nep-ias New Economics Papers
on Insurance Economics
Issue of 2014‒05‒04
fourteen papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. How Do the Interest Rate and the Inflation Rate Affect the Non-Life Insurance Premiums ? By Heni Boubaker; Nadia Sghaier
  2. Updated Estimates of the Effects of the Insurance Coverage Provisions of the Affordable Care Act, April 2014 By Congressional Budget Office
  3. Insurance Contracts and Derivatives that Substitute for Them: How and Where Should Their Systemic and Nonperformance Risks be Regulated? By Edward J. Kane
  4. ObamaCare: Rocky Politics, Stable Coverage By David B. Kendall
  5. Formal and Informal Social Protection in Iraq By Johnson, Hillary; El Mekkaoui de Freitas, Najat
  6. Adding Employer Contributions to Health Insurance to Social Security's Earnings and Tax Base By Karen E. Smith; Eric Toder
  7. La gestión de riesgos climáticos catastróficos para el sector agropecuario en México:Caso del Componente para la Atención a Desastres Naturales para el sector Agropecuario (CADENA) By Cabestany-Noriega, Jaime; Hernandez-Hernandez, Emilio; Celaya-del-Toro, Víctor
  8. Optimal Insurance for Small Stakeholders By Frankel, David M.
  9. Unemployment Benefit Extensions Caused Jobless Recoveries!? By Kurt Mitman; Stanislav Rabinovich
  10. The Authority of the FSOC and the FSB to Designate SIFIs: Implications for the Regulation of Insurers in the United States after the Prudential Decision By Peter J. Wallison
  11. Competition among non-life insurers under solvency constraints: A game-theoretic approach By Christophe Dutang; Hansjoerg Albrecher; Stéphane Loisel
  12. Systemic Risk and Regulation of the U.S. Insurance Industry By J. David Cummins; Mary A. Weiss
  13. The six "ins" of climate-smart agriculture: Inclusive institutions for information, innovation, investment, and insurance: By Meinzen-Dick, Ruth Suseela; Bernier, Quinn; Haglund, Eric
  14. The Past, Present and Future of U.S. Health Care Reform By Jonathan Gruber

  1. By: Heni Boubaker; Nadia Sghaier
    Abstract: This paper proposes an original framework based on nonlinear panel data models to study the empirical influence of the interest rate and the inflation rate on the non-life insurance premiums for fourteen developed countries over the period 1965-2008. More specifically, we apply the panel smooth transition error correction model which takes into account both the short and long-run effects of changes in economic variables on the growth rate of non-life insurance premiums and which allows the regression coefficients to vary across countries and over time. Our empirical results show that the interest rate and the inflation rate have a differentiated impact on the non-life insurance premiums depending on the value of the inflation rate. These empirical findings provide evidence of changes in insurance pricing rules.
    Keywords: non-life insurance premiums, interest rate, inflation rate, panel smooth transition error correction model and insurance pricing rules.
    Date: 2014–04–29
  2. By: Congressional Budget Office
    Abstract: CBO and the staff of the Joint Committee on Taxation have lowered their estimates of the net federal cost of the ACA’s insurance coverage provisions. As reflected in CBO’s April 2014 baseline, the agencies now project a cost of $36 billion for 2014, $5 billion less than the projection made in February; and close to $1.4 trillion for the 2015–2024 period, about $100 billion less than the February projection.
    JEL: I10 I11 I13 I18 I38
    Date: 2014–04–14
  3. By: Edward J. Kane
    Abstract: Traditionally, individual states have shared responsibility for regulating the US insurance industry. The Dodd-Frank Act changes this by tasking the Federal Reserve with regulating the systemic risks that particularly large insurance organizations might pose and assigning the regulation of swap-based substitutes for insurance and reinsurance products to the SEC and CFTC. This paper argues that prudential regulation of large insurance firms and weaknesses in federal swaps regulation could reduce the effectiveness of state-based systems for protecting policyholders and taxpayers from nonperformance in the insurance industry. Swap-based substitutes for traditional insurance and reinsurance contracts offer protection sellers a way to transfer responsibility for guarding against nonperformance into potentially less-effective hands. The CFTC and SEC lack the focus, expertise, experience, and resources to manage adequately the ways that swaps transactions can affect US taxpayers’ equity position in global safety nets, while regulators at the Fed refuse to recognize that conscientiously monitoring accounting capital at financial holding companies will not adequately protect taxpayers and policyholders until and unless it is accompanied by severe penalties for managers that willfully hide their firm's exposure to destructive tail risks.
