and expenditure as risk adjusters dilutes incentives for efficiency, but using multiyear data may reduce this disadvantage.
    Keywords: risk adjustment, long-term care, managed competition, public insurance
    JEL: H51 I11 I18 L13
    Date: 2013–01–17
  4. By: Cai, Jing
    Abstract: Taking advantage of a natural experiment and a rich household-level panel dataset, this paper tests the impact of an agricultural insurance program on household level production, borrowing, and saving. The empirical strategy includes both difference-in-difference and triple difference estimations. I find that, first, introducing insurance increases the production area of insured crops by around 20% and decreases production diversification; second, provision of insurance raises the credit demand by 25%; third, it decreases household saving by more than 30%; fourth, the effect of insurance on borrowing persists in the long-run, while the effect on saving is significant only in the medium-run; and fifth, the impact of insurance is greater on larger farmers and on households with lower migration remittance.
    Keywords: Insurance; Production; Borrowing; Saving
    JEL: D14 G21 G22 O16 Q12
    Date: 2013–05–09
  5. By: Wendy Janssens (VU University Amsterdam)
    Abstract: This paper analyzes free-riding and coordination problems in microinsurance. Our proposition is that the demand for insurance suffers from a social dilemma when formal insurance is introduced in existing risk-sharing networks. Less risk averse individuals offered welfare-improving insurance are tempted to free-ride on the enrollment of their network members while the more risk averse may fail to coordinate. This results in suboptimal demand. Group insurance binds both types to the social optimum. A framed laboratory experiment in Tanzania elicits demand for group versus individual insurance among microcredit clients who typically share risk through joint liability. The experiment demonstrates substantial free-riding but only limited coordination failures. These findings extend the literature on strategic decisions in the presence of a public good and provide a potential explanation for the low take-up of microinsurance.
    Keywords: Framed field experiment, micro health insurance, microfinance, risk-sharing, public good game
    JEL: D71 G21
    Date: 2012–12–18
  6. By: Cai, Jing; de Janvry, Alain; Sadoulet, Elisabeth
    Abstract: Using data from a randomized experiment in rural China, this paper studies the influence of social networks on weather insurance adoption and the mechanisms through which social networks operate. To quantify network effects, the experiment offers intensive information sessions about the insurance product to a random subset of farmers. For untreated farmers, the effect of having an additional treated friend on take-up is equivalent to granting a 15% reduction in the insurance premium. By varying the information available about peers’ decisions and using randomized default options, the experiment shows that the network effect is driven by the diffusion of insurance knowledge rather than purchase decisions.
    Keywords: Social network, Insurance demand, Learning
    JEL: D12 D83 G22 O33
    Date: 2013–05–09
  7. By: Maria Dementyeva (VU University Amsterdam); Paul R. Koster (VU University Amsterdam); Erik T. Verhoef (VU University Amsterdam)
    Abstract: Accident externalities are among the most important external costs of road transport. We study the regulation of these when insurance companies have market power. Using analytical models, we compare a public-welfare maximizing monopoly with a private profit-maximizing monopoly, and markets where two or more firms compete. A central mechanism in the analysis is the accident externality that individual drivers impose on one another via their presence on the road. Insurance companies will internalize some of these externalities, depending on their degree of market power. We derive optimal insurance premiums, and "manipulable" taxes that take into account the response of the firm to the tax rule applied by the government. Furthermore, we study the taxation of road users under different assumptions on the market structure. We illustrate our analytical results with numerical examples, in order to better understand the determinants of the relative performance of different market structures.
    Keywords: accident externalities, traffic regulation, safety, second-best, market power
    JEL: D43 D62 R41 R48
    Date: 2013–01–18
  8. By: Angelov, Nikolay (IFAU); Johansson, Per (IFAU); Lindahl, Erica (IFAU)
    Abstract: This study investigates possible reasons for the gender difference in sickness absence. We estimate both short- and long-term effects of parenthood in a within-couple analysis based on the timing of parenthood. We find that after entering parenthood, women increase their sickness absence by between 0.5 days per month (during the child's third year) and 0.85 days per month (during year 17) more than their spouse. By investigating possible explanations for the observed effect, we conclude that the effect mainly stems from higher home commitment, which reduces women's labour market attachment and, in turn, increases female sickness absence.
