nep-ias New Economics Papers
on Insurance Economics
Issue of 2014‒05‒24
twelve papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Natural Disasters: Exposure and Underinsurance By Grislain-Letrémy, Céline
  2. Wheat Area-Yield Insurance Effectiveness: Simulating Rates in Australian Reality By Orlowski, Jan Alexander Kazimierz
  3. Unemployment Insurance in High Informality Countries By Emilio Espino; Juan M. Sánchez
  4. Area Yield Crop Insurance: Effectiveness of an Australian simulation By Orlowski, Jan Alexander Kazimierz
  5. Social Program Substitution and Optimal Policy By Nicholas Lawson
  6. More Insurers Lower Premiums: Evidence from Initial Pricing in the Health Insurance Marketplaces By Leemore Dafny; Jonathan Gruber; Christopher Ody
  7. Constant Proportion Portfolio Insurance under Tolerance and Transaction Costs By Farid MKAOUAR; Jean-luc PRIGENT
  8. The Unemployment Subsidy Program in Colombia: An Assessment By Jorge Andrés Tamayo; Jairo Núñez; Carlos Medina
  9. Social Security Programs and Retirement Around the World: Disability Insurance Programs and Retirement - Introduction and Summary By Courtney Coile; Kevin S. Milligan; David A. Wise
  10. The role of weather derivatives and portfolio effects in agricultural water management By Buchholz, Matthias; Musshoff, Oliver
  11. Aggregate Effects of a Universal Social Insurance Fiscal Reform By Arturo Antón; Julio Leal
  12. Accounting and Actuarial Smoothing of Retirement Payouts in Participating Life Annuities By Raimond Maurer; Olivia S. Mitchell; Ralph Rogalla; Ivonne Siegelin

  1. By: Grislain-Letrémy, Céline
    Abstract: Insurance coverage for natural disasters remains low in many exposed areas. A limited supply of insurance is commonly identified as a primary causal factor in this low insurance coverage. The French overseas departments provide a rare natural experiment of a well-developed supply of natural disasters insurance in highly exposed regions. The French system of natural disasters insurance is underwritten and regulated by the French government; instituted initially for metropolitan France only, it was extended to overseas departments in the state of emergency following Hurricane Hugo in 1989. This natural experiment makes it possible to analyze the determinants of insurance coverage on the demand side. Based on unique household-level micro-data, I estimate an insurance market model which had not yet been empirically tested. Using this structural approach, I 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 the anticipation of assistance, which crowds out insurance. Individual insurance decisions are influenced by neighbors’insurance choices through peer effects and neighborhood eligibility for assistance.
    Keywords: Natural disasters; insurance; disaster aid; public assistance;
    JEL: Q54 G22 H84 D12
    Date: 2013–10
  2. By: Orlowski, Jan Alexander Kazimierz
    Abstract: Agribusiness inherently encounters various risks. These include risks arising from producer behavior to those resulting from changing weather conditions. Rising scrutiny and deliberation on climate change/severity forecasts a progressively important need for yield risk mitigation tools. Such tools include financial markets and insurance schemes, with insurance taking the predominant role with regard to yield risk. Area Yield Insurance is one of several crop insurance schemes available in the US. AYI differentiates itself by releasing indemnities on an aggregate rather then individual level, thus reducing administrative costs and the impact of both moral hazard and adverse selection. As is the case with many forms of yield insurance, AYI requires excessive subsidization in its current form. This study primarily addresses effectiveness and benefits offered to Australian producers through AYI, as well viability and risk diversification opportunities.
    Keywords: Agricultural Finance, Risk and Uncertainty,
    Date: 2014–02
  3. By: Emilio Espino; Juan M. Sánchez
    Abstract: Providing unemployment insurance is particularly problematic in countries with high informality because workers can claim unemployment benefits and work in the informal sector at the same time. This paper proposes a method to evaluate alternative schemes to provide insurance for unemployed individuals. First, it presents an economy that can be calibrated to reproduce key features of the economy for which the reform will be evaluated. Then, it shows how the implementation of an unemployment insurance savings account (UISA) scheme can be evaluated. The method is applied to Mexico, and the results show how the UISA scheme would eliminate incentives for participation in the informal sector. The implementation of the UISA would imply large welfare gains from the ex-ante perspective.
