nep-ias New Economics Papers
on Insurance Economics
Issue of 2014‒08‒09
fourteen papers chosen by
Soumitra K. Mallick
Indian Institute of Social Welfare and Business Management

  1. Disability Insurance and the Dynamics of the Incentive-Insurance Tradeoff By Hamish Low; Luigi Pistaferri
  2. Insurance and the Macroeconomic Environment By Casper Christophersen; Petr Jakubik
  3. Positive Externalities of Social Insurance: Unemployment Insurance and Consumer Credit By Joanne W. Hsu; David A. Matsa; Brian T. Melzer
  4. Sons as Widowhood Insurance : Evidence from Senegal By Sylvie Lambert; Pauline Rossi
  5. Unemployment, Crime and Social Insurance By Long, Iain W.; Polito, Vito
  6. An Integrated Risk Assessment Model for the Implementation of Drought Insurance Markets in Spain By Carlos Dionisio Pérez Blanco; Carlos Mario Gómez Gómez
  7. How Does Family Health Care Use Respond to Economic Shocks? Realized and Anticipated Effects By Alan C. Monheit; Irina Grafova; Rizie Kumar
  8. Tradeoffs in the Design of Health Plan Payment Systems: Fit, Power and Balance By Michael Geruso; Thomas G. McGuire
  9. Social security and the interactions between aggregate and idiosyncratic risk By Harenberg, Daniel; Ludwig, Alexander
  10. On the Radio: Effectiveness of the Viva Seguro Financial Education Program By Catherine Rodríguez; Fabio Sánchez; Sandra Zamora
  11. Global Systemically Important Insurers By Carlos Guiné
  12. Rainfall risk and religious membership in the late Nineteenth-Century United States By Philipp Ager; Antonio Ciccone
  13. Reciprocal Brokered Deposits, Bank Risk, and Recent Deposit Insurance Policy By Guo Li; Sherrill Shaffer
  14. Integrating Physical Health Care in Behavioral Health Agencies in Rural Pennsylvania. By Angela M. Gerolamo; Jung Y. Kim; Jonathan Brown

  1. By: Hamish Low; Luigi Pistaferri
    Abstract: We provide a lifecycle framework for comparing the insurance value and the incentive cost of disability benefits. We estimate the risks that individuals face and the parameters governing the disability insurance program using longitudinal US data on consumption, health, disability insurance, and wages. We characterize the economic effects of disability insurance and study how policy reforms impact behavior and household welfare. Disability insurance is characterised by high rejections rates of disabled applicants; acceptances of healthy applicants is less widespread. Welfare increases as: (1) the program becomes less strict, reducing rejection rates among the disabled, despite the worsening of incentives; (2) generosity is reduced or reassessments increased because false applications decline; (3) the generosity of unconditional means-tested benefits is increased.
    Keywords: disability, social security, savings behavior, wage risk
    JEL: D91 H53 H55 J26
    Date: 2014–07–24
  2. By: Casper Christophersen; Petr Jakubik (EIOPA)
    Abstract: Insurance companies play an important role in the financial sector and the availability of insurance products is an essential element of sustainable economic growth. This article analyses the relationship between growth in the insurance sector and key macroeconomic determinants using a European panel data set published by EIOPA. We focus on gross written premiums (GWP) to capture insurance market growth. Our empirical analysis reveals a high GWP persistence as well as a strong link between GWP and economic growth and unemployment. Moreover, the estimated model suggests a higher sensitivity to the macroeconomic environment for life compared to non-life insurance. Finally, there is also empirical evidence that insurers expand their international activities in periods when domestic growth opportunities are low. These findings can be used to underpin a quantitative financial stability framework to assess the potential impact of different macroeconomic scenarios on insurance market growth.
    Keywords: Gross written premiums, insurance, macroeconomic environment, quantitative financial stability framework
    JEL: G22 G28 E27
    Date: 2014–06
  3. By: Joanne W. Hsu; David A. Matsa; Brian T. Melzer
    Abstract: This paper studies the impact of unemployment insurance (UI) on consumer credit markets. Exploiting heterogeneity in UI generosity across U.S. states and over time, we find that UI helps the unemployed avoid defaulting on their mortgage debt. We estimate that UI expansions during the Great Recession prevented about 1.4 million foreclosures. Lenders respond to this decline in default risk by expanding credit access and reducing interest rates for low-income households at risk of being laid off. Our findings call attention to two benefits of unemployment insurance not previously highlighted: reducing deadweight losses from loan default and expanding access to credit.
    JEL: D14 G21 H31 R28
    Date: 2014–07
  4. By: Sylvie Lambert (PSE - INRA); Pauline Rossi (CREST - PSE)
    Abstract: Exploiting original data from a Senegalese household survey, we provide evidence that fertility choices are partly driven by women's needs for widowhood insurance. We use a duration model of birth intervals to show that women most exposed to the risk of widowhood intensify their fertility until they get a son. Insurance through sons entails substantial health costs : short birth spacing raises maternal and infant mortality rates
    Keywords: Intra-household insurance, Gender, Fertility, Health, Senegal
    JEL: D13 I15 J13 O15
    Date: 2014–02
  5. By: Long, Iain W. (Cardiff Business School); Polito, Vito (Cardiff Business School)
    Abstract: We study an individual's incentive to search for a job in the presence of random criminal opportunities. These opportunities extenuate moral hazard, as the individual sometimes commits crime rather than searching. Even when he searches, he applies less effort. We then revisit the design of optimal unemployment insurance in this environment. If the individual is more likely to remain unemployed and unpunished when he commits crime than when he searches for a job (as suggested by empirical studies), declining unemployment benefits reduce the payoff from crime relative to that from searching. Compared to the canonical models of optimal unemployment insurance, this provides a further incentive to reduce benefits over time.