    Keywords: double burden, health investment, household work, labour market work, moral hazard, parenthood, sickness insurance, work absence
    JEL: C23 D13 I19 J22
    Date: 2013–04
  9. By: Zhiming Cheng; Ingrid Nielsen; Russell Smyth
    Abstract: Since 1958 the hukou (household registration) system has assigned Chinese citizens either a rural or urban status. Some studies argue that the rural-to-urban migrants in China who do not have urban hukou are not entitled to urban social insurance schemes, due to institutional discrimination, which applies differing treatment to urban and rural hukou (chengxiang fenge). Although rural-urban migrants participate less in the social insurance system than their counterparts with urban hukou, a closer examination of recent policy developments shows that migrants actually do have the legal right to access the system. This implies that discrimination between rural and urban workers has been declining, and distinctions based on household registration status are less able to explain China's current urban transition. This paper provides a new way of examining Chinese migrants' social insurance participation, by adopting a framework that includes both rural-to-urban migrants and urban-to-urban migrants, which are an important, but less studied, migrant group. Among our key findings are that urban migrants are more likely to sign a labour contract than rural migrants; urban migrants have higher participation rates in social insurance than rural migrants; having a labour contract has a greater impact than hukou status in determining whether Beijing's floating population accesses social insurance; and urban migrants who have signed a labour contract have higher participation rates in social insurance than either rural migrants or urban migrants without a labour contract.
    Keywords: rural-to-urban migrants, urban-to-urban migrants, social insurance, labour contract
    Date: 2013–05
  10. By: Andreas Ravndal Kostøl; Magne Mogstad
    Abstract: Disability Insurance (DI) programs have long been criticized by economists for apparent work disincentives. Some countries have recently modified their programs such that DI recipients are allowed to keep some of their benefits if they return to work, and other countries are considering similar return-to-work policies. However, there is little empirical evidence of the effectiveness of programs that incentivize the return to work by DI recipients. Using a local randomized experiment that arises from a sharp discontinuity in DI policy in Norway, we provide transparent and credible identification of how financial incentives induce DI recipients to return to work. We find that many DI recipients have considerable capacity to work that can be effectively induced by providing financial work incentives. We further show that providing work incentives to DI recipients may both increase their disposable income and reduce program costs. Our findings also suggest that targeted policies may be the most effective in encouraging DI recipients to return to work.
    JEL: H53 H55 I18 J21
    Date: 2013–05
  11. By: Philip J. Grossman; Mana Komai
    Abstract: We report results from a multi-period game designed to stimulate feelings of envy. There are a number of important features of our game that distinguish it from previous games used to examine envy. A unique and important feature of our design is that it addresses the two negative effects of envy: the wasteful expenditure of resources in an attempt to harm others and the wasteful use of resources by those envied in an attempt to protect themselves. We find that as wasteful as attacks are, spending on protection against attacks, while individually rational, results in even more waste. Players purchase insurance at twice the rate of attacks. Our multiperiod game permits us to examine how subjects' behaviour motivated by envy or the threat of envious actions changes over time. We report evidence consistent with players learning that envious feelings are wasteful and are less satisfying than the foregone monetary rewards.
    Keywords: anti-social preferences, envy, insurance
    JEL: C91 D6
    Date: 2013–05
  12. By: Zhiyuan Hou (Shandong University, Jinan, China); Ellen Van de Poel (Erasmus University Rotterdam, Netherlands); Eddy Van Doorslaer (Erasmus University Rotterdam, Netherlands); Baorong Yua (Shandong University, Jinan, China); Qingyue Menge (Peking University, China)
    Abstract: The introduction of the New Cooperative Medical Scheme in rural China is one of the largest health care reforms in the developing world since the millennium. The literature to date has mainly used the uneven rollout of NCMS across counties as a way of identifying its effects on access to care and financial protection. This study exploits the cross-county variation in NCMS generosity in 2006 and 2008 in Ningxia and Shandong province and adopts an instrumenting approach to estimate the effect of a continuous measure of coverage level. Our results confirm earlier findings of NCMS being effective in increasing access to care, but not increasing financial protection. In addition, we find that NCMS enrollees are sensitive to the incentives set in the NCMS design when choosing their provider, but also that providers seem to respond by increasing prices and/or providing more expensive care.
    Keywords: Health insurance, access, financial protection, China
    JEL: D63 I14
    Date: 2012–04–16
  13. By: Eva Hromadkova; Michal Zdenek
    Abstract: In this paper we investigate the effects of introduction of lump sum copayments on the utilization of prescription drugs by elderly patients. We make use of an unique dataset and analyze the policy change that implemented patient cost-sharing in the Czech Republic starting in 2008. After the introduction of copayments the number of prescriptions filled decreased by 29%. At the same time, however, total expenditures on prescription drugs dropped only in the first quarter of the postintroduction period and then returned to previous levels. This was partially due to behavioral responses of patients and physicians: strategic shift of prescription purchases to the time right before the introduction of reform, prescription of more packages on one prescription and an upward shift in the price composition of prescribed drugs. Moreover, patients in general decided to forego those types of drugs that did not cause immediate worsening of health status.