    Keywords: Workforce & Employment, Social Security, Labor Policy, Unemployment, insurance, informality
    Date: 2013–02
  4. By: Orlowski, Jan Alexander Kazimierz
    Abstract: Area Yield Insurance (AYI) differentiates itself from the other more popular yield insurance schemes in its ability to reduce administrative costs, and decrease both adverse selection and moral hazard. These basic characteristics make AYI a candidate for considering a yield insurance scheme within Australia. This study simulates AYI indemnities and premium rates for five shires separated into two groups, based on geographical location. Through a set of coverage levels and farm yield variability, risk reduction and certainty equivalent measures are found. Adequacy of these measures are addressed though sensitivity analysis across a wide range of variables. Basis risk issues are confronted and brought to the forefront through correlation analysis of both acrossHshire and farmHshire yields. Results provide positive notions towards effectiveness in yield protection for Australian producers, however under the immobilizing assumption of government or external support.
    Keywords: Agricultural Finance, Risk and Uncertainty,
    Date: 2014–02
  5. By: Nicholas Lawson (AMSE - Aix-Marseille School of Economics - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM))
    Abstract: A growing literature on substitution between social programs provides consistent evidence that changes in the generosity of one program can lead to changes in enrollment on other programs. However, this evidence has been ignored in welfare analyses of social insurance programs. I demonstrate that substitutions between programs can dramatically alter conclusions about optimal policy, with a particular focus on optimal unemployment insurance (UI) when there is substitution between UI and disability insurance (DI). If more generous UI reduces enrollment on DI, the result is a reduction in government spending on DI, and I show that this effect can significant increase the optimal UI replacement rate from 3% to 85%.
    Keywords: fiscal interactions; program substitution; optimal unemployment insurance; disability insurance
    Date: 2014–05
  6. By: Leemore Dafny; Jonathan Gruber; Christopher Ody
    Abstract: First-year insurer participation in the Health Insurance Marketplaces (HIMs) established by the Affordable Care Act is limited in many areas of the country. There are 3.9 participants, on (population-weighted) average, in the 395 ratings areas spanning the 34 states with federally facilitated marketplaces (FFMs). Using data on the plans offered in the FFMs, together with predicted market shares for exchange participants (estimated using 2011 insurer-state market shares in the individual insurance market), we study the impact of competition on premiums. We exploit variation in ratings-area-level competition induced by United Healthcare’s decision not to participate in any of the FFMs. We estimate that United’s nonparticipation decision raised the second-lowest-price silver premium (which is directly linked to federal subsidies) by 5.4 percent, on average. If all insurers active in each state’s individual insurance market in 2011 had participated in all ratings areas in that state’s HIM, we estimate this key premium would be 11.1% lower and 2014 federal subsidies would be reduced by $1.7 billion.
    JEL: H51 I11 I18 L1
    Date: 2014–05
  7. By: Farid MKAOUAR; Jean-luc PRIGENT
    Abstract: Portfolio insurance allows investors to recover at maturity a given percentage of their initial investment, whatever financial market evolu- tions. This portfolio insurance strategy limits downside risk in falling markets, while it allows potential benefits in rising markets. We analyze this method in the presence of jumps in asset price dynamics, in partic- ular for Lévy processes. First we examine the continuous-time rebalancing case, second we introduce a stochastic-time rebalancing according to investor's tolerance. This latter case is more in accordance with usual practice and allows to take account of transaction costs. The target mul- tiple may be either deterministic or stochastic.We study in particular the impact of tolerance and transaction costs. We provide general results that we illustrate when the risky asset price follows a double exponential Lévy process.
    Keywords: Portfolio Insurance, CPPI, Lévy processes, risk tolerance, transaction costs.
    Date: 2014–05–23
  8. By: Jorge Andrés Tamayo; Jairo Núñez; Carlos Medina
    Abstract: This paper assesses the effects of the Colombian Unemployment Subsidy (US), which includes benefits as well as training for some recipients. Using regression discontinuity and matching differences-in-differences estimators, the study finds that participation in the labor market, earnings of beneficiaries, and household income do not increase, and for some populations decrease during the 18 months after leaving the US program. Enrollment in formal health insurance falls. Effects on male heads of household include reductions in their earnings, decreases in their labor participation, and increases in their unemployment rates. The study also finds a small though statistically significant positive effect on beneficiaries¿ school attendance, but none on their children¿s weight or height at birth. The results are sensitive to the type of training that beneficiaries receive. Overall, the program serves more as a mechanism for smoothing consumption and providing social assistance than for increasing labor market efficiency.
