nep-ias New Economics Papers
on Insurance Economics
Issue of 2014‒01‒24
eighteen papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Supplemental Health Insurance and Healthcare Consumption: A Dynamic Approach to Moral Hazard By Carine Franc; Marc Perronnin; Aurelie Pierre
  2. Risk, Insurance and Wages in General Equilibrium By Ahmed Mushfiq Mobarak; Mark Rosenzweig
  3. Managing multichannel strategies in the service sector- the example of the French insurance industry By Ilaria Dalla Pozza; Lionel Texier
  4. Social Insurance, Informality and Labor Markets: How to Protect Workers While Creating Good Jobs By Pagés, Carmen; Rigolini, Jamele; Robalino, David A.
  5. Cyclicity in the French PropertyLiability Insurance Industry - New Findings over the Recent Period By Catherine Bruneau; Nadia Sghaier
  6. Sovereign Borrowing, Financial Assistance and Debt Repudiation By Florian Kirsch; Ronald Rühmkorf
  7. Risk aggregation and stochastic claims reserving in disability insurance By Boualem Djehiche; Bj\"orn L\"ofdahl
  8. Shocks to Philippine households: Incidence, idiosyncrasy and impact By Joseph J. Capuno; Aleli D. Kraft; Stella A. Quimbo; Carlos Antonio R. Tan, Jr.
  9. "Optimal Hedging for Fund & Insurance Managers with Partially Observable Investment Flows" By Masaaki Fujii; Akihiko Takahashi
  10. Just how good is unemployment as a measure of welfare? A policy note By Emmanuel S. de Dios; Katrina Dinglasan
  11. Youth Unemployment in Southern Europe By João Leão; Guida Nogueira
  12. Where Was the Wealth of the Nation? Measuring Swedish Capital for the 19th and 20th Centuries By Lindmark, Magnus; Andersson, Lars Fredrik
  13. The Industrial Organization of Health Care Markets By Martin Gaynor; Kate Ho; Robert Town
  14. Labor and Finance: Mortensen and Pissarides meet Holmstrom and Tirole By Pietro Garibaldi
  15. The Short-Term Population Health Effects of Weather and Pollution: Implications of Climate Change By Ziebarth, Nicolas R.; Schmitt, Maike; Karlsson, Martin
  16. Recall and unemployment By Fujita, Shigeru; Moscarini, Giuseppe
  17. We're Number 1: Price Wars for Market Share Leadership By Luis Cabral
  18. Price Jumps on European Stock Markets By Jan Hanousek; Evžen Kočenda; Jan Novotný

  1. By: Carine Franc (CERMES centre de recherche medecine, sciences, sante et societe); Marc Perronnin (IRDES Institute for research and information in health economics); Aurelie Pierre (IRDES Institute for research and information in health economics)
    Abstract: We analyze the existence and persistence of moral hazard over time to test the assumption of pent-up demand. We consider the effects of supplemental health insurance provided by a private insurer when added to compulsory public insurance already supplemented by private insurance. Using panel data from a French mutuelle, we compute error component models with the Chamberlain specification to control for adverse selection. By separating outpatient care consumption into (1) the probability of healthcare use, (2) the number of uses conditional on use and (3) the per-unit cost of care, we provide evidence that supplemental insurance is significantly and positively associated with (1), (2) and (3). However, these effects decrease significantly over time. This pattern supports the existence of pent-up demand, the magnitude of which varies greatly and depends on the dimensions (1), (2) and (3) and the type of care (physician care, prescription drugs, dental care or optical care).
    Keywords: Supplemental health insurance, moral hazard, health care expenditures, longitudinal analysis
    JEL: I13
    Date: 2014–01
  2. By: Ahmed Mushfiq Mobarak; Mark Rosenzweig
    Abstract: We estimate the general-equilibrium labor market effects of a large-scale randomized intervention in which we designed and marketed a rainfall index insurance product across three states in India. Marketing agricultural insurance to both cultivators and to agricultural wage laborers allows us to test a general-equilibrium model of wage determination in settings where households supplying labor and households hiring labor face weather risk. Consistent with theoretical predictions, we find that both labor demand and equilibrium wages become more rainfall sensitive when cultivators are offered rainfall insurance, because insurance induces cultivators to switch to riskier, higher-yield production methods. The same insurance contract offered to agricultural laborers smoothes wages across rainfall states by inducing changes in labor supply. Policy simulations based on our estimates suggest that selling insurance only to land-owning cultivators and precluding the landless from the insurance market (which is the current regulatory practice in India and other developing countries), makes wage laborers worse off relative to a situation where insurance does not exist at all.
