nep-ias New Economics Papers
on Insurance Economics
Issue of 2014‒07‒05
eleven papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Business Management

  1. Do Remittances Help Smooth Consumption During Health Shocks? Evidence From Jamaica By Diether Beuermann; Inder J. Ruprah; Ricardo Sierra
  2. Natural catastrophe insurance: How should the government intervene? By Arthur Charpentier; Benoît Le Maux
  3. Can Workfare Programs Moderate Violence? Evidence from India By Thiemo Fetzer
  4. Immigrants, labor market performance, and social insurance By Bernt Bratsberg; Oddbjørn Raaum; Knut Røed
  5. Business As Usual: New Jersey Employers’ Experiences with Family Leave Insurance By Sharon Lerner; Eileen Appelbaum
  6. Medicaid and the Elderly By Mariacristina De Nardi; Eric French; John Bailey Jones
  7. Double moral hazard and the energy efficiency gap By Louis-Gaëtan Giraudet; Sébastien Houde
  8. Max-Min optimization problem for Variable Annuities pricing By Christophette Blanchet; Etienne Chevalier; Idriss Kharroubi; Thomas Lim
  9. A Dynamic AutoRegressive Expectile for Time-Invariant Portfolio Protection Strategies By Benjamin Hamidi; Bertrand Maillet; Jean-Luc Prigent
  10. What drives heterogeneity of loan loss provisions’ procyclicality in the EU? By Olszak, Małgorzata; Pipień, Mateusz; Kowalska, Iwona; Roszkowska, Sylwia
  11. Forecasting with DSGE models with financial frictions By Kolasa, Marcin; Rubaszek, Michał

  1. By: Diether Beuermann; Inder J. Ruprah; Ricardo Sierra
    Abstract: We identify whether remittances facilitate consumption smoothing during health shocks in Jamaica. In addition, we investigate whether remittances are subject to moral hazard by receivers, how the informal insurance provided by remittances interacts with formal health insurance, and whether there are differential effects by gender of the household head. We find that remittances offer complete insurance toward decreased consumption during health shocks and that moral hazard is weak. The role of remittances as a social insurance mechanism, however, is relevant only in the absence of private health insurance. No differential effects by gender of the household head are found.
    Keywords: Income, Consumption & Saving, Health Policy, Remittances, Remittances, Consumption, Health insurance, Social insurace
    Date: 2014–06
  2. By: Arthur Charpentier (CREM - Centre de Recherche en Economie et Management - CNRS : UMR6211 - Université de Rennes 1 - Université de Caen Basse-Normandie); Benoît Le Maux (CREM - Centre de Recherche en Economie et Management - CNRS : UMR6211 - Université de Rennes 1 - Université de Caen Basse-Normandie)
    Abstract: This paper develops a theoretical framework for analyzing the decision to provide or buy insurance against the risk of natural catastrophes. In contrast to conventional models of insurance, the insurer has a non-zero probability of insolvency which depends on the distribution of the risks, the premium rate, and the amount of capital in the company. When the insurer is insolvent, each loss reduces the indemnity available to the victims, thus generating negative pecuniary externalities. Our model shows that government-provided insurance will be more attractive in terms of expected utility, as it allows these negative pecuniary externalities to be spread equally among policyholders. However, when heterogeneous risks are introduced, a government program may be less attractive in safer areas, which could yield inefficiency if insurance ratings are not chosen appropriately.
    Keywords: Insurance; Natural catastrophe; Externalities; Government intervention; Strong Nash equilibrium
    Date: 2014–07
  3. By: Thiemo Fetzer
    Abstract: Governments in conflict torn states scramble for effective policies to persistently reduce levels of violence. This paper provides evidence that a workfare program that functions as a social insurance, providing employment opportunities in times of need, may be an effective antidote to shut down an important mechanism that drives conflict. By mitigating adverse income shocks, the Indian National Rural Employment Guarantee scheme has been successful in removing the income dependence of insurgency violence and thus, contributes to persistently lower levels of violence.
    Keywords: social insurance, conflict, India, insurgency
    JEL: D74 Q34 J65
    Date: 2014–06
  4. By: Bernt Bratsberg (Frisch Centre for Economic Research); Oddbjørn Raaum (Frisch Centre for Economic Research); Knut Røed (Frisch Centre for Economic Research)
    Abstract: Using longitudinal data from the date of arrival, we study longâ€term labor market and social insurance outcomes for all major immigrant cohorts to Norway since 1970. Immigrants from highincome countries performed as natives, while labor migrants from lowâ€income source countries had declining employment rates and increasing disability program participation over the lifecycle. Refugees and family migrants assimilated during the initial period upon arrival, but labor market convergence halted after a decade and was accompanied by rising social insurance rates. For the children of labor migrants of the 1970s, we uncover evidence of intergenerational assimilation in education, earnings and fertility.
