nep-ias New Economics Papers
on Insurance Economics
Issue of 2014‒01‒17
eighteen papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Disability Insurance and Healthcare Reform: Evidence from Massachusetts By Nicole Maestas; Kathleen J. Mullen; Alexander Strand
  2. Natural Disasters: Exposure and Underinsurance By C. GRISLAIN-LETRÉMY
  3. The Determinants of Rising Inequality in Health Insurance and Wages, Second Version By Rong Hai
  5. How Family Status and Social Security Claiming Options Shape Optimal Life Cycle Portfolios By Andreas Hubener; Raimond Maurer; Olivia S. Mitchell
  6. Enrollment in community based health insurance schemes in rural Bihar and Uttar Pradesh, India By Panda, P.; Chakraborty, A.; Dror, D.M.; Bedi, A.S.
  8. The Effect of Cutting Disability Insurance Benefits on Labor Supply in Households By Kauer, Lukas
  9. Health Insurance and Retirement Decisions By John Karl Scholz; Ananth Seshadri
  10. Community-Based Health Insurance Schemes By Mebratie, A.D.; Sparrow, R.A.; Alemu, G.; Bedi, A.S.
  11. Taxes, banks and financial stability By Gropp, Reint
  12. Enrolment in Ethiopia’s Community Based Health Insurance Scheme By Derseh, A.; Sparrow, R.A.; Debebe, Z.Y.; Alemu, G.; Bedi, A.S.
  13. Estimates of the Potential Insurance Value of Disability Insurance for Individuals with Mental Health Impairments By John Bound; Kyle J. Caswell; Timothy Waidmann
  14. Weather Derivatives and Crop Insurance in China By Baojing Sun; Changhao Guo; G. Cornelis van Kooten
  15. How do insured deposits affect bank risk? Evidence from the 2008 emergency economic stabilization act By Lambert, Claudia; Noth, Felix; Schüwer, Ulrich
  16. Technical Review Panel for the Pension Insurance Modeling System (PIMS) By Olivia S. Mitchell; Christopher C. Geczy; Robert Novy-Marx; Raimond Maurer; Donald E. Fuerst; Christopher M. Bone; Donald J. Segal; Martin G. Clarke; Frank J. Fabozzi; Deborah Lucas; David F. Babbel
  17. Interbank network and bank bailouts: Insurance mechanism for non-insured creditors? By Eisert, Tim; Eufinger, Christian
  18. Optimal Hedging for Fund & Insurance Managers with Partially Observable Investment Flows By Masaaki Fujii; Akihiko Takahashi

  1. By: Nicole Maestas (RAND); Kathleen J. Mullen (RAND); Alexander Strand (Social Security Adminstration)
    Abstract: As health insurance becomes available outside of the employment relationship as a result of the Affordable Care Act (ACA), the cost of applying for Social Security Disability Insurance (SSDI)—potentially going without health insurance coverage during a waiting period totaling 29 months from disability onset—will decline for many people with employer-sponsored health insurance. At the same time, the value of SSDI and Supplemental Security Income (SSI) participation will decline for individuals who otherwise lacked access to health insurance. We study the 2006 Massachusetts healthcare reform to estimate the potential effects of the ACA on SSDI and SSI applications.
    Date: 2013–11
  2. By: C. GRISLAIN-LETRÉMY (Insee)
    Abstract: Insurance coverage against natural disasters remains low in many exposed areas. Limited insurance supply is commonly identified as a primary factor causing low insurance coverage. The French overseas departments provide an unusual combination of a well-developed natural disasters insurance supply in highly exposed regions. Indeed, the French natural disasters insurance system is guaranteed by the French government; first foreseen for continental France only, it was extended to overseas departments after Hurricane Hugo in 1989, in a state of emergency. This situation enables to analyze the determinants of insurance coverage on the demand side. Using unique household-level micro-data, I estimate a semi-structural model of insurance market which had not been empirically tested. The structural approach enables to show that underinsurance in the French overseas departments is neither due to perception biases nor to unaffordable insurance, but mainly to uninsurable housing and to anticipated assistance, which crowds out insurance. Individual insurance decision is impacted by neighbors insurance choices via peer effects and via neighborhood eligibility for assistance.