    Keywords: Dodd-Frank Act, systemic risk, nonperformance risk, regulatory culture, financial reform
    JEL: E61 G21 G22 G28 K42
    Date: 2014–04
  4. By: David B. Kendall
    Abstract: The Affordable Care Act (ACA) and Medicare Part D had the same rocky start. Both were criticized as unworkable and unsustainable. Yet both have similar structures. They offer individuals a choice of competing health plans, provide subsidies to make coverage affordable, and impose penalties for late enrollment. Medicare Part D's success in creating stable coverage of prescriptions drugs for Medicare beneficiaries shows how the ACA may stabilize health insurance coverage for working-age Americans. The comparison with Part D also reveals two potential sources of instability for the ACA: a narrow subsidy structure and benefit mandates. The biggest source of instability for the ACA and all other forms of health care coverage is rising health care costs. That threat, which can lead to higher taxes or benefit cuts, could stimulate bipartisan action. There are a series of opportunities that start small and work up to major action: the repeal of Medicare’s Sustainable Growth Rate, sequestration replacement, state gain-sharing, and tax reform. A focus by policy makers on rising costs as a common enemy can help move the health care debate beyond the rocky politics over the ACA.
    Keywords: Affordable Care Act, health insurance, exchanges, Medicare Part D.
    JEL: H4 H2 I00
    Date: 2013–10
  5. By: Johnson, Hillary; El Mekkaoui de Freitas, Najat
    Abstract: We study formal and informal insurance in Iraq using empirical data from a household survey. We study access to social security, health insurance, and retirement. Then, we examine the types of risks that Iraqi households face, and the informal coping mechanisms they use to deal with them. After studying formal and informal social protection separately, we study the relationship between the two and test the hypothesis of crowding out. We find that socio-­demographic characteristics affect formal insurance detention, the probability of a risk occurring, and the type of risk coping mechanism that a household uses. The most important determinant of receiving formal benefits is the sector of employment: public sector workers are between 83% and 84% more likely than private sector workers to have formal benefits. Poverty, the type of employment, the place of residence, the size of the household, the gender of the household head, and the education of the household impact the probability with which a household is affected by different types of risks. These socio -­‐ demographic characteristics along with the type of risk that the household faced influence the household’s choice of risk coping mechanism. We find evidence of crowding out; however, we conclude that this should not translate to a reduction in formal safety nets. Our results have many policy implications to improve access to formal insurance, reduce risks, and mitigate the negative aspects of certain informal coping mechanisms in Iraq .
    Keywords: Iraq; Social protection; formal and informal insurance; risk coping mechanisms;
    JEL: O53 O17 I38 D10 D81
    Date: 2013–09
  6. By: Karen E. Smith; Eric Toder
    Abstract: The inclusion of employer-sponsored health insurance (ESI) in taxable income would increase income and payroll tax receipts, but would also increase Old Age, Survivors, and Disability Insurance (OASDI) benefits by adding ESI to the OASDI earnings base. This study uses the Urban Institute’s DYNASIM model to estimate the effects of including ESI premiums in taxable earnings on the level and distribution by age and income groups of income tax burdens, payroll tax burdens, and OASDI benefits. We find that the increased present value of OASDI benefits from including ESI in the wage base in 2014 offsets about 22 percent of increased income and payroll taxes, 57 percent of increased payroll taxes, and 72 percent of increased OASDI taxes. The overall distributions of taxes and benefits by income group follow the same pattern, with both taxes and benefits increasing as a share of income between the bottom and middle quintiles and then declining as a share of income for higher income taxpayers. But households in the bottom income quintiles receive a net benefit from including ESI in the tax base because their increase in OASDI benefits exceeds their increase in income and payroll taxes. Over a lifetime perspective, all earnings groups experience net tax increases, but workers in the middle of the earnings distribution experience the largest net tax increases as a share of lifetime earnings. Higher benefits offset a larger share of tax increases for lower than for higher income groups.