    Date: 2014–06
  5. By: Sharon Lerner; Eileen Appelbaum
    Abstract: This study examines New Jersey employers’ experiences with employees who need time off to care for a seriously ill child or family member or to bond with a new baby since 2009, when the state began offering paid family leave through the statewide Family Leave Insurance (FLI) program. This program builds on the state’s Temporary Disability Insurance (TDI) Program, which has been in place since 1948 and has covered maternity leave since 1970. Since 2009, New Jersey has provided benefits for more than 100,000 FLI leaves, the vast majority of which were used for the care of new babies. This study examines how this relatively new, statewide program has affected employers’ processes for administering and managing employee leaves. Does the program generate excessive paperwork, for instance, or burden employers in other ways? Is the program being abused, as some initially feared? And how, if at all, has it helped employers?
    Keywords: family leave, medical leave, family leave insurance, new jersey
    JEL: I I1 H J J8 J83 J88 J3 J33 J38
    Date: 2014–06
  6. By: Mariacristina De Nardi; Eric French; John Bailey Jones
    Abstract: The brief’s key findings are: *Medicaid covers not only the low-income elderly but also those with higher incomes who become impoverished by health costs, such as nursing home care. *The percentage of high-income single retirees receiving Medicaid rises with age – from near zero for those in their 70s to 20 percent for those in their late 90s. *Even higher-income retirees who never receive Medicaid benefit from the insurance value that it provides, which allows them to maintain smaller reserves. *The analysis suggests that single retirees of all incomes value current Medicaid benefits at more than their cost but an expansion at less than its cost.
    Date: 2014–06
  7. By: Louis-Gaëtan Giraudet (CIRED - Centre International de Recherche sur l'Environnement et le Développement - Centre de coopération internationale en recherche agronomique pour le développement [CIRAD] : UMR56 - CNRS : UMR8568 - École des Hautes Études en Sciences Sociales (EHESS) - École des Ponts ParisTech (ENPC) - AgroParisTech); Sébastien Houde (University of Maryland - University of Maryland)
    Abstract: We investigate how moral hazard problems can cause sub-optimal investment in energy efficiency, a phenomenon known as the energy efficiency gap. We argue that such problems are likely to be important for home energy retrofits, where both the seller and the buyer can take hidden actions. The retrofit contractor may cut on the quality of installation to save costs, while the homeowner may rebound, that is, increase her use of energy services when provided with higher energy efficiency. We first formalize the double moral hazard problem described above and examine how the resulting energy efficiency gap can be reduced through minimum quality standards or energy-savings insurance. We then calibrate the model to the U.S. home insulation market and quantify the deadweight loss. We find that for a large range of market environments, the welfare gains from undoing moral hazard are substantially larger than the costs of quality audits. They are also about one order of magnitude larger than those from internalizing carbon dioxide externalities associated with the use of natural gas for space heating. Moral hazard problems are consistent with homeowners investing with implied discount rates in the 15-35% range. Finally, we find that minimum quality standards outperform energy-savings insurance.
    Keywords: Energy efficiency gap, moral hazard, energy-savings insurance, minimum quality standard
    Date: 2014–06–21
  8. By: Christophette Blanchet (ICJ - Institut Camille Jordan - CNRS : UMR5208 - Université Claude Bernard - Lyon I (UCBL) - Ecole Centrale de Lyon - Institut National des Sciences Appliquées [INSA] : - LYON - Université Jean Monnet - Saint-Etienne); Etienne Chevalier (LaMME - Laboratoire de Mathématiques et Modélisation d'Evry - CNRS : UMR8071 - Université d'Evry-Val d'Essonne - Institut national de la recherche agronomique (INRA) - Université Paris V - Paris Descartes - Université Paris-Est Créteil Val-de-Marne (UPEC) - ENSIIE); Idriss Kharroubi (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris IX - Paris Dauphine); Thomas Lim (LaMME - Laboratoire de Mathématiques et Modélisation d'Evry - CNRS : UMR8071 - Université d'Evry-Val d'Essonne - Institut national de la recherche agronomique (INRA) - Université Paris V - Paris Descartes - Université Paris-Est Créteil Val-de-Marne (UPEC) - ENSIIE)
    Abstract: We study the valuation of variable annuities for an insurer. We concentrate on two types of these contracts that are the guaranteed minimum death benefits and the guaranteed minimum living benefits ones and that allow the insured to withdraw money from the associated account. As for many insurance contracts, the price of variable annuities consists in a fee, fixed at the beginning of the contract, that is continuously taken from the associated account. We use a utility indifference approach to determine this fee and, in particular, we consider the indifference fee rate in the worst case for the insurer i.e. when the insured makes the withdrawals that minimize the expected utility of the insurer. To compute this indifference fee rate, we link the utility maximization in the worst case for the insurer to a sequence of maximization and minimization problems that can be computed recursively. This allows to provide an optimal investment strategy for the insurer when the insured follows the worst withdrawals strategy and to compute the indifference fee. We finally explain how to approximate these quantities via the previous results and give numerical illustrations of parameter sensibility.