    Keywords: natural disasters, insurance, disaster aid, public assistance
    JEL: Q54 G22 H84 D12
    Date: 2013
  3. By: Rong Hai (Becker Friedman Institute for Research in Economics, University of Chicago)
    Abstract: What has caused the rising gap in health insurance coverage by education in the U.S. over the last thirty years? How does the employment-based health insurance market interact with the labor market? What are the effects of social insurance such as Medicaid? By developing and structurally estimating an equilibrium model, I find that the interaction between labor market technological changes and the cost growth of medical services explains 60% to 70% of the gap. Using counterfactual experiments, I also evaluate the impact of further Medicaid eligibility expansion and employer mandates introduced in the Affordable Care Act on labor and health insurance markets.
    Keywords: Inequality, Human Capital, Health Insurance, Health Care Reform, Labor Market Equilibrium
    JEL: I13 J31 J32
    Date: 2013–01–16
  4. By: Vasiljević, Zorica; Zarić, Vlade; Šević, Dunja
    Abstract: Due to its specific nature agriculture is exposed to a number of risks, whose emergence could lead to the losses in production as well as volatility in the business. The risks can not be completely eliminated, but they can be managed and their impacts can be minimized. Insurance could have the most important role in minimization of risk. Insurance is a form of risk management used to limit potential losses. Insurance in agriculture includes crop and fruit insurance, but also insurance of livestock, domestic and wild animals, buildings and machinery, and can be applied in greenhouses, forestry and aquaculture as well. Insurance in Serbian agriculture is undeveloped. The share of the crop insurance and the animal insurance premiums was only about 2.6% of the total non-life insurance premiums in 2011. In Serbia it has been insured only about 3% of registered farms and 8-10% of the cultivable land areas. It is common practice that governments around the world take an active role in subsidizing agricultural insurance. Since 2006 Serbian government has also introduced the subsidizing of insurance premiums in the case of animals, crops and fruits insurance (in 2006 and 2007 by 30%, while since 2007 onward by 40%). Some local governments subsidize additional 10% of premium. These incentives have not led to the increased interest of farmers to ensure their production and fixed assets. By utilization of the desk research method it has been analyzed the general situation of agricultural insurance in Serbia, together with comparative analysis of the situation in Serbia with the one in the neighboring countries and EU. On the basis of the case study method for 100 family farms belonging to the municipalities of the Belgrade city, there have been analyzed the following parameters: presence of the crop and fruit insurance at the family farms, the types of risk from which the farmers usually insure their crops and fruits, the success of getting fee for damages caused by the insured events, the reasons why insurance is not present in the larger extent in Serbian agriculture and what are the possibilities for greater use of insurance as the safest form of minimization the potential risks in agriculture. The authors have also discussed a possibility of introducing the mandatory insurance for agricultural production, as well as the participation in agricultural insurance of those stakeholders which have interest for greater use of insurance in Serbian agriculture (insurance companies, food processing companies, banks, veterinary and extension services, local government authorities etc).
    Keywords: insurance, agriculture, risk, family farms, Serbia, Agricultural and Food Policy, Risk and Uncertainty, G22,
    Date: 2013–09
  5. By: Andreas Hubener (Goethe University of Frankfurt); Raimond Maurer (Goethe University of Frankfurt); Olivia S. Mitchell (The Wharton School, University of Pennsylvania)
    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: 2013–10
  6. By: Panda, P.; Chakraborty, A.; Dror, D.M.; Bedi, A.S.
    Abstract: This paper assesses insurance uptake in three community based health insurance (CBHI) schemes located in rural parts of two of India’s poorest states and offered through women’s self-help groups (SHGs). We examine what drives uptake, the degree of inclusive practices of the schemes, and the influence of health status on enrollment. The most important finding is that a household’s socio-economic status does not appear to substantially inhibit uptake. In some cases Scheduled Caste/ Scheduled Tribe (SC/ST) households are more likely to enroll. Second, households with greater financial liabilities find insurance more attractive. Third, access to the hospital insurance scheme (RSBY) does not dampen CBHI uptake, suggesting that the potential for greater development of insurance markets and products beyond existing ones would respond to a need. Fourth, recent episodes of illness and selfassessed health status do not influence uptake. Fifth, insurance coverage is prioritized within households, with the household head, the spouse of the household head and both male and female children of the household head, more likely to be insured as compared to other relatives. Sixth, offering insurance through women’s SHGs appears to mitigate concerns about the inclusiveness and sustainability of CBHI schemes. Given the pan-Indian spread of SHGs, offering insurance through such groups offers the potential to scale-up CBHI.
