nep-ias New Economics Papers
on Insurance Economics
Issue of 2013‒06‒24
eighteen papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. The National Flood Insurance Program Underwater: Censored Regressions on Flood Insurance Claims By Hungerford, Ashley; Ghosh, Sujit; Barry, Goodwin
  2. The Impact of Index-Based Insurance on Informal Risk-Sharing Networks By Boucher, Steve; Delpierre, Matthieu
  3. Hips and hearts: the variation in incentive effects of insurance across hospital procedures By Denise Doiron; Denzil G Fiebig; Agne Suziedelyte
  4. Political Economy of Crop Insurance Risk Subsidies under Imperfect Information By Bulut, Harun; Collins, Keith J.
  5. Farmer Participation in Hog Insurance: Case from China By Qing, Ping; Wan, Wei; Hu, Wuyang
  6. Premium Benefits? A Heterogeneous Agent Model of Credit-Linked Index Insurance and Farm Technology Adoption By Farrin, Katie; Miranda, Mario J.
  7. Moral Hazard, Risks and Index Insurance in the Rural Credit Market: A Framed Field Experiment in China By Cheng, Lan
  8. Partial consumption insurance and financial openness across the world By Hevia, Constantino; Serven, Luis
  9. Basis Risk and Compound-Risk Aversion: Evidence from a WTP Experiment in Mali By Elabed, Ghada; Carter, Michael R.
  10. Premium Estimation Inaccuracy and the Distribution of Crop Insurance Subsidies across Participating Producers By Ramirez, Octavio; Colson, Gregory
  11. Native Grassland Conversion: the Roles of Risk Intervention and Switching Costs By MIAO, RUIQING; HENNESSY, DAVID A.; FENG, HONGLI
  12. Revisiting the demand for crop insurance: evidences from the Italian market By Santeramo, Fabio G.; Goodwin, Barry K.; Adinolfi, Felice; Capitanio, Fabian
  13. The Effect of Climate on Crop Insurance Premium Rates and Producer Subsidies By Tack, Jesse
  14. Medicare Advantage 2013 Spotlight: Enrollment Market Update. By Marsha Gold; Gretchen Jacobson; Anthony Damico; Tricia Newuman
  15. Medicaid Insurance in Old Age By Mariacristina De Nardi; Eric French; John Bailey Jones
  16. Can National Health Insurance Programs Improve Health Outcomes?—Re-Examining the Case of the New Cooperative Medical Scheme in Rural China By Chu, Xueling; Chen, Qihui; Fang, Xiangming
  17. How Do the Disabled Cope While Waiting for SSDI? By Norma B. Coe; Stephan Lindner; Kendrew Wong; April Yanyuan Wu
  18. Labour Market and Social Policies to Foster More Inclusive Growth in Sweden By Stéphanie Jamet; Thomas Chalaux; Vincent Koen

  1. By: Hungerford, Ashley; Ghosh, Sujit; Barry, Goodwin
    Keywords: Flood, Spatial Econometrics, Insurance, Bayesian, Environmental Economics and Policy, Research Methods/ Statistical Methods, Risk and Uncertainty,
    Date: 2013
  2. By: Boucher, Steve; Delpierre, Matthieu
    Keywords: Farm Management, Risk and Uncertainty,
    Date: 2013
  3. By: Denise Doiron (School of Economics, the University of New South Wales); Denzil G Fiebig (School of Economics, the University of New South Wales); Agne Suziedelyte (School of Economics, the University of New South Wales)
    Abstract: The separate identification of effects due to incentives, selection and preference heterogeneity in insurance markets is the topic of much debate. In this paper, we investigate the presence and variation in moral hazard across health care procedures. The key motivating hypothesis is the expectation of larger causal effects in the case of more discretionary procedures. The empirical approach relies on an extremely rich and extensive dataset constructed by linking survey data to administrative data for hospital medical records. Using this approach we are able to provide credible evidence of large moral hazard effects but for elective surgeries only.
    Keywords: health insurance, asymmetric information, moral hazard
    JEL: D82 I11
    Date: 2013–06
  4. By: Bulut, Harun; Collins, Keith J.
    Abstract: We consider a political economy where government cares about risk-averse farmers’ loss of income and yet incurs political cost if it provides monetary support to farmers. Government evaluates three options: 1) ex-post disaster aid; 2) ex-ante insurance option with perfect information; 3) ex-ante insurance with imperfect information (farmers are over-confident about their risk). It is assumed that marginal political cost is high enough so that the possibility of monetary support to farmers in the absence of economic loss is ruled out. In comparing 1) and 2), we find that government prefers farmers manage their risks through fairly priced insurance In comparing 1) and 3), if the information problems prevent risk-averse farmers to take up full insurance under actuarially fair rates, government prefers to subsidize farmers’ insurance ex-ante rather than providing disaster aid ex-post (subject to political cost) for a wide range of parameter values.
