nep-ias New Economics Papers
on Insurance Economics
Issue of 2014‒06‒28
nineteen papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Equilibrium of Financial Derivative Markets under Portfolio Insurance Constraints By Philippe Bertrand; Jean-luc Prigent
  2. Deposit insurance database By Demirguc-Kunt, Asli; Kane, Edward; Laeven, Luc
  3. Analyzing the Effects of Insuring Health Risks: On the Trade-off between Short Run Insurance Benefits vs. Long Run Incentive Costs By Harold L. Cole; Soojin Kim; Dirk Krueger
  4. Law versus Economics? How should insurance intermediaries influence the insurance demand decision By Annika Pape
  5. Hedging of unit-linked life insurance contracts with unobservable mortality hazard rate via local risk-minimization By Claudia Ceci; Katia Colaneri; Alessandra Cretarola
  6. Dynamic Portfolio Insurance Strategies: Risk Management under Johnson Distributions By Naceur Naguez; Jean-Luc Prigent
  7. On the Depletion Problem for an Insurance Risk Process: New Non-ruin Quantities in Collective Risk Theory By Zied Ben-Salah; H\'el\`ene Gu\'erin; Manuel Morales; Hassan Omidi Firouzi
  8. Institutional investors and long-term investment : evidence from Chile By Opazo, Luis; Raddatz, Claudio; Schmukler, Sergio L.
  9. Insurance and inclusive growth By Lester, Rodney
  10. Do the poor benefit less from informal risk-sharing? Risk externalities and moral hazard in decentralized insurance arrangements By DELPIERRE Matthieu; VERHEYDEN Bertrand; WEYNANTS Stéphanie
  11. On Path-Dependent Structured Funds: Complexity Does Not Always Pay (Asian versus Average Performance Funds) By Philippe Bertrand; Jean-luc Prigent
  12. Activation and Active Labour Market Policies in OECD Countries:Stylized Facts and Evidence on their Effectiveness By John P. Martin
  13. Liability Rule Failures? Evidence from German Court Decisions By Annika Pape
  14. Assessing the costs of risk management tools: A crop insurance scenario based on a stochastic partial equilibrium model approach By Feng, Siyi; Patton, Myles; Binfield, Julian; Davis, John
  15. Leaving Poverty Behind? The Effects of Generous Income Support Paired with Activation By Markussen, Simen; Røed, Knut
  16. Health, Disability Insurance and Retirement in Denmark By Paul Bingley; Nabanita Datta Gupta; Michael Jorgensen; Peder Pedersen
  17. Family welfare cultures By Gordon B. Dahl; Andreas Ravndal Kostøl; Magne Mogstad

  1. By: Philippe Bertrand; Jean-luc Prigent
    Abstract: This paper examines the equilibrium of financial portfolios under insurance
    Keywords: This paper examines the equilibrium of financial portfolios under insurance
    JEL: C62 G11 L10
    Date: 2014–06–16
  2. By: Demirguc-Kunt, Asli; Kane, Edward; Laeven, Luc
    Abstract: This paper provides a comprehensive, global database of deposit insurance arrangements as of 2013. The authors extend their earlier dataset by including recent adopters of deposit insurance and information on the use of government guarantees on banks'assets and liabilities, including during the recent global financial crisis. They also create a Safety Net Index capturing the generosity of the deposit insurance scheme and government guarantees on banks'balance sheets. The data show that deposit insurance has become more widespread and more extensive in coverage since the global financial crisis, which also triggered a temporary increase in the government protection of non-deposit liabilities and bank assets. In most cases, these guarantees have since been formally removed but coverage of deposit insurance remains above pre-crisis levels, raising concerns about implicit coverage and moral hazard going forward.