    Keywords: Bihar, Uttar Pradesh, community-based health insurance, enrollment, health microinsurance, rural India, self-help groups
    Date: 2013–03–30
  7. By: LAURENCE SEIDMAN (Department of Economics,University of Delaware)
    Abstract: Medicare for seniors has been evolving for half a century and has performed very satisfactorily. Extending Medicare to cover everyone regardless of age would have several advantages. It would provide automatic coverage and portability for everyone regardless of employment, health status, income, marital status, or residential location. It would use single-payer bargaining power to reduce medical cost as a percent of GDP. It would eliminate the burden imposed by private health insurance premiums. It would eliminate health insurance distraction for business managers, entrepreneurs, and job seekers, thereby improving the productivity of the U.S. economy. It would remove that implicit tax on entrepreneurship and job mobility that is imposed by a system of employer-provided private health insurance, and thereby achieve a welfare gain equal to the magnitude of this deadweight loss. It would also remove the implicit tax on having a high expected medical cost that is imposed on individuals by a system of individually-purchased private insurance, and thereby achieve what many citizens would judge to be an improvement in the equity. Medicare for All, however, would require a significant increase in taxes as a percent of GDP (roughly 8 percent of GDP—from 30 percent to 38 percent of GDP) to replace the elimination of private insurance premiums, and this tax increase would impose some efficiency cost on the economy. Moreover, Medicare for All might have harmful effects on medical care if the government uses its payer bargaining power to force down medical prices severely rather than moderately or if public tax resistance reduces earmarked revenue for medical care (as a percent of GDP) severely rather than moderately. Thus, if Medicare for All is adopted, it would be important to finance it with taxes that have moderate rather than severe efficiency costs, and to raise sufficient taxes so Medicare can pay prices that are high enough to avoid waiting lists and achieve high quality.
    Date: 2014
  8. By: Kauer, Lukas
    Abstract: Previous empirical literature has shown a substantial extent of work disincentives in the Disability Insurance (DI). While its focus has been on the inflow into DI and on increases in benefits, this study focuses on a partial benefit cut and on existing beneficiaries. The partial benefit reduction affected married DI beneficiaries only and was also dependent on their entry into DI. The richness of the dataset allows me to look at the behavioral response on labor market participation from the spouse and not only from the beneficiary. Using a difference-in-differences methodology, I find no effect on labor supply or earnings for both members of the couple. If anything, there might be spillover effects into means-tested social insurance. These results indicate partially cutting benefits is not an effective policy to increase labor supply of existing DI beneficiaries.
    Keywords: Disability insurance, labor supply, policy reform
    JEL: H55 J21
    Date: 2014–01
  9. By: John Karl Scholz (University of Wisconsin-Madison); Ananth Seshadri (University of Wisconsin-Madison)
    Abstract: We develop a rich model to study the complex interrelationship between health insurance and retirement decisions. The decision to retire depends on a number of factors including availability of health insurance, health shocks, pensions, Social Security, and how consumption and health interact in the utility function. We incorporate these features in a computational model of optimal wealth and retirement decisions, solving the model household-by-household using data from the HRS. We use the model to study two important SSA priority areas: first, to what extent do people remain in the labor force until age 65 in order to maintain health insurance for themselves (and after age 65 to maintain health insurance for their spouses)? Second, do early retirees have poorer health than others and does the availability of Medicare interact with their decision to claim benefits?
    Date: 2013–09
  10. By: Mebratie, A.D.; Sparrow, R.A.; Alemu, G.; Bedi, A.S.
    Abstract: Due to the limited ability of publicly financed health systems in developing countries to provide adequate access to health care, community-based health financing has been proposed as a viable option. This has led to the implementation of a number of Community- Based Health Insurance (CBHI) schemes, in several developing countries. To assess the ability of such schemes in meeting their stated objectives, this study systematically reviews the existing empirical evidence on three outcomes – access to schemes, effect on health care utilization and effect on financial protection. In addition to collating and summarizing the evidence we analyse the link between key scheme design characteristics and their effect on outcomes and comment on the role that may be played by study characteristics in influencing outcomes. The review shows that the ultra-poor are often excluded and at the same time there is evidence of adverse selection. The bulk of the studies find that access to CBHI is associated with increased health care utilization, especially with regard to the use of relatively cheaper outpatient care services as opposed to inpatient care. The schemes also appear to mitigate catastrophic healthcare expenditure. There are clear links between scheme design and effectiveness suggesting the importance of involving the target population in designing and implementing CBHI schemes.