    Keywords: Social Security, Fiscal Policy, Workforce & Employment, Unemployment, Social assistance, Labor markets
    Date: 2013–05
  9. By: Courtney Coile; Kevin S. Milligan; David A. Wise
    Abstract: This is the introduction and summary to the sixth phase of an ongoing project on Social Security Programs and Retirement Around the World. The first phase described the retirement incentives inherent in plan provisions and documented the strong relationship across countries between social security incentives to retire and the proportion of older persons out of the labor force. The second phase documented the large effects that changing plan provisions would have on the labor force participation of older workers. The third phase demonstrated the consequent fiscal implications that extending labor force participation would have on net program costs—reducing government social security benefit payments and increasing government tax revenues. The fourth phase presented analyses of the relationship between the labor force participation of older persons and the labor force participation of younger persons in twelve countries. We found no evidence that increasing the employment of older persons will reduce the employment opportunities of youth and no evidence that increasing the employment of older persons will increase the unemployment of youth. The fifth phase on “Historical Trends in Mortality and Health, Employment, and Disability Insurance Participation and Reforms” was intended to set the stage for this current phase. This sixth phase of the ongoing ISS project is particularly related to the fifth phase (Wise, 2012) and the second phase (Gruber and Wise, 2004) of the project. This volume continues the focus of the previous volume on DI programs while extending the methodology to study retirement behavior used in the second phase to focus in particular on the effects of the DI programs. The key question this volume seeks to address is: given health status, to what extent are differences in labor force participation across countries determined by the provisions of disability insurance programs?
    JEL: H31 H55 I19 J14 J26
    Date: 2014–05
  10. By: Buchholz, Matthias; Musshoff, Oliver
    Abstract: Restrictive irrigation water policies established due to e.g. environmental concerns or water scarcity appear to result in declining farm income and arising risk exposure in terms of yield uncertainty. With this in mind, we investigate the potential of index-based weather insurance, which is also known as weather derivatives, to cope with the economic disadvantages for farmers resulting from a reduction in water quotas and increased water prices. By means of a whole-farm risk programming approach, we systematically compare crop portfolios without and with the possibility of purchasing standardized weather derivatives based on precipitation and temperature indices. In doing so, we allow for crop diversification as well as water reallocation between crops. Thus, overcoming some of the shortcomings inherent to previous studies in this strand of research. In an application to a representative cash crop farm in northern Germany, we found that the use of weather derivatives offsets the loss in the farmer’s certainty equivalent resulting from moderate reductions in water quotas and water price increases. Our results also indicate that weather derivatives have the potential to substantially alter farm plans and the optimal irrigation water demand. Far reaching environmental implications might be the consequence which require further attention and careful consideration by policymakers.
    Keywords: Irrigation, index-based weather insurance, whole-farm risk programming, Agribusiness, Crop Production/Industries, Environmental Economics and Policy,
    Date: 2014–02
  11. By: Arturo Antón; Julio Leal
    Abstract: This paper analyzes the aggregate effects of a revenue neutral fiscal-cum-social policy reform in a typical developing country that consists of two main changes: (1) the implementation of universal social insurance to replace the current dual social protection system (i.e., a reconfiguration of transfers); and (2) the elimination of the current social security payroll tax to replace it with a generalized VAT (i.e., a reconfiguration of taxes). The authors find that this reform increases productivity by 2 percent and output by 3 percent as it improves the allocation of resources across firms and sectors, and generates a substantial change in occupational choices that favors wage earners. As a result, wages (before transfers) increase for all employees. Also, due to the reconfiguration of transfers, earnings (wages after transfers) for informal employees increase relative to the earnings of formal employees, which decreases inequality. However, we also find that the reform could affect some groups in the population, given the regressive nature of VAT and heterogeneity in the valuation of transfers across workers.
    Keywords: Fiscal Policy, Productivity, Social Security, Total factor productivity; Fiscal policy; Social security; Informal labor markets
    Date: 2013–08
  12. By: Raimond Maurer; Olivia S. Mitchell; Ralph Rogalla; Ivonne Siegelin
    Abstract: Life insurers use accounting and actuarial techniques to smooth reporting of firm assets and liabilities, seeking to transfer surpluses in good years to cover benefit payouts in bad years. Nevertheless, these techniques been criticized as they make it difficult to assess insurers’ true financial status. We develop stylized and realistically-calibrated models of participating lifetime annuities, an insurance product that pays retirees guaranteed lifelong benefits along with variable non-guaranteed surplus. Our goal is to illustrate how accounting and actuarial techniques for this type of financial contract shape policyholder wellbeing, along with insurer profitability and stability. Smoothing adds value to both the annuitant and the insurer, so curtailing smoothing could undermine the market for long-term retirement payout products.
    JEL: G22 J14 J32 M41
    Date: 2014–05

This nep-ias issue is ©2014 by Soumitra K Mallick. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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