    Keywords: Deposit Insurance,Debt Markets,Bankruptcy and Resolution of Financial Distress,Banks&Banking Reform,Access to Finance
    Date: 2014–06–01
  3. By: Harold L. Cole (Department of Economics, University of Pennsylvania and NBER); Soojin Kim (Krannert School of Management, Department of Economics, Purdue University); Dirk Krueger (Department of Economics, University of Pennsylvania, CEPR, CFS, NBER and Netspar)
    Abstract: This paper constructs a dynamic model of health insurance to evaluate the short- and long-run effects of policies that prevent firms from conditioning wages on health conditions of their workers, and that prevent health insurance companies from charging individuals with adverse health conditions higher insurance premia. Our study is motivated by recent US legislation that has tightened regulations on wage discrimination against workers with poorer health status (such as Americans with Disability Act of 1990, ADA, and its amendment in 2008, the ADAAA) and that prohibits health insurance companies from charging different premiums for workers of different health status starting in 2014 (Patient Protection and Affordable Care Act, PPACA). In the model, a trade-off arises between the static gains from better insurance against poor health induced by these policies and their adverse dynamic incentive effects on household efforts to lead a healthy life. Using household panel data from the PSID we estimate and calibrate the model and then use it to evaluate the static and dynamic consequences of no-wage discrimination and no-prior conditions laws for the evolution of the cross-sectional health and consumption distribution of a cohort of households, as well as ex-ante lifetime utility of a typical member of this cohort. In our quantitative analysis we find that although the competitive equilibrium features too little consumption insurance and a combination of both policies is effective in providing such insurance period by period, it is suboptimal to introduce both policies jointly since such a policy innovation severely undermines the incentives to lead healthier lives and thus induces a more rapid deterioration of the cohort health distribution over time. This effect more than offsets the static gains from better consumption insurance so that expected discounted lifetime utility is lower under both policies, relative to implementing wage nondiscrimination legislation alone. This is true despite the fact that both policy options are strongly welfare improving relative to the competitive equilibrium.
    Keywords: Health Risks, Social Insurance, Health Effort Choices
    JEL: E61 H31 I18
    Date: 2014–04–24
  4. By: Annika Pape (Leuphana University Lueneburg, Germany)
    Abstract: How should intermediaries influence the insurance demand decision? The answer must refer to the interdependence of economic determinants and legal duties. Intermediaries potentially guide demand decisions by delivering objective information and by considering individuals’ situation and economic circumstances. The economic theory provides determinants that are essential for the insurance demand decision. Undoubtedly, consumers lack information about certain variables, and therefore misjudge their demand for insurances. In response to the consumer, an intermediaries’ task is to discover possible misjudgments and to provide the correct information. Since the information in the insurance market is asymmetrically distributed, an insurance agent has an incentive to behave opportunistically, a tendency that is reinforced by the remuneration scheme in Germany. In 2007/2008, insurance intermediaries became regulated by law. That law states, among other things, the four basic obligations of insurance intermediaries and a liability rule to sanction violations. In order to interpret and substantiate the legal terms, those have to match the relevant economic determinants to state the ideal behavior of an intermediary.
    Keywords: insurance, insurance intermediation, advice, liability, Insurance Contract Act
    JEL: G22 D83 D89 K29 K40
    Date: 2013–06
  5. By: Claudia Ceci; Katia Colaneri; Alessandra Cretarola
    Abstract: In this paper we investigate the local risk-minimization approach for a combined financial-insurance model where there are restrictions on the information available to the insurance company. In particular we assume that, at any time, the insurance company may observe the number of deaths from a specific portfolio of insured individuals but not the mortality hazard rate. We consider a financial market driven by a general semimartingale and we aim to hedge unit-linked life insurance contracts via the local risk-minimization approach under partial information. The F\"ollmer-Schweizer decomposition of the insurance claim and explicit formulas for the optimal strategy for pure endowment and term insurance contracts are provided in terms of the projection of the survival process on the information flow. Moreover, in a Markovian framework, we reduce to solve a filtering problem with point process observations.