    Keywords: Agricultural risk, crop insurance, disaster assistance, Agribusiness, Crop Production/Industries, Political Economy, Risk and Uncertainty, D81, G22, Q12, Q18,
    Date: 2013–06–06
  5. By: Qing, Ping; Wan, Wei; Hu, Wuyang
    Keywords: Livestock Production/Industries,
    Date: 2013
  6. By: Farrin, Katie; Miranda, Mario J.
    Abstract: Lack of protection from downside risk has been posited as one explanation for sluggish technology uptake among subsistence agricultural households in the developing world. Access to credit and insurance is thought to be a stimulant to technology adoption where new methods are riskier but higher yielding on average, or, in the alternative, require sunk costs of investment that can be significant for households that already consume very little when harvests are poor. Despite recent efforts to pilot index-based insurance to smallholder farmers where no formal insurance was previously available, demand for individual-level contracts has been unexceptional at best, even when premiums are highly subsidized. On the flip side, the effect of index insurance on credit supply is ambiguous: if clients are insured against potential losses, theory suggests that credit supply should increase, as banks face lower probabilities of systemic default; however, due in part to the nature of basis risk that is inherent in index-based contracts, there are cases in which mandatory index insurance that indemnifies the policyholder directly can lead to decreased internal rates of return for lending institutions. In this paper, we employ a dynamic, stochastic, heterogeneous agent model where farm households have access to contingent credit or credit-linked insurance, and may also make dichotomous choices regarding technology and loan repayment in each period. The approach we take is novel in that insurance is modeled as a meso-level product, where the bank is first indemnified before any payouts are distributed to its borrowing clients. Thus, the model we put forward takes into account both supply- and demand-side concerns, and shows the possibilities of a trickle-down effect when index insurance contracts are sold not to individual households, but instead to risk aggregators for whom basis risk is lower. Results show that insurance can have a positive effect on technology uptake, while letting the lender lay first claim on indemnities lowers default rates.
    Keywords: Agricultural and Food Policy, Agricultural Finance, Risk and Uncertainty,
    Date: 2013
  7. By: Cheng, Lan
    Abstract: Abstract This paper studies the interaction between index insurance market and the rural credit market by investigating how the availability of index insurance affects borrowers' moral hazard behavior. Among different types of moral hazard problem in the credit market, we focuses on credit diversion, which occurs when borrowers violate loan contracts and use some or all of production loans for consumption purpose. We build a theoretical model to show that credit non-diverters are likely to benefit from and purchase index insurance, while credit diverters are not. For credit non-diverters, index insurance provides consumption smoothing and increases future income by preventing loan default. For credit diverters who are already implicitly insured by diverting credit from risky investments to consumption, index insurance increases their consumption risks and can even lower expected consumption level. The fundamental reason for the difference of the impact between credit diverters and non-diverters is that index insurance pays indemnities based on external indices rather than farmers' realized outcome. Therefore, the availability of index insurance encourages farmers to choose full investment of loans instead of credit diversion. To test these theoretical predictions empirically, we conducted a framed field experiment with 450 rural households in the north region of China. Coinciding with theoretical predictions, experimental results show that index insurance reduces the number of credit diverters by 75.8%. The treatment effect on credit diversion is heterogeneous across farmers depending on their risk preferences and ethical costs associated with violating loan contracts. The theoretical and empirical results have important policy implications for stimulating credit supply to agriculture and reducing credit rationing. They suggest that lenders can use index insurance as a signaling instrument to overcome information asymmetry in the credit market. Index insurance can be substituted for collateral requirements and lessen both quantity and risk rationing caused by collateral requirement.
    Keywords: Moral Hazard, Index Insurance, Credit Market, Credit Rationing, Agricultural Finance, Institutional and Behavioral Economics, International Development, Risk and Uncertainty,
    Date: 2013
  8. By: Hevia, Constantino; Serven, Luis
    Abstract: This paper examines the extent of international consumption risk sharing for a group of 50 industrial and developing countries. The analysis is based on the empirical implementation of a model of partial consumption insurance whose parameters have the natural interpretation of coefficients of partial risk sharing even when the null hypothesis of perfect risk sharing is rejected. Estimation results show that rich countries exhibit higher degrees of risk sharing than developing countries, and that the gap between both country groups appears to have widened over the period of financial globalization. Moreover, the pattern of consumption risk sharing is related to the degree of financial openness: countries with larger stocks of foreign assets or liabilities exhibit larger degrees of risk sharing. Furthermore, countries whose foreign asset stocks are more tilted towards foreign direct investment assets also show higher degrees of consumption risk sharing.