    Date: 2014–04
  7. By: Cabestany-Noriega, Jaime; Hernandez-Hernandez, Emilio; Celaya-del-Toro, Víctor
    Abstract: El Componente de Atención a los Desastres Naturales, “CADENA”, es un programa del Gobierno de México que acaba de cumplir 10 años de operación. A diferencia de otros fondos para la atención a desastres naturales, es administrado y supervisado por la cabeza ejecutiva del sector, en este caso, la Secretaría de Ganadería, Agricultura, Desarrollo Rural, Pesca y Alimentación, SAGARPA. Uno de sus principales objetivos consiste en fomentar la protección de productores agropecuarios de bajos ingresos que no cuenten con esquemas de seguros para protegerse en caso de eventos naturales catastróficos. La entrega de apoyos financieros ex post reglamentada y administrada por este programa, busca que esta población meta pueda reactivar sus actividades económicas a pesar de los daños sufridos. El CADENA ha movilizado y fomentado el desarrollo de seguros paramétricos catastróficos, entre otros esquemas de aseguramiento, administrados a nivel de un territorio dado. Esta mecánica operativa, única a nivel mundial, explica sus inmensos logros de expansión, que hoy día se están traduciendo por una cobertura ante desastres naturales prácticamente universal a nivel de la población de pequeños productores en México. Otro logro relevante consiste en haberse convertido en el agente motor del seguro agropecuario en México, dado que ha logrado conjuntar los esfuerzos de las diversas instancias relacionadas con el tema, tanto a nivel público como privado. The CADENA, is a program of the Government of Mexico that has just achieved 10 years in operation. Unlike other public funds to provide assistance in the case of natural disasters, it is administered and supervised by the executive head of the sector, in this case, the Secretariat of Agriculture, Livestock , Rural Development, Fisheries and Food, SAGARPA. One of the program’s main objective is to promote the protection of low-income farmers who do not have insurance schemes to protect themselves in case of catastrophic natural events. The delivery of financial support ex-post, regulated and administered by this program, seeks to enable the target population to reactivate their productive activities despite the damages suffered. The CADENA provided resources and encouraged the development of parametric catastrophic insurance, among other insurance products, to cover risks at the level of a given territory. This unique operational scheme explains its immense expansion, which today represent almost a universal coverage of the population of low-income farmers in Mexico. Another important achievement is to have become the engine of the agricultural insurance industry in Mexico, as it has managed to encourage collaborative efforts from the various public and private entities related to the topic.
    Keywords: Seguros agropecuarios; seguros paramétricos; redes protección social; México Agircultural insurance; parametric insurance; social protection programs; Mexico
    JEL: O10 O13 Q14
    Date: 2013–11
  8. By: Frankel, David M.
    Abstract: We study optimal insurance for consumers who must decide whether or not to buy from a unionized firm that produces a good that is subject to network externalities. The union first announces a wage schedule. The firm then sees a precise public signal of a random economic state and chooses a price. The consumers then see even more precise signals of the state and decide whether or not to buy. The network externality and the union pricing distortion lead them to buy too infrequently. We show that the first best can be costlessly attained by providing countercyclical purchase insurance.
    Keywords: Stakeholders; Optimal Insurance; Labor Unions; Automobiles; Detroit; Crises; network externalities
    JEL: G38 H21
    Date: 2014–04–26
  9. By: Kurt Mitman (Department of Economics, University of Pennsylvania); Stanislav Rabinovich (Department of Economics, Amherst College)
    Abstract: The last three recessions in the United States were followed by jobless recoveries: while labor productivity recovered, unemployment remained high. In this paper, we show that countercyclical unemployment benefit extensions lead to jobless recoveries. We augment the standard Mortensen-Pissarides model to incorporate unemployment benefits expiration and state-dependent extensions of unemployment benefits. In the model, an extension of unemployment benefits slows down the recovery of vacancy creation in the aftermath of a recession. We calibrate the model to US data and show that it is quantitatively consistent with observed labor market dynamics, in particular the emergence of jobless recoveries after 1990. Furthermore, counterfactual experiments indicate that unemployment benefits are quantitatively important in explaining jobless recoveries.
    Keywords: Unemployment Insurance, Business Cycles, Jobless Recoveries
    JEL: E24 E32 J65
    Date: 2014–04–21
  10. By: Peter J. Wallison
    Abstract: The Financial Stability Oversight Council (FSOC), established by the Dodd-Frank Act, has the extraordinary authority to designate financial firms as systemically important financial institutions (SIFIs). Firms so designated are then turned over to the Fed for “stringent” regulation. FSOC’s recent designation of Prudential Financial as a SIFI shows that the agency is unlikely to set any standards that might limit its own discretion, raising the possibility that other insurers will also be designated in the future. Moreover, the US Treasury and the Federal Reserve are both members of an international regulatory group, the Financial Stability Board (FSB) that has been empowered by the G20 leaders to reform the international financial system in the wake of the 2008 financial crisis. The FSB has also taken it upon itself to designate global SIFIs, including three US insurers—AIG, Prudential and MetLife—and has done so with the concurrence of the US Treasury and the Fed. The FSOC just followed the FSB’s lead. This, together with the absence of any standards for what constitutes a SIFI, suggests that if the FSB continues to designate other insurers in the future the FSOC will follow suit. This will have major effects on competition in the insurance industry in the future.
