nep-ias New Economics Papers
on Insurance Economics
Issue of 2013‒06‒09
six papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. How Do You Feel? The Effect of the New Cooperative Medical Scheme in China By Carine Milcent; Binzhen Wu
  2. Youth Unemployment in Korea: From a German and Transitional Labour Market Point of View By Schmid, Günther
  3. Post-Crisis Reversal in Banking and Insurance Integration: An Empirical Survey By Dirk Schoenmaker
  4. Credit Lines as Monitored Liquidity Insurance: Theory and Evidence By Heitor Almeida; Filippo Ippolito; Ander Perez; Viral Acharya
  5. Adjusted Money's Worth Ratios in Life Annuities By Jaime Casassus; Eduardo Walker
  6. Credit-crunch dynamics with uninsured investment risk By Jonathan E. Goldberg

  1. By: Carine Milcent (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - École des Hautes Études en Sciences Sociales [EHESS] - Ecole des Ponts ParisTech - Ecole normale supérieure de Paris - ENS Paris - Institut national de la recherche agronomique (INRA)); Binzhen Wu (School of Economics and Management - Tsinghua University)
    Abstract: During the 2003-2006 period, subjective health status in Chinese rural areas improved. We used a unique household longitudinal survey to analyze how the introduction of a public insurance system has contributed to the change. This program is based on a doubly voluntary process: counties decide to launch, then households decide to subscribe. We disentangle two channels of influence of the insurance: the insurance effect of the coverage and a general equilibrium effect on all residents in the insurance-adopting counties. The empirical findings include, first, a positive extensive margin: individuals feel better about their health status when covered by the NCMS. However, there is no intensive margin: an individual's self-assessed health status does not improve with the number of years enrolled in the program. Second, we find a positive general equilibrium effect of introducing the NCMS program on non-participants in NCMS counties. This effect accumulates over time.
    Keywords: Subjective health ; Rural China ; Health insurance ; New Cooperative Medical Scheme
    Date: 2013–05–28
  2. By: Schmid, Günther (WZB - Social Science Research Center Berlin)
    Abstract: By conventional statistics, youth unemployment seems to be quite moderate in Korea: ‘only’ 9.6 percent of the ‘active’ youth labour force was unemployed compared to 21.4 percent in EU-27 in 2011. Germany, with a youth unemployment rate of 8.5 percent, is one of the very few European countries outperforming Korea. But the Korean case is in one respect unusual. From the perspective of intergenerational risk sharing Korea’s youth unemployment rate is 4.6 times higher than the unemployment rate of adults aged 45 to 54; in Germany, this figure is only 1.7. Further peculiarities come up if unemployment is measured by the number of youth not in employment, education or training (NEET) in percent of the total youth population. Korea’s NEET figures are at the top in OECD countries, especially for youth with tertiary education. This paper throws some light to explain this conundrum: It sketches, first, the main causes of youth unemployment and the general policy interventions; because a large part of the problem is structural, possible immediate measures to avoid long-term scar effects for the unemployed youth are briefly reviewed; differences between Europe and the United States show in particular the importance of automatic stabilizers like unemployment insurance in order to reduce the pressure on unfavourable risk sharing for youth in times of recession. The main part is devoted to possible lessons for Korea from Europe, in particular from Germany. Dual education and vocational training systems that emphasise middle level and market oriented skills are identified as institutional device both for fairer intergenerational risk sharing as well as for a smoother transition from school to work. In its outlook, the paper comes back to the puzzle of highly and academically inflated youth unemployment by referring to a possible hidden cause in Korea: A strong insurance motive might explain the overall striving for an academic degree inducing not only wasteful congestion at labour market entries but also unfair job allocation through credentialism.
    Keywords: unemployment, education, vocational training, labour market policy, transitional labour markets, risk sharing
    JEL: E24 I24 J64
    Date: 2013–05
  3. By: Dirk Schoenmaker
    Abstract: This empirical essay reviews post-crisis integration in banking and insurance. Looking at aggregate data, we find that cross-border banking flows have been reversed, in particular into the CESEE and peripheral counties (Portugal, Ireland and Greece). But data at the individual firm level for banks and insurers indicate that cross-border activities remain persuasive within Europe. This intensity of cross-border activities indicates that the potential for coordination failure among national authorities remains high. Host country supervisors have so far responded by ring-fencing activities in subsidiaries, leading to further fragmentation. This essay argues that if we want to keep the benefits of both the single financial market and financial stability, we need new supranational institutions that encourage integration. The advance to Banking Union with integrated supervision and resolution can provide the necessary policy push for an integrated approach.