    Keywords: Variable annuities, indifference pricing, backward stochastic differential equation, utility maximization, insurance.
    Date: 2014–07–02
  9. By: Benjamin Hamidi (Neuflize OBC Investissements - Neuflize OBC Investissements); Bertrand Maillet (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR7322 - Université d'Orléans); Jean-Luc Prigent (THEMA - Théorie économique, modélisation et applications - CNRS : UMR8184 - Université de Cergy Pontoise)
    Abstract: "Constant proportion portfolio insurance" (CPPI) is nowadays one of the most popular techniques for portfolio insurance strategies. It simply consists of reallocating the risky part of a portfolio with respect to market conditions, via a leverage parameter - called the multiple - guaranteeing a predetermined floor. We propose to introduce a conditional time-varying multiple as an alternative to the standard unconditional CPPI method, directly linked to actual risk management problematics. This "ex ante" approach for the conditional multiple aims to diversify the risk model associated, for example, with the expected shortfall (ES) or extreme risk measure estimations. First, we recall the portfolio insurance principles, and main properties of the CPPI strategy, including the time-invariant portfolio protection (TIPP) strategy, as introduced by Estep and Kritzman (1988). We emphasize the existence of an upper bound on the multiple, for example to hedge against sudden drops in the market. Then, we provide the main properties of the conditional multiples for well-known financial models including the discrete-time portfolio rebalancing case and Lévy processes to describe the risky asset dynamics. For this purpose, we precisely define and evaluate different gap risks, in both conditional and unconditional frameworks. As a by-product, the introduction of discrete or random time portfolio rebalancing allows us to determine and/or estimate the density of durations between rebalancements. Finally, from a more practical and statistical point of view due to trading restrictions, we present the class of Dynamic AutoRegressive Expectile (DARE) models for estimating the conditional multiple. This latter approach provides useful complementary information about the risk and performance associated with probabilistic approaches to the conditional multiple.
    Keywords: CPPI ; VaR ; Expected Shorfall ; Expectile ; Quantile Regression ; Dynamic Quantile Model ; Extreme Value
    Date: 2014–06–26
  10. By: Olszak, Małgorzata; Pipień, Mateusz; Kowalska, Iwona; Roszkowska, Sylwia
    Abstract: This paper documents a large cross-bank and cross-country variation in the relationship between loan loss provisions and the business cycle and explores bank management specific, bank-activity specific and country specific (institutional and regulatory) features that explain this diversity in the European Union. Our results indicate that LLP in large, publicly traded and commercial banks, as well as in banks reporting in consolidated statements’ format, are more procyclical. Better investor protection and more restrictive bank regulations reduce the procyclicality of LLP. Additional evidence shows that moral hazard resulting from deposit insurance renders LLP more procyclical. We do not find support for the view that better quality of market monitoring mitigates the risk-taking behavior of banks. Our findings clearly indicate the empirical importance of earnings management for LLP procyclicality. Sensitivity of LLP to the business cycle seems to be limited in the case of banks which engage in more income smoothing and which apply prudent credit risk management.
    Keywords: loan loss provisions, procyclicality, earnings management, investor protection, bank regulation, bank supervision
    JEL: E32 E44 G21
    Date: 2014–06–20
  11. By: Kolasa, Marcin; Rubaszek, Michał
    Abstract: This paper compares the quality of forecasts from DSGE models with and without financial frictions. We find that accounting for financial market imperfections does not result in a uniform improvement in the accuracy of point forecasts during non-crisis times while the average quality of density forecast even deteriorates. In contrast, adding frictions in the housing market proves very helpful during the times of financial turmoil, overperforming both the frictionless benchmark and the alternative that incorporates financial frictions in the corporate sector. Moreover, we detect complementarities among the analyzed setups that can be exploited in the forecasting process.
    Keywords: DSGE models; Financial frictions; Housing market
    JEL: C11 C53 E44
    Date: 2014–06

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