    JEL: J2 O13 O16 O17 Q12
    Date: 2014–01
  3. By: Ilaria Dalla Pozza; Lionel Texier
    Abstract: The goal of this paper is to investigate the implementation of multichannel strategies in the service sector and to understand objectives, difficulties faced by companies, synergies and competitive effects among channels, and future areas of investment. We answer our research questions using in depth interviews with a sample of insurance directors responsible for the multichannel strategy of the major French insurance players.
    Keywords: Global financial crisis, contagion, emerging equity markets, sovereign risk.
    Date: 2014–01–06
  4. By: Pagés, Carmen (Inter-American Development Bank); Rigolini, Jamele (World Bank); Robalino, David A. (World Bank)
    Abstract: This paper provides an overview of the main findings of the book "Social Insurance and Labor Markets: How to Protect Workers While Creating New Jobs." The book conceptualizes and reviews the empirical evidence on the potential distortions that the social insurance system of a country can have on the supply and demand side of the labor market, and proposes options to address them. The overall message is that current Bismarckian systems are inadequate to extend coverage to the entire labor force of a country and that, at the same time, can affect the level and structure of employment – for instance, by promoting informality and reducing participation rates. These effects can be important enough to deserve consideration in policy discussion. In part, they are explained by a series of explicit and implicit taxes and subsidies that emerge as part of the design of health insurance, pensions, and unemployment benefits programs. Going forward, there a few general principles that countries can follow to expand coverage while reducing potential distortions in labor markets. First, giving more flexibility to individuals in the choice of the bundle of social insurance programs, the level of benefits, and the portfolio of investments (in the case of savings programs), while providing better information and incentives to enroll. Second, relying on explicit, integrated, and in some circumstances means-tested redistributive arrangements in order to better contribute to reduce poverty and inequality. Finally, from the point of view of labor markets, by aiming to reduce perceived tax-wedges. This could be done by better linking contributions to benefits, improving the quality of services, and financing redistributive arrangements through general revenues.
    Keywords: social insurance, pensions, informality, pay-roll taxes, redistribution, labor markets
    JEL: J3 J6 H2 H3 I3 D3
    Date: 2013–12
  5. By: Catherine Bruneau; Nadia Sghaier
    Abstract: This paper reinvestigates the presence and the causes of the underwriting cycle in the French property-liability insurance industry as displayed by the combined ratio for the 1963-2008 period. The question is still a timely issue if we refer to regulation issues and the recent proposals in the Sovency framework to take into account the fluctuations of the profitability in specifying the solvency capital requirement. In the literature, two approaches are traditionally adopted to investigate the underwriting cycle : the first one refers to an endogeneous characterization of the cyclical properties from an AR(2) model. The second one claims that the cycle in the property-liability insurance has exogeneous sources related to the financial markets and the general economy. In this article, we reconcile the two approaches by using a smooth transition regression (STR) model. This model shows that the AR(2) model is relevant in a first regime where the capacity constraint is binding. In contrast, the fluctuations in the combined ratio are positively influenced by the lagged stock market return in a second regime where the capacity is not constrained, as for the most recent period. Moreover, we find that the current capacity is related to the lagged inflation rate in the latter case. These results confirm the idea that the European rules regarding the solvency capital requirement for insurance companies should take into account the state of the economy and the financial markets.
    Keywords: underwriting cycle, property-liability insurance, combined ratio, AR(2) model, financial markets, general economy, STR model, capacity constraint, solvency.
    Date: 2014–01–06
  6. By: Florian Kirsch; Ronald Rühmkorf
    Abstract: Official lenders provide financial assistance to countries that face sovereign debt crisis. The availability of financial assistance has counteracting effects on the default incentives of governments. On the one hand, financial assistance can help to avoid defaults by bridging times of fundamental crises or resolving coordination failures among private investors. On the other hand, the insurance effect of financial assistance lowers borrowing costs which induces the sovereign to accumulate higher debt levels. To assess the overall effect of financial assistance on the probability of default we construct a quantitative model of endogenous credit structure and sovereign default that allows for self-fulfilling expectations of default. Calibrating the model to Argentinean data we find that the availability of financial assistance reduces the number of defaults that occur due to self-fulfilling runs by private investors. However, at the same time it raises average debt levels causing an overall increase of the probability of default.