    Keywords: catastrophic health expenditure, community health insurance, low-income groups
    Date: 2013–10–30
  11. By: Gropp, Reint
    Abstract: In this note, a new concept for a European deposit guarantee scheme is proposed, which takes account of the strong political reservations against a mutualization of the liability for bank deposits. The three-stage model for deposit insurance outlined in the text builds on existing national deposit guarantee schemes, offering loss compensation on a European level and at the same time preventing excessive risk and moral hazard taking by individual banks. --
    Keywords: bank risk,banking union,deposit insurance
    Date: 2013
  12. By: Derseh, A.; Sparrow, R.A.; Debebe, Z.Y.; Alemu, G.; Bedi, A.S.
    Abstract: In June 2011, the Government of Ethiopia rolled out a pilot Community Based Health Insurance (CBHI) scheme. This paper assesses scheme uptake. We examine whether the scheme is inclusive, the role of health status in inducing enrolment and the effect of the quality of health care on uptake. By December 2012, scheme uptake had reached an impressive 45.5 percent of target households. We find that a household’s socioeconomic status does not inhibit uptake and the most food-insecure households are substantially more likely to enrol. Recent illnesses, incidence of chronic diseases and self-assessed health status do not induce enrolment, while there is a positive link between past expenditure on outpatient care and enrolment. A relative novelty is the identification of the quality of health care on enrolment. We find that the availability of medical equipment and waiting time to see a medical professional play a substantial role in determining enrolment. Focus group discussions raise concerns about the behaviour of health care providers who tend to provide preferential treatment to uninsured households. Nevertheless, the start of the pilot scheme has been impressive and despite some concerns, almost all insured households indicate their intention to renew membership and more than half of uninsured households indicate a desire to enrol. While this augurs well, the estimates suggest that expanding uptake will require continued investments in the quality of health care.
    Keywords: communit based health insurance, adverse selection, social exclusion, Ethiopia
    Date: 2013–12–20
  13. By: John Bound (University of Michigan); Kyle J. Caswell (Urban Institute); Timothy Waidmann (Urban Institute)
    Abstract: Since the mid-1980s there has been dramatic growth in the number and fraction of DI and SSI beneficiaries with mental illness. With longer life expectancies and younger ages of disability onset than beneficiaries with physical impairments, their growth exerts added fiscal pressure on the programs. While not specifically focused on mental illness, fears of an increase in the duration (and thus prevalence) of disability claims that may result from this demographic shift have generated calls to tighten eligibility rules again. Using data from the Health and Retirement Study linked to SSA administrative records, we created statistically matched control groups of non-beneficiaries with severe mental illness. We then estimated the earnings, income, and health insurance coverage among rejected DI/SSI applicants with mental illness who have characteristics comparable to persons awarded benefits on the basis of mental impairments. We found that even after controlling for health and demographic characteristics, DI beneficiaries were substantially worse off than rejected applicants in terms of wealth and income. While these rejected applicants with mental illness were worse off than those with physical impairments, our findings suggests that the programs successfully select applicants with the greatest income needs, and that retrenchment could result in significant hardship.
    Date: 2013–08
  14. By: Baojing Sun; Changhao Guo; G. Cornelis van Kooten
    Abstract: The effectiveness of financial weather derivatives to hedge against risk in agriculture has not been well demonstrated; therefore, this risk hedging instrument has only been slowly adopted. The current study analyzes the hedging efficiency of weather index derivatives for corn production in Northeast China. It has two purposes: (1) to identify potential weather variables, such as cumulative rainfall or growing degree days, that impact corn yields; and (2) to analyze the efficiency of financial weather derivatives under varying strike values, where efficiency is defined in terms of its benefit to farmers. Regression results indicate that cumulative rainfall is important for crop production in the study region, and that, under some circumstances, it is efficient to use a weather-indexed financial derivatives to hedge the corresponding risk.