    Date: 2014–06
  6. By: Naceur Naguez; Jean-Luc Prigent
    Abstract: The purpose of this paper is to analyze the gap risk of dynamic portfo- lio insurance strategies which generalize the "Constant Proportion Port- folio Insurance " (CPPI) method by allowing the multiple to vary. We illustrate our theoretical results for conditional CPPI strategies indexed on hedge funds. For this purpose, we provide accurate estimations of hedge funds returns by means of Johnson distributions. We introduce also an EGARCH type model with Johnson innovations to describe dy- namics of risky logreturns. We use both VaR and Expected Shortfall as downside risk measures to control gap risk. We provide accurate upper bounds on the multiple in order to limit this gap risk. We illustrate our theoretical results on Credit Suisse Hedge Fund Index. The time period of the analysis lies between December 1994 and December 2013.
    Keywords: Portfolio insurance; CPPI; Hedge funds; Johnson distribu- tion, gap risk, VaR, CVaR.
    JEL: C6 G11 G24
    Date: 2014–06–16
  7. By: Zied Ben-Salah; H\'el\`ene Gu\'erin; Manuel Morales; Hassan Omidi Firouzi
    Abstract: The field of risk theory has traditionally focused on ruin-related quantities. In particular, the socalled Expected Discounted Penalty Function has been the object of a thorough study over the years. Although interesting in their own right, ruin related quantities do not seem to capture path-dependent properties of the reserve. In this article we aim at presenting the probabilistic properties of drawdowns and the speed at which an insurance reserve depletes as a consequence of the risk exposure of the company. These new quantities are not ruin related yet they capture important features of an insurance position and we believe it can lead to the design of a meaningful risk measures. Studying drawdowns and speed of depletion for L\'evy insurance risk processes represent a novel and challenging concept in insurance mathematics. In this paper, all these concepts are formally introduced in an insurance setting. Moreover, using recent results in fluctuation theory for L\'evy processes, we derive expressions for the distribution of several quantities related to the depletion problem. Of particular interest are the distribution of drawdowns and the Laplace transform for the speed of depletion. These expressions are given for some examples of L\'evy insurance risk processes for which they can be calculated, in particular for the classical Cramer-Lundberg model.
    Date: 2014–06
  8. By: Opazo, Luis; Raddatz, Claudio; Schmukler, Sergio L.
    Abstract: Developing countries are trying to develop long-term financial markets and institutional investors are expected to play a key role. This paper uses unique evidence on the universe of institutional investors from the leading case of Chile to study to what extent mutual funds, pension funds, and insurance companies hold and bid for long-term instruments, and which factors affect their choices. The paper uses monthly asset-level portfolios to show that, despite the expectations, mutual and pension funds invest mostly in short-term assets relative to insurance companies. The significant difference across maturity structures is not driven by the supply side of debt or tactical behavior. Instead, it seems to be explained by manager incentives (related to short-run monitoring and the liability structure) that, combined with risk factors, tilt portfolios toward short-term instruments, even when long-term investing yields higher returns. Thus, the expansion of large institutional investors does not necessarily imply longer-term markets.
    Keywords: Debt Markets,Mutual Funds,Emerging Markets,Deposit Insurance,Non Bank Financial Institutions
    Date: 2014–06–01
  9. By: Lester, Rodney
    Abstract: While the real sector and governments (along with a few micro economists) have long recognized the core economic role that the insurance function plays, the mainstream economics profession has largely treated it as invisible background. This literature review of the relevant research, most of which has been carried out in the past few decades, demonstrates that the insurance sector contributes at a basic level to inclusive economic growth and the effectiveness of the credit function. It also shows that the latter impact may be particularly fundamental in assisting the poor to avoid poverty traps and to progress economically. However, the research and the theoretical models underpinning it also highlight certain constraints to the efficient utilization of the insurance function. The literature dealing with innovations designed to overcome these constraints is reviewed and successful initiatives and remaining challenges are identified.