    Keywords: Sovereign debt, Sovereign default, Self-fulfilling runs, Bailout
    JEL: F34 G15 O19
    Date: 2013–01
  7. By: Boualem Djehiche; Bj\"orn L\"ofdahl
    Abstract: We consider a large, homogeneous portfolio of life or disability annuity policies. The policies are assumed to be independent conditional on an external stochastic process representing the economic-demographic environment. Using a conditional law of large numbers, we establish the connection between claims reserving and risk aggregation for large portfolios. Further, we derive a partial differential equation for moments of present values. Moreover, we show how statistical multi-factor intensity models can be approximated by one-factor models, which allows for solving the PDEs very efficiently. Finally, we give a numerical example where moments of present values of disability annuities are computed using finite difference methods.
    Date: 2014–01
  8. By: Joseph J. Capuno (School of Economics, University of the Philippines); Aleli D. Kraft (School of Economics, University of the Philippines); Stella A. Quimbo (School of Economics, University of the Philippines); Carlos Antonio R. Tan, Jr. (School of Economics, University of the Philippines)
    Abstract: With their country located in the Pacific Ring of Fire and in the monsoon belt, Philippine households are perennially exposed to natural disasters and calamities. In addition, they face health, economic and sociopolitical risks. Using a nationally representative sample of households, we assess the overall incidence of different shocks, the extent to which they simultaneously affect households in the same area, and their impact. A huge majority of households experience shocks, with the incidence of different shocks being roughly the same for poor and rich households. Natural and economic shocks appear to affect more households simultaneously in the same area than sociopolitical shocks, health shocks and deaths. Health shocks and deaths lead to greater short-term and long-term impacts. Richer households are able to recover better than the poor. We draw some implications for the design and targeting of social health insurance, disaster management and other social protection programs.
    Keywords: Household shocks; coping mechanisms; welfare
    JEL: D10 I38
    Date: 2013–11
  9. By: Masaaki Fujii (Faculty of Economics, The University of Tokyo); Akihiko Takahashi (Faculty of Economics, 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.
  10. By: Emmanuel S. de Dios (School of Economics, University of the Philippines Diliman); Katrina Dinglasan (Philippine Center for Economic Development, Diliman, Quezon City)
    Abstract: The government is rightly concerned with employment generation to make growth inclusive. The use of the open unemployment rate to measure its success, however, is misplaced. In a developing country with a large informal sector and in the absence of unemployment insurance, open unemployment is primarily a middle-class phenomenon: the unemployed are not predominantly poor, and the poor are not predominantly unemployed. Measures of productivity and shifts of labour across sectors may contain more information.
    Keywords: unemployment, underemployment, labour force, welfare, poverty
    JEL: J21 I32
    Date: 2014–01
  11. By: João Leão (Office for Strategy and Studies (GEE), Portuguese Ministry of Economy; ISCTE- University Institute of Lisbon); Guida Nogueira (Office for Strategy and Studies (GEE), Portuguese Ministry of Economy)
    Abstract: The youth unemployment rate in Europe increased to very high levels after the great recession of 2008, reaching 23% in European Union and 45% in southern European countries. We examine the causes of the high youth unemployment rate which is consistently bigger than the overall unemployment rate. The empirical evidence shows that the youth unemployment rate depends crucially of the level of the overall unemployment rate and on the variation of the unemployment rate.
    Keywords: Keywords: Southern Europe, unemployment, youth unemployment.
    JEL: E24 J64 J13
    Date: 2013–12
  12. By: Lindmark, Magnus (CERE, Umeå University); Andersson, Lars Fredrik (CERE, Umeå University)
    Abstract: This report presents estimates of the Swedish national wealth from 1830 to 2010. This contributes to economic historical research on structural change and growth, while it also supplements debates on the composition of wealth and incomes across countries. The report also includes for the first time a historical estimate of the Consumer Rate Interest CRI and an estimate of wealth based on surveys and insurance data. The report includes an extensive description and documentation of the historical estimates. The main findings are that the proportion of intangible capital grew before modern economic growth was achieved in Sweden during the 1890’s. Secondly, we show that the proportion of natural assets fell prior to and during the industrialization, while the share of produced capital has fluctuated, but has remained fairly stable over the period as a whole.
    Keywords: capital stocks; national wealth; Historical national accounts; Sweden; Economic history
    JEL: N00
    Date: 2014–01–13
  13. By: Martin Gaynor; Kate Ho; Robert Town
    Abstract: The US health care sector is large and growing – health care spending in 2011 amounted to $2.7 trillion and 18% of GDP. Approximately half of health care output is allocated via markets. In this paper, we analyze the industrial organization literature on health care markets focusing on the impact of competition on price, quality and treatment decisions for health care providers and health insurers. We conclude with a discussion of research opportunities for industrial organization economists, including opportunities created by the US Patient Protection and Affordable Care Act.