    Keywords: Labor Policies,Financial Intermediation,Insurance&Risk Mitigation,Emerging Markets,Debt Markets
    Date: 2013–06–01
  9. By: Elabed, Ghada; Carter, Michael R.
    Abstract: We present a novel way to understand the low uptake of index insurance using the interlinked concepts of ambiguity and compound-lottery aversion. Noting that the presence of basis risk makes index insurance a compound lottery, we derive an expression of the willingness to pay (WTP) to eliminate basis risk. Empirically, we implement this WTP measure using framed eld experiments with cotton farmers in Southern Mali. In this sample, 57% of the surveyed farmers reveal themselves to be compound-risk averse to varying degrees. Using the distributions of compound-risk aversion and risk aversion in this population, we simulate the impact of basis risk on the demand for an index insurance contract. Compound-risk aversion decreases the demand for index insurance relative to what it would be if individuals had the same degree of risk aversion but were compound-risk neutral. In addition, demand declines more steeply as basis risk increases under compound-risk aversion than it does under risk neutrality. Our results highlight the importance of designing contracts with minimal basis risk if potential buyers are compound-risk averse.
    Keywords: Index Insurance, Risk and Uncertainty, Compound Risk, Ambiguity, Field Experiments, International Relations/Trade, Research Methods/ Statistical Methods, Risk and Uncertainty,
    Date: 2013
  10. By: Ramirez, Octavio; Colson, Gregory
    Keywords: Agricultural and Food Policy, Financial Economics, Risk and Uncertainty,
    Date: 2013
    Abstract: We develop a real option model of the irreversible native grassland conversion decision. Upon plowing, native grassland can be followed by either a permanent cropping system or a system in which land is put under cropping (respectively, grazing) whenever crop prices are high (respectively, low). Switching costs are incurred upon alternating between cropping and grazing. The effects of risk intervention in the form of crop insurance subsidies are studied, as are the effects of cropping innovations that reduce switching costs. We calibrate the model by using cropping return data for South Central North Dakota over 1989-2012. Simulations show that a risk intervention that offsets 20% of a cropping return shortfall increases the sod-busting cost threshold, below which native sod will be busted, by 41% (or $43.7/acre). Omitting cropping return risk across time underestimates this sod-busting cost threshold by 23% (or $24.35/acre) and hence underestimates the native sod conversion caused by crop production.
    Keywords: conservation tillage, crop insurance policy, irreversibility, native grassland, sodbusting., Land Economics/Use, Risk and Uncertainty, Q18, Q38, H23,
    Date: 2013
  12. By: Santeramo, Fabio G.; Goodwin, Barry K.; Adinolfi, Felice; Capitanio, Fabian
    Keywords: Crop Production/Industries, Demand and Price Analysis, International Relations/Trade,
    Date: 2013
  13. By: Tack, Jesse
    Abstract: Likely climate change impacts in the U.S. include damages to agricultural production resulting from increased exposure to extreme heat. However, considerable uncertainty remains regarding impacts on the performance of the Federal Crop Insurance Program. Here we utilized a large panel of corn yield data to predict the effect of a 1oC uniform increase in temperature on premium rates and subsidies for the Group Risk Plan. We found a statistically significant increase in rates, which is primarily driven by increased exposure to extreme heat. These increases induce large increases in subsidy payments, the incidence of which is spread disproportionately across regions.
    Keywords: Climate Change, Crop Insurance, Moments, Entropy, Agricultural and Food Policy, Crop Production/Industries, Production Economics, Productivity Analysis, Risk and Uncertainty,
    Date: 2013
  14. By: Marsha Gold; Gretchen Jacobson; Anthony Damico; Tricia Newuman
    Keywords: Medicare Advantage, Enrollment, Affordable Care Act, Health
    JEL: I
    Date: 2013–06–30
  15. By: Mariacristina De Nardi; Eric French; John Bailey Jones
    Abstract: The old age provisions of the Medicaid program were designed to insure poor retirees against medical expenses. However, it is the rich who are most likely to live long and face expensive medical conditions when very old. We estimate a rich structural model of savings and endogenous medical spending with heterogeneous agents, and use it to compute the distribution of lifetime Medicaid transfers and Medicaid valuations across single retirees. We find that retirees with high lifetime incomes can end up on Medicaid, and often value Medicaid’s insurance features the most, as they face a larger risk of catastrophic medical needs at old ages, and face the greatest consumption risk. Finally, our compensating differential calculations indicate that retirees value Medicaid insurance at more than its actuarial cost, but that most would value expansions of the current Medicaid program at less than cost.