    Keywords: health insurance; moral hazard; cost sharing; prescription drugs;
    JEL: I11 I19
    Date: 2013–04
  14. By: Martin Koudstaal (Double Effect); Sweder van Wijnbergen (University of Amsterdam)
    Abstract: This paper deals with the relation between excessive risk taking and capital structure in banks. Examining a quarterly dataset of U.S. banks between 1993 and 2010, we find that equity is valued higher when more risky portfolios are chosen when leverage is high, and that more risk taking has a negative impact on valuation of the debt of highly leveraged banks. We find no evidence that deposit insurance is encouraging risk taking behaviour. We do find that banks with a more troubled loan portfolio take on more risk. Banks whose share price has slumped tend to gamble for resurrection by increasing the riskiness of their asset portfolios. The results suggest that incentives embedded in the capital structure of banks contribute to systemic fragility, and so support the Basel III proposals towards less leverage and higher loss absorption capacity of capital.
    Keywords: bank fragility, risk shifting, deposit insurance, gambles for resurrection
    JEL: G21 G28 G32
    Date: 2012–03–12
  15. By: Singh, R.K.P.; Singh, K.M.
    Abstract: Bihar has a large agrarian economy of over Rs 250 billion with more than 80 percent of rural population subsisting on farming. Agricultural work force increased more than two-fold from 126 lakh in 1981 to 265 lakh in 2006 whereas net sown area declined by about one lakh hectares and gross cropped area has been stagnating at 80 lakh hectares during the period. Due to increase in number of agricultural labour force in Bihar, per agricultural worker annual real productivity (at 1980 prices) has declined from Rs 1977.00 in 1980-81 to Rs 1278.00 in 2005-06. Among the major states in India, Bihar is at the lowest ladder in terms of proportion of institutional loan to total loan disbursement to farmers. The high indebtedness to money lenders may be an important reason for indifferent attitude of farmers towards lending institutions, resulting in low investment and low productivity in Bihar. An assessment of the situation at ground level indicates that recourse to non-institutional credit continues to dominate as far as rural areas and agriculture sector are concerned. The study recommends interest rate on co-operative agricultural loans be reduced to 3 per cent in Bihar for benefit of farmers. It will motivate farmers to approach cooperatives for agricultural loans who are still not inclined to contact commercial bank branches. Agricultural insurance offers protection against losses caused by fluctuations in the output of a crop from one year to another or from one crop season to another. Its objective is to stimulate and support the production of principal crops in the country. Providing financial support to farmers in the event of crop failure, it makes farmers credit-worthy for the next crop season. It has been observed that the majority of small and marginal farmers, as well as tenant farmers and farm laborers bear the brunt of crop failure. However, the performance of National Agricultural Insurance Scheme has also been unsatisfactory in Bihar. Despite change in form of crop insurance scheme and establishment of Agricultural Insurance Company Ltd. the regional disparities in crop insurance still persist. It is accordingly recommended that a campaign be launched in rural areas to create awareness among farmers about crop insurance involving, inter alia, non-loan taking farmers because a large number of farmers are still not in a position to avail crop loan facility from institutional agencies in Bihar.
    Keywords: Agricultural credit, Crop insurance, Weather-based insurance Bihar, India
    JEL: Q1 Q14 Q18
    Date: 2013–01–09
  16. By: Shinya Sugawara (Faculty of Economics, University of Tokyo); Jiro Nakamura (Advanced Research Institute for the Sciences and Humanities, Nihon University)
    Abstract:       This study evaluates the Japanese Long-Term Care Insurance(LTCI) a decade after its launch, focusing on the effects of its 2006 amendment. The radical program led to the emergence of markets for various care services such as home care, daycare and temporary institutional care besides permanent institutional care, which comprises only a formal care sector in many developed countries. We analyze the labor market behavior of women who face requirement for elderly care in their household, under the availability of the various formal care services. Our empirical analysis shows that the 2006 amendment reduced the negative impacts of care requirement both on the rate of female labor force participation and their working hours. However, our results also indicate that regular workers are more likely to utilize formal care, while many non-regular workers provide informal care by themselves.
    Date: 2013–05

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