    Keywords: financial weather derivatives, climate risk, corn production, rainfall
    JEL: Q14 Q15 Q18
    Date: 2013–02
  15. By: Lambert, Claudia; Noth, Felix; Schüwer, Ulrich
    Abstract: This paper tests whether an increase in insured deposits causes banks to become more risky. We use variation introduced by the U.S. Emergency Economic Stabilization Act in October 2008, which increased the deposit insurance coverage from $100,000 to $250,000 per depositor and bank. For some banks, the amount of insured deposits increased significantly; for others, it was a minor change. Our analysis shows that the more affected banks increase their investments in risky commercial real estate loans and become more risky relative to unaffected banks following the change. This effect is most distinct for affected banks that are low capitalized. --
    Keywords: financial crisis,deposit insurance,bank regulation
    JEL: G21 G28
    Date: 2013
  16. By: Olivia S. Mitchell (The Wharton School, University of Pennsylvania); Christopher C. Geczy (The Wharton School, University of Pennsylvania); Robert Novy-Marx (Simon School of Business, University of Rochester); Raimond Maurer (Finance Department, Goethe University); Donald E. Fuerst (Mercer Human Resource Consulting); Christopher M. Bone (Edth Limited LLC); Donald J. Segal (Society of Actuaries); Martin G. Clarke (Pension Protection Fund); Frank J. Fabozzi (EDHEC Business School, EDHEC Risk Institute); Deborah Lucas (Sloan School of Management, Massachusetts Institute of Technology); David F. Babbel (The Wharton School, University of Pennsylvania)
    Abstract: In April of 2013, the Pension Research Council of the Wharton School at the University of Pennsylvania convened a Technical Review Panel, comprising ten experts whose task it was to review the Pension Benefit Guaranty Corporation’s (PBGC) Pension Insurance Modeling System (PIMS), including inputs, outputs, and model assumptions. The review was intended to provide a formal evaluation of the technical adequacy of the model by outside experts. Each expert participating on the Technical Panel was asked to review background material (see References) and focus on a particular aspect of the PIMS model. The list of panelists and topics was developed by the Council in discussion with the Social Security Administration (SSA). This report and the appended papers herein from our Technical Panel comprise the Final Report under this project. The Panel’s key findings may be summarized as follows: (1) The PIMS models are an important and valuable tool in modeling the Agency’s liability risk. To the best of our knowledge, there is no other model that can do a comparable job. (2) Nevertheless, some improvements could be integrated in the Agency’s approach to modeling. Those deserving highest priority attention in the experts’ view are the following: (a) Incorporating systematic mortality risk (i.e., treat mortality and longevity as stochastic variables); (b) Including new asset classes increasingly found in defined benefit plan portfolios (e.g., commercial real estate, private equity funds, infrastructure, hedge funds, and others); (c) Developing a more complex model for the term structure of interest rates; and (d) Incorporating an option value approach to pricing the insurance provided. (3) The Agency could also do more to communicate the range of uncertainty and potential for problems associated with the PBGC’s financial status. This could include additional information including the Conditional Value at Risk (CVaR), and perhaps an ‘intermediate,’ ‘optimistic,’ and ‘pessimistic’ set of projected outcomes, as well as the expected ‘date of exhaustion’ for assets backing pension benefits insured by the PBGC.
    Date: 2013–09
  17. By: Eisert, Tim; Eufinger, Christian
    Abstract: This paper presents a theory that explains why it is beneficial for banks to be highly interconnected on the interbank market. Using a simple network structure, it shows that, if there is a non-zero bailout probability, banks can significantly increase the expected repayment of uninsured creditors by entering into cyclical liabilities on the interbank market before investing in loan portfolios. Therefore, banks are better able to attract funds from uninsured creditors. Our results show that implicit government guarantees incentivize banks to have large interbank exposures, to be highly interconnected, and to invest in highly correlated, risky portfolios. --
    Keywords: bailout,cycle flows,cyclical liabilities,interbank network,leverage
    JEL: G01 G21 G28 L14
    Date: 2013
  18. By: Masaaki Fujii (The University of Tokyo); Akihiko Takahashi (The University of Tokyo)
    Abstract: All the financial practitioners are working in incomplete markets full of unhedgeable risk-factors. Making the situation worse, they are only equipped with the imperfect information on the relevant processes. In addition to the market risk, fund and insurance managers have to be prepared for sudden and possibly contagious changes in the investment flows from their clients so that they can avoid the over- as well as under-hedging. In this work, the prices of securities, the occurrences of insured events and (possibly a network of) the investment flows are used to infer their drifts and intensities by a stochastic filtering technique. We utilize the inferred information to provide the optimal hedging strategy based on the mean-variance (or quadratic) risk criterion. A BSDE approach allows a systematic derivation of the optimal strategy, which is shown to be implementable by a set of simple ODEs and the standard Monte Carlo simulation. The presented framework may also be useful for manufactures and energy firms to install an efficient overlay of dynamic hedging by financial derivatives to minimize the costs.
    Date: 2014–01

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