    JEL: D11 D14 D31 E21 H2 I14
    Date: 2013–06
  16. By: Chu, Xueling; Chen, Qihui; Fang, Xiangming
    Abstract: In 2003, China launched a new health insurance system - the New Cooperative Medicine Scheme (NCMS) in its rural areas, where more than 87 percent of China’ rural residents were not covered by any health insurance programs. By the end of 2009, the NCMS had expanded to cover 95 percent of China’s rural residents. Previous research has yielded conflicting results regarding the effects of the NCMS in rural China, but the conflicting results may be due to estimation biases. This paper uses a triple-difference method, which takes into account rural residents’ unobserved heterogeneity, to re-evaluate the impacts of the NCMS on rural residents’ health outcomes, including hypertension, diabetes, heart disease, apoplexy and born fracture. Using a longitudinal sample drawn from the China Health and Nutrition Survey, our tripledifference method indicates that the NCMS significantly reduces the incidence of diabetes, heart disease, apoplexy for rural residents over age 55. Our results also suggest that the commonlyadopted impact evaluation method, the double-difference method, is likely to underestimate the health impacts of the NCMS.
    Keywords: Rural China, New Cooperative Medical Scheme, Impact Evaluation, Triple- Difference, Community/Rural/Urban Development, Health Economics and Policy, International Development, International Relations/Trade,
    Date: 2013
  17. By: Norma B. Coe; Stephan Lindner; Kendrew Wong; April Yanyuan Wu
    Abstract: The wait time for a Social Security Disability Insurance (SSDI) award varies from a few months to several years. Little is known about how applicants fund their consumption during this period. Using the Survey of Income and Program Participation (SIPP) linked to the Social Security Administration’s 831 file, this study examines the use of seven different coping strategies on which applicants may rely for resources, including government transfers, intra-family resources, other financial resources, and locational changes. Our results suggest that applicants use some coping strategies more frequently with longer application duration, especially spousal employment, the Supplemental Nutrition Assistance Program (SNAP) and the Supplemental Security Income (SSI) program for the disabled and children. They are also less likely to report receiving Unemployment Insurance benefits, changing their address, and owning a home. Together, these results suggests that some of the studied coping strategies are an important part of funding consumption during the application process, either by sustaining ongoing applications or by making it easier to file an appeal of an initially denied application.
    Date: 2013–06
  18. By: Stéphanie Jamet; Thomas Chalaux; Vincent Koen
    Abstract: Sweden is a very egalitarian country but inequalities have risen and some groups are poorly integrated into the labour market. For growth to become more inclusive, the gap between the cost of labour and productivity for some groups needs to be reduced, transitions from education to work should be facilitated, incentives to take a job ought to be strengthened and the non-employed need to be protected against the risk of falling into unemployment or inactivity traps. This calls for lowering minimum wages relative to the average wage for groups at risk of becoming unemployed, improving vocational education and training, and extending the coverage of the unemployment insurance while strengthening obligations for the unemployed. To address labour market duality risks, the gap in job protection between temporary and permanent contracts needs to be reduced. Women’s employment is high but the gender wage gap could be narrowed further by enhancing their employment opportunities.<P>Des politiques sociales et du marché du travail au service d'une croissance plus solidaire en Suède<BR>Bien qu’elle soit un pays très égalitaire, la Suède accuse aujourd’hui un creusement des inégalités, et certaines catégories de sa population restent en marge du marché du travail. Pour favoriser une croissance plus solidaire, il est nécessaire de réduire l’écart entre le coût du travail et la productivité de certaines catégories de main-d’oeuvre, de faciliter le passage de l’école à la vie professionnelle, de renforcer les incitations au travail et de protéger les sans-emploi contre le piège du chômage ou de l’inactivité. Pour y parvenir, il faudra abaisser les minima salariaux par rapport au salaire moyen pour les groupes risquant de se retrouver au chômage, améliorer l’enseignement et la formation professionnelle et élargir la couverture de l’assurance-chômage, tout en renforçant les obligations des chômeurs. Pour faire face au risque de dualisme du marché du travail, les disparités dans la protection de l’emploi entre contrats temporaires et contrats permanents devront être réduites. Le taux d’emploi des femmes est certes élevé, mais l’écart salarial par rapport aux hommes pourrait être encore réduit en améliorant les perspectives d’emploi des femmes.
    Keywords: Sweden, employment protection legislation, labour costs, unemployment insurance, public employment services, minimum wage, vocational training, labour market dualism, vocational education, inclusive growth, inequality, gender equality, Suède, assurance chômage, salaire minimum, coût du travail, service public de l'emploi, dualisme du marché du travail, croissance inclusive, inégalités, législation pour la protection de l’emploi, apprentissage et formation professionnelle, égalité des genres
    JEL: I14 I28 I3 J08 J16 J3 J51 J65
    Date: 2013–02–18

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