    Keywords: Climate Change Economics,Debt Markets,Insurance&Risk Mitigation,Insurance Law,Banks&Banking Reform
    Date: 2014–06–01
  10. By: DELPIERRE Matthieu; VERHEYDEN Bertrand; WEYNANTS Stéphanie
    Abstract: Empirical evidence on developing countries highlights that poor farm-households are less keen to adopt high risk / high return technologies than rich households. Yet, they tend to be more vulnerable to income shocks than the rich. This paper develops a model of informal risk-sharing with endogenous risk-taking which provides a rationale for these observations. In our framework, informal risk-sharing is incomplete due to risk externalities, which leads to moral hazard. We compare the .rst best and second best to a decentralized bargaining process, where the lack of coordination moral hazard. The analysis of group composition yields counterintuitive results. First, if groups are homogeneous, poor groups share less risks than rich groups even though the rich take more risks. Second, the insurance level of rich households decreases in the presence of poor households, potentially making them reluctant to share risk with poorer households.
    Keywords: Risk-taking; Risk-sharing; Risk externality; Moral hazard
    JEL: O12 O13
    Date: 2014–06
  11. By: Philippe Bertrand; Jean-luc Prigent
    Abstract: As emphasized by the U.S. Dodd-Frank Act and the European MiFID directive, financial institu-
    Keywords: Structured financial products; portfolio insurance; Asian options; average of calls; Kappa measures.
    JEL: G11 G13 G21 D03
    Date: 2014–06–16
  12. By: John P. Martin (UCD Geary Institute, University College Dublin)
    Abstract: Activation policies aimed at getting working-age people off benefits and into work have become a buzzword in labour market policies. Yet they are defined and implemented differently across OECD countries and their success rates vary too. The Great Recession has posed a severe stress test for these policies with some commentators arguing that they are at best 2fair weather” policies. This paper sheds light on these issues mainly via the lens of recent OECD research. It presents the stylized facts on how OECD countries have responded to the Great Recession in terms of ramping up their spending on active labour market policies (ALMPs), a key component in any activation strategy. It then reviews the macroeconomic evidence on the impact of ALMPs on employment and unemployment rates. This is followed by a review of the key lessons from recent OECD country reviews of activation policies. It concludes with a discussion of crucial unanswered questions about activation.
    Keywords: activation, active labour market policies, Great Recession, unemployment insurance, benefit conditionality
    JEL: J01 J08 J68
    Date: 2014–06–18
  13. By: Annika Pape (Leuphana University Lueneburg, Germany)
    Abstract: Since 2007, all insurance intermediaries face negligence liability that is supposed to reallocate risks and set economic incentives. Nonetheless, further measures are taken to improve consumer protection. So, the question arises does the liability rule influence the agents behavior, or not, and does it influence in the intended way, or not? Do court cases provide evidence for failure of the current liability rule? Based upon an economic analysis of liability rules, aspects concerning potential failures can be derived. An analysis of twelve verdicts suggests that understatement of intermediary responsibility as well as a potential overstatement of the consumer responsibility yields suboptimal results. Often, missing documentation reinforces that tendency.
    Keywords: Insurance, Intermediaries, Liability, Consumer Protection, Court Errors, Court Cases
    JEL: G22 D83 D89 K29 K40
    Date: 2014–05
  14. By: Feng, Siyi; Patton, Myles; Binfield, Julian; Davis, John
    Abstract: Following the move from a situation of stable, administratively determined prices and production linked subsidies to freely moving prices and decoupled subsidies, risk is of increasing concern within the EU agricultural sector. Also, significant increases in global market prices have further contributed to volatility. There are increasing interests in developing programmes aiming at providing assistance in risk management, which already exist in other countries such as the US on a large scale. The operation of these programmes is similar to insurance to some extent and therefore entails complex design issues. At the same time, these programmes generally involve policy support due to the presence of systematic risks within the sector. Thus, careful assessment is required. This paper examines a hypothetical scheme that provides protection against crop yield falls within the UK using the stochastic FAPRI-UK and EU-GOLD modelling system. The two key aspects investigated are the level of aggregation and the definition of reference. The choice of level of aggregation is closely related to the trade-offs between programme cost and its effectiveness in risk reduction. Furthermore, the definition of reference also has implications on programme costs and their variability.