    Keywords: Financial Stability Oversight Council, Dodd-Frank Act, Insurance Regulation, SIFI, G-SII, International Association of Insurance Supervisors, Financial Stability Board
    JEL: G22 G28 F3 F5
    Date: 2014–03
  11. By: Christophe Dutang (SAF - Laboratoire de Sciences Actuarielle et Financière - Université Claude Bernard - Lyon I : EA2429, IRMA - Institut de Recherche Mathématique Avancée - CNRS : UMR7501 - Université de Strasbourg); Hansjoerg Albrecher (UNIL - Université de Lausanne - Université de Lausanne); Stéphane Loisel (SAF - Laboratoire de Sciences Actuarielle et Financière - Université Claude Bernard - Lyon I : EA2429)
    Abstract: In this paper, we formulate a noncooperative game to model a non-life insurance market. The aim is to analyze the e ects of competition between insurers through di erent indicators: the market premium, the solvency level, the market share and the underwriting results. Resulting premium Nash equilibria are discussed and numerically illustrated.
    Date: 2013
  12. By: J. David Cummins; Mary A. Weiss
    Abstract: This paper analyzes the characteristics of U.S. insurers for purposes of determining whether they are systemically risky. More specifically, primary factors (size, interconnectedness, and lack of substitutability) and contributing factors (leverage, liquidity risk and maturity mismatch, complexity and government regulation) associated with systemic risk are assessed for the insurance sector. A distinction is made between the core activities of insurers (e.g., underwriting, reserving, claims settlement, etc.) and non-core activities (such as providing financial guarantees). Statistical analysis of insurer characteristics and their relationship with a well-known systemic risk measure, systemic expected shortfall, is provided. Consistent with other research, the core activities of propertycasualty insurers are found not to be systemically risky. However, we do find evidence that some core activities of life insurers, particularly separate accounts and group annuities, may be associated with systemic risk. The non-core activities of both property-casualty and life insurers can contribute to systemic risk. However, research findings indicate that generally insurers are victims rather than propagators of systemic risk events. The study also finds that insurers may be susceptible to intrasector crises such as reinsurance crises arising from counterparty credit risk. New and proposed state and federal regulation are reviewed in light of the potential for systemic risk for this sector.
    Keywords: Systemic risk, Insurance regulation, Financial Stability Oversight Council
    JEL: G20 G22
    Date: 2013–03
  13. By: Meinzen-Dick, Ruth Suseela; Bernier, Quinn; Haglund, Eric
    Abstract: This paper reviews the central role of institutions for climate-smart agriculture (CSA), focusing on the role of institutions in promoting inclusivity, providing information, enabling local level innovation, encouraging investment, and offering insurance to enable smallholders, women, and poor resource-dependent communities to adopt and benefit from CSA. We discuss the role of state, collective action, and market institutions at multiple levels, with particular attention to the importance of local-level institutions and institutional linkages across levels.
    Keywords: Climate change, Property rights, Institutions, Smallholders, Climate-smart agriculture, collective action,
    Date: 2013
  14. By: Jonathan Gruber
    Abstract: The beginning of the most important elements of the Patient Protection and Affordable Care Act of 2010 (ACA) is an opportune time to review the history of health care reform in the United States, the issues involved in the development of the ACA and its prospects. Efforts for reform trace back to President Teddy Roosevelt and have moved forward since then. The ACA is the culmination of years of debate and discussion at the federal level, but the Massachusetts Health Care Reform Plan adopted in 2006, Romneycare, was the most tangible forerunner and experiment confirming the design, possibilities and success of the ACA. Obamacare is Romneycare. Based on the success of Romneycare, Obamacare will be successful. This paper develops the fundamental challenges of reform and the approaches taken by the ACA to solve those potential problems, especially improving access to health care, improving affordability and avoiding increased federal budget deficits. It also outlines steps developed in the ACA to achieve significant future cost control in health care without sacrificing the trend productivity gains in health care observed in the past and that can further improve access and affordability. This paper is based on a presentation at the Networks Financial Institute’s forum on health care reform, \The Big Bang for the Affordable care Act
    Keywords: Affordable Care Act, Health Care Insurance, Obamacare
    JEL: H20 H11 I13
    Date: 2013–10

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