    JEL: G21 G22 G28 H41
    Date: 2013–04
  4. By: Heitor Almeida (University of Illinois); Filippo Ippolito (Universitat Pompeu Fabra); Ander Perez (Universitat Pompeu Fabra); Viral Acharya (New York University)
    Abstract: Recent empirical and survey evidence on corporate liquidity management suggests that bank credit lines do not offer fully committed liquidity insurance, and that they are frequently used to finance future growth opportunities rather than for precautionary motives. In this paper, we propose and test a theory of corporate liquidity management that is consistent with these findings. We argue that a corporate credit line can be understood as a form of monitored liquidity insurance, which controls illiquidity-seeking behavior by firms through bank monitoring and credit line revocation. In addition, we allow firms to demand liquidity not to hedge against negative liquidity shocks, but to help finance future growth opportunities. We show that bank monitoring and credit line revocation play less of a role for such firms, because the nature of their liquidity demand reduces their incentives to engage in illiquidity-seeking behavior. Thus, firms that have low hedging-needs (e.g., high correlation between cash flows and investment opportunities) can access fully committed credit lines that dominate cash holdings as an optimal liquidity management tool. We use a novel dataset on corporate credit lines to provide empirical evidence that is consistent with the predictions of the model. The evidence suggests that credit line users have lower liquidity risk than firms that use cash for liquidity management. In addition, firms with low hedging-needs are more likely to use credit lines for liquidity management. Credit line covenants and covenant violations are less common when the credit line user has low hedging needs.
    Date: 2012
  5. By: Jaime Casassus; Eduardo Walker
    Abstract: The Money's Worth Ratio (MWR) measures an annuity's actuarial fairness. It is calculated as the discounted present value of expected future payments divided by its cost. We argue that from the perspective of annuitants, this measure may overestimate the value-for-money obtained, since it does not adjust for liquidity or risk factors. Measuring these factors is challenging, requiring detailed knowledge of assets, liabilities, and of the stochastic processes followed by them. Using a multi-factor continuous-time model, we propose a simple solution for an adjusted MWR (AMWR), which does consider illiquidity and default risk. We implement this solution for the competitive Chilean annuity market, which offers MWRs above 1, finding that indeed these ratios are biased upward 7 percent on average. We also present estimates of default option values, asset insufficiency probabilities and implied credit spreads for each annuity provider.
    Keywords: money's worth ratios, annuities, insurance companies, credit risk, liquidity premium, default probability, multi-factor continuous time models, emerging markets, Chile
    JEL: G22 G13 G28
    Date: 2013
  6. By: Jonathan E. Goldberg
    Abstract: I study the effects of credit tightening in an economy with uninsured idiosyncratic investment risk. In the model, entrepreneurs require an equity premium because collateral constraints limit insurance. After collateral constraints tighten, the equity premium and the riskiness of consumption rise and the risk-free interest rate falls. I show that, both immediately after the shock and in the long run, the equity premium and the riskiness of consumption increase more than they would if the risk-free rate were constant. Indeed, the long-run increase in the riskiness of consumption growth is purely a general-equilibrium effect: if the risk-free rate were constant (as in a small open economy), an endogenous decrease in risk-taking by entrepreneurs would, in the long run, completely offset the decrease in their ability to diversify. I also show that the credit shock leads to a decrease in aggregate capital if the elasticity of intertemporal substitution is sufficiently high. Finally, I show that, due to a general-equilibrium effect, there is no "overshooting" in the equity premium: in response to a permanent decrease in firms' ability to pledge their future income, the equity premium immediately jumps to its new steady-state level and remains constant thereafter, even as aggregate capital adjusts over time. However, if idiosyncratic uncertainty is sufficiently low, credit tightening has no short- or long-run effects on aggregate capital, the equity premium, or the riskiness of consumption. Thus my paper highlights how investment risk affects the economy's response to a credit crunch.
    Date: 2013

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