    Keywords: stochastic modelling, risk management tool, Agricultural Finance, Demand and Price Analysis, Research Methods/ Statistical Methods, Risk and Uncertainty, Q1,
    Date: 2014–04
  15. By: Markussen, Simen (Ragnar Frisch Centre for Economic Research); Røed, Knut (Ragnar Frisch Centre for Economic Research)
    Abstract: We evaluate a comprehensive activation program in Norway targeted at hard-to-employ social assistance claimants with reduced work capacity. The program offers a combination of tailored rehabilitation, training and job practice, and a generous, stable, and non-means-tested benefit. Its main aims are to mitigate poverty and subsequently promote self-supporting employment. Our evaluation strategy exploits a geographically staggered program introduction, and the causal effects are identified on the basis of changes in employment prospects that coincide with local program implementation in a way that correlates with the predicted probability of becoming a participant. We find that the program raised employment prospects considerably.
    Keywords: poverty, vocational rehabilitation, social insurance, treatment effects, program evaluation
    JEL: C21 C26 H55 I30 J24
    Date: 2014–06
  16. By: Paul Bingley; Nabanita Datta Gupta; Michael Jorgensen; Peder Pedersen
    Abstract: There are large differences in labor force participation rates by health status. We examine to what extent these differences are determined by the provisions of Disability Insurance and other pension programs. Using administrative data for Denmark we find that those in worse health and with less schooling are more likely to receive DI. The gradient of DI participation across health quintiles is almost twice as steep as for schooling – moving from having no high school diploma to college completion. Using an option value model that accounts for different pathways to retirement, applied to a period spanning a major pension reform, we find that pension program incentives in general are important determinants of retirement age. Individuals in poor health and with low schooling are significantly more responsive to economic incentives than those who are in better health and with more schooling. Similar gradients in outcomes and behavior by health and schooling partially reflects the less educated having poorer health on average, but also that the less educated have worse job prospects and higher replacement rates due to a progressive formula for DI and other pension benefits.
    JEL: H55 I1 J14
    Date: 2014–05
  17. By: Gordon B. Dahl; Andreas Ravndal Kostøl; Magne Mogstad (Statistics Norway)
    Abstract: Strong intergenerational correlations in various types of welfare use have fueled a long-standing debate over whether welfare receipt in one generation causes welfare participation in the next generation. Some claim a causal relationship in welfare receipt across generations has created a culture in which welfare use reinforces itself through the family. Others argue the determinants of poverty or poor health are correlated across generations, so that children's welfare participation is associated with, but not caused by, parental welfare receipt. However, there is little empirical evidence to sort out these claims. In this paper, we investigate the existence and importance of family welfare cultures in the context of Norway's disability insurance (DI) system. To overcome the challenge of correlated unobservables across generations, we take advantage of random assignment of judges to DI applicants whose cases are initially denied. Some appeal judges are systematically more lenient, which leads to random variation in the probability a parent will be allowed DI. Using this exogenous variation, we find strong evidence that welfare receipt in one generation causes welfare participation in the next generation: when a parent is allowed DI, their adult child's participation over the next five years increases by 6 percentage points. This effect grows over time, rising to 12 percentage points after ten years. While these findings are specific to our setting, they serve to highlight that welfare reforms can have longlasting effects on program participation, since any original effect on the current generation could be reinforced by changing the participation behavior of their children as well. The detailed nature of our data allows us to compare the intergenerational transmission with spillover effects in other networks and to explore mechanisms. Our findings point to a special link between parents and their children, with little impact due to close neighbors' DI participation. We find suggestive evidence that what may change as a result of a parent being allowed DI is their children's beliefs about the efficacy of trying to get on to the DI program or their attitudes about DI participation and its stigma.
    Keywords: Intergenerational welfare transmission; welfare cultures; disability insurance
    JEL: I38 J62 H53
    Date: 2014–06

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