nep-ias New Economics Papers
on Insurance Economics
Issue of 2013‒11‒22
six papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Multiple Dimensions of Private Information in Life Insurance Markets By Xi Wu; Li Gan
  2. Do flood insurance schemes in developing countries provide incentives to reduce physical risks? By Swenja Surminski; Delioma Oramas-Dorta
  3. How family status and social security claiming options shape optimal life cycle portfolios By Hubener, Andreas; Maurer, Raimond; Mitchell, Olivia S.
  4. Promoting resilient economies by exploring insurance potential for facing coastal flooding and erosion: evidence from Italy, Spain, France and United Kingdom By Osiel González Dávila; Mavra Stithou; Gianluca Pescaroli; Luca Pietrantoni; Phoebe Koundouri; Pedro Díaz-Simal; Bénédicte Rulleau; Nabil Touli; François Hissel; Edmund Penning-Rowsell
  5. On the Optimal Size of Public Employment By Eduardo Zilberman; Anna Dos Reis
  6. Don’t Worry, Be Happy: The Welfare Cost of Climate Variability – A Subjective Well-Being Approach By Yonas Alem; Jonathan Colmer

  1. By: Xi Wu; Li Gan
    Abstract: Conventional theory for private information of adverse selection predicts a positive correlation between insurance coverage and ex post risk. This paper shows the opposite in the life insurance market despite the clear evidence of private information on mortality risk. The reason for this contradictory result is the existence of multiple dimensions of private information. The paper discusses how the private information on insurance preference offsets the effect of the private information on mortality risk. A mixture density model is applied to disentangle these two effects.
    JEL: D82 G22 I13
    Date: 2013–11
  2. By: Swenja Surminski; Delioma Oramas-Dorta
    Abstract: Risk transfer, including insurance, is widely recognized as a tool for increasing financial resilience to severe weather events such as floods. The application of this mechanism varies widely across countries, with a range of different types and schemes in operation. While most of the analytical focus has so far been on those markets that have a long tradition of insurance, there is still a clear gap in our understanding of how this mechanism works in a developing country context. This paper assesses 27 insurance schemes that transfer the risk of economic losses arising from floods in low and middle income countries, focusing on the linkages between financial risk transfer and risk reduction. This aspect is important to avoid the effect or moral hazard and has gained particular relevance in the context of the climate change adaptation discourse, where some scholars and practitioners view insurance as a potential tool not just for current risks, but also to address projected future impacts of a changing climate by incentivizing risk reduction. We therefore look beyond the pure financial risk transfer element of those 27 insurance schemes and investigate any prevention and risk reduction initiatives. Our analysis suggests that the potential for utilizing risk transfer for risk reduction is far from exhausted, with only very few schemes showing an operational link between risk transfer and risk reduction, while the effectiveness and implementation on the ground remains unclear. The dearth of linkages between risk reduction and insurance is a missed opportunity in the efforts to address rising risk levels, particularly in the context of climate change. Rising risk levels pose a threat to the insurability of floods, and insurance without risk reduction elements could lead to moral hazard. Therefore a closer linkage between risk transfer and risk reduction could make this a more sustainable and robust tool.
    Date: 2013–07
  3. By: Hubener, Andreas; Maurer, Raimond; Mitchell, Olivia S.
    Abstract: Household decisions are profoundly shaped by a complex set of financial options due to Social Security rules determining retirement, spousal, and survivor benefits, along with benefit adjustments that vary with the age at which these are claimed. These rules influence optimal household asset allocation, insurance, and work decisions, given life cycle demographic shocks such as marriage, divorce, and children. Our model generates a wealth profile and a low and stable equity fraction consistent with empirical evidence. We also confirm predictions that wives will claim retirement benefits earlier than husbands, while life insurance is mainly purchased by younger men. Our policy simulations imply that eliminating survivor benefits would sharply reduce claiming differences by sex while dramatically increasing men's life insurance purchases. --
    Date: 2013
  4. By: Osiel González Dávila; Mavra Stithou; Gianluca Pescaroli; Luca Pietrantoni; Phoebe Koundouri; Pedro Díaz-Simal; Bénédicte Rulleau; Nabil Touli; François Hissel; Edmund Penning-Rowsell
    Abstract: Insurance against natural perils such as flooding can be considered a significant element in coastal management. It can offer not only much-needed support to accelerate economic and social recovery following a disaster (coastal resilience) but also contribute to impact limitation by using pricing or restrictions on availability of coverage to discourage new development in hazard-prone areas. Insurance can affect the redistribution of damage costs across the population and through time, both in the short and long term. Policies of damage reduction are linked to mitigation measures for the properties (old or new buildings) by changing the depth-damage relationship while the long-run risk impacts could affect the overall damage function by discouraging new buildings in high risk areas. This paper will provide an overview of the main theoretical perspectives on insurance in flood risk management. Four different European contexts will be analysed. Data are derived from surveys and interviews conducted in France, United Kingdom, Italy and Spain.
    Date: 2013–09
  5. By: Eduardo Zilberman (PUC-Rio); Anna Dos Reis (PUC-Rio)
    Abstract: A public job can be seen as a source of insurance against income risk. Indeed, many public employees have job stability, which is compounded with a less volatile and more compressed wage distribution. Hence, by increasing its number of public employees, the government enhances the overall degree of insurance in the economy. In this paper, we introduce public employment in a standard incomplete markets model with overlapping generations. The aim is to explore the welfare gains or losses due to a larger government, accounting for this extra source of insurance. In a model economy calibrated to Brazil, we find that if the government relies on consumption taxes to balance its budget, the optimal size of public employment is nearly flat, ranging from 10 to 24 percent of the workforce. However, if the public employment is reduced from 22 to 10 percent, welfare losses due to a reduction in the degree of insurance are 4.5 percent, which are compensated by welfare gains due to level and inequality effects. Finally, if the wage distribution becomes even less volatile and more compressed, social welfare decreases.
    Date: 2013
  6. By: Yonas Alem; Jonathan Colmer
    Abstract: Using a household panel data set in rural Ethiopia combined with a new data set containing daily atmospheric parameters, we are able to show that increased climate variability reduces the level of a farmer’s subjective assessment of their individual well-being. Resulting from the impact that climate variability has on uncertainty about future income, those living in riskier areas report lower life satisfaction than those living in more stable environments. The magnitude of our result indicates that a one standard deviation increase in climate variability has an equivalent e?ect on life satisfaction to a two standard deviation (1-2%) decrease in real consumption expenditure per capita. Out of all of the determinants examined, this e?ect is shown to be one of the largest determinants of life satisfaction in rural Ethiopia. Robustness tests demonstrate the resilience of our results and help to disentangle the e?ects of climate variability from weather e?ects. They also help to draw out the mechanism by which climate variability impacts life satisfaction. We also demonstrate, using a second panel data set in urban Ethiopia, that increased climate variability has no impact on subjective well-being for urban households. In light of the resilience and magnitude of our result, policies that reduce dependence on rain-fed agriculture, improve farmers’ ability to deal with climatic risk, and provide credible insurance are likely to be welfare-enhancing.
    Date: 2013–07

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