    JEL: I11 L1 L10
    Date: 2014–01
  14. By: Pietro Garibaldi
    Abstract: In real life labor markets firms hold at all times a variety of liquid assets not invested in their core business. Such external use of funds acts as an insurance against future adverse financial shocks, and typically varies across firms and sectors. As a result, different firms use different degrees of financial leverage. This paper investigates the consequence of firms' use of funds on their hiring and firing policy. Using a standard matching model of unemployment, the paper finds an equilibrium interplay between the value of unemployment and financial conditions. Financial market imperfections- such as the probability of refinancing or firms' share of their pleadgeable income- affect equilibrium unemployment. In this sense, the paper brings together the work on liquidity by Holmstrom anf Tirole (2011) with the traditional Mortensen Pissarides (2004) model of equilibrium unemployment. The model implies also that at times of adverse financial shocks, firms that are more leveraged are more likely to liquiditate their assets and destroy jobs. Empirically, we test whether there is a causal link between firms leverage and job destruction at times of adverse financial shocks. We draw on firm-level data on employment adjustment matched with balance sheet records throughout the Great Recession and find that highly leveraged firms destroy more jobs during a financial crisis.
    Date: 2013
  15. By: Ziebarth, Nicolas R. (Cornell University); Schmitt, Maike (Darmstadt University of Technology); Karlsson, Martin (University of Duisburg-Essen)
    Abstract: This study comprehensively assesses the immediate effects of extreme weather conditions and high concentrations of ambient air pollution on population health. For Germany and the years 1999 to 2008, we link the universe of all 170 million hospital admissions, along with all 8 million deaths, with weather and pollution data reported at the day-county level. Extreme heat significantly increases hospitalizations and deaths. Extreme cold has a negligible effect on population health. High ambient PM10, O3 and NO2 concentrations are associated with increased hospitalizations and deaths, particularly when ignoring simultaneous weather and pollution conditions. We find strong evidence for "harvesting", and that the instantaneous heat-health relationship is only present in the short-term. We calculate that one "Hot Day" with a temperature higher than 30 °C (86 °F) triggers short-term adverse health effects valued between $0.10 and $0.68 per resident.
    Keywords: register data, hospital admissions, mortality, weather and pollution, climate change
    JEL: I12 I18 Q51 Q53 Q54 Q58
    Date: 2013–12
  16. By: Fujita, Shigeru (Federal Reserve Bank of Philadelphia); Moscarini, Giuseppe (Yale University)
    Abstract: Using data from the Survey of Income and Program Participation (SIPP) covering 1990-2011, we document that a surprisingly large number of workers return to their previous employer after a jobless spell and experience more favorable labor market outcomes than job switchers. Over 40% of all workers separating into unemployment regain employment at their previous employer; over a fifth of them are permanently separated workers who did not have any expectation of recall, unlike those on temporary layoff. Recalls are associated with much shorter unemployment duration and better wage changes. Negative duration dependence of unemployment nearly disappears once recalls are excluded. We also find that the probability of finding a new job is more procyclical and volatile than the probability of a recall. Incorporating this fact into an empirical matching function significantly alters its estimated elasticity and the time-series behavior of matching efficiency, especially during the Great Recession. We develop a canonical search-and-matching model with a recall option where new matches are mediated by a matching function, while recalls are free and triggered by both aggregate and job-specific shocks. The recall option is lost when the unemployed worker accepts a new job. A quantitative version of the model captures well our cross-sectional and cyclical facts through selection of recalled matches.
    Keywords: Recalls; Unemployment; Duration dependence; Matching function
    JEL: E24 E32 J64
    Date: 2013–11–01
  17. By: Luis Cabral
    Date: 2014
  18. By: Jan Hanousek; Evžen Kočenda; Jan Novotný
    Abstract: We analyze the dynamics of price jumps and the impact of the European debt crisis using the high-frequency data reported by selected stock exchanges on the European continent during the period January 2008 to June 2012. We employ two methods to identify price jumps: Method 1 minimizes the probability of false jump detection (the Type-II Error-Optimal price jump indicator) and Method 2 maximizes the probability of successful jump detection (the Type-I Error-Optimal price jump indicator). We show that individual stock markets exhibited differences in price jump intensity before and during the crisis. We also show that in general the variance of price jump intensity could not be distinguished as different in the pre-crisis period from that during the crisis. Our results indicate that, contrary to common belief, the intensity of price jumps does not uniformly increase during a period of financial distress. However, there do exist differences in price jump dynamics across stock markets and investors have to model emerging and mature markets differently to properly reflect their individual dynamics.
    Keywords: European stock markets, price jump indicators, non-parametric testing, clustering analysis, financial econometrics, emerging markets.
    JEL: C14 C58 F37 G15 G17
    Date: 2013–09–15

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