    Keywords: Unemployment insurance; Moral hazard; Crime; Recursive contracts
    JEL: C61 D82 H55 J65 K42
    Date: 2014–07
  6. By: Carlos Dionisio Pérez Blanco (University of Alcalá de Henares and Madrid Institute for Advanced Studies in Water Technologies (IMDEA-Water)); Carlos Mario Gómez Gómez (University of Alcalá de Henares and Madrid Institute for Advanced Studies in Water Technologies (IMDEA-Water))
    Abstract: Water is a key input in the production of many goods and services and under certain conditions can become a critical limiting factor with significant impacts on regional development. This is the case of many agricultural European Mediterranean basins, where water deficit during drought events is partially covered by illegal abstractions, mostly from aquifers, which are tolerated by the authorities. Groundwater overexploitation for irrigation has created in these areas an unprecedented environmental catastrophe that threatens ecosystems sustainability, urban water supply and the current model of development. Market-based drought insurance systems have the potential to introduce the necessary incentives to reduce overexploitation during drought events and remove the high costs of the drought indemnity paid by the government. This paper develops a methodology to obtain the optimum risk premium based on concatenated stochastic models. The methodology is applied to the agricultural district of Campo de Cartagena (Segura River Basin, Spain). Results show that the prices in a hypothetic competitive private drought insurance market would be reasonable and the expected environmental outcomes significant.
    Keywords: Drought Insurance, Stochastic Models, Groundwater, Agriculture, Drought Contingency Plan
    JEL: Q5 Q25
    Date: 2014–07
  7. By: Alan C. Monheit; Irina Grafova; Rizie Kumar
    Abstract: Families in constrained economic circumstances resulting from economic shocks face difficult choices regarding how best to spend their diminished resources. As families strive to preserve their living standards, decisions regarding health care use and its allocation among family members may become more discretionary and complex. Using two-year panel data from the Medical Expenditure Panel Survey for 2004 to 2011, we examine how the intra-family allocation of health care spending responds to realized and anticipated changes in family economic status. We focus on the share of total family health care spending allocated to children, and measure realized economic shocks based on changes in the family’s income, employment, and health insurance status. We account for anticipated economic shocks by differentiating families by whether they are observed prior to, at the onset of, or during the Great Recession, or in the post-recession period. Our findings suggest that both types of economic shocks affect the share of family health care spending allocated to children, with findings more pronounced for single-mother families. We also find that realized economic shocks have a greater impact on children’s spending share than the anticipated change in economic status associated with the Great Recession and its recovery.
    JEL: I12 I13 I18
    Date: 2014–07
  8. By: Michael Geruso; Thomas G. McGuire
    Abstract: In many markets, including the new U.S. Exchanges, health plans are paid by risk-adjusted capitation, in some markets combined with reinsurance and other payment features. This paper proposes three metrics for grading these complex payment systems: fit, power and balance, each of which addresses a distinct market failure in health insurance. We implement these metrics in a study of Exchange payment systems with data similar to that used to develop the Exchange risk adjustment scheme and describe the tradeoffs among the metrics. We find that a simple reinsurance system scores better on fit, power and balance than the risk adjustment formula in use in the Exchanges.
    JEL: H42 H51 I13 I18
    Date: 2014–07
  9. By: Harenberg, Daniel; Ludwig, Alexander
    Abstract: We ask whether a PAYG-financed social security system is welfare improving in an economy with idiosyncratic and aggregate risk. We argue that interactions between the two risks are important for this question. One is a direct interaction in the form of a countercyclical variance of idiosyncratic income risk. The other indirectly emerges over a household's life-cycle because retirement savings contain the history of idiosyncratic and aggregate shocks. We show that this leads to risk interactions, even when risks are statistically independent. In our quantitative analysis, we find that introducing social security with a contribution rate of two percent leads to welfare gains of 2.2% of lifetime consumption in expectation, despite substantial crowding out of capital. This welfare gain stands in contrast to the welfare losses documented in the previous literature, which studies one risk in isolation. We show that jointly modeling both risks is crucial: 60% of the welfare benefits from insurance result from the interactions of risks. --
    Keywords: social security,idiosyncratic risk,aggregate risk,welfare
    JEL: C68 E27 E62 G12 H55
    Date: 2014
  10. By: Catherine Rodríguez; Fabio Sánchez; Sandra Zamora
    Abstract: Through a novel randomized control trial this paper estimates the impact of Viva Seguro, a financial education program that covers topics on risks and insurance management, on knowledge, attitudes and actual behavior. The program was broadcasted in two Colombian radio stations that have low and medium income households as target audience. Listeners from these radio stations comprise our treatment group. The control group is comprised by listeners from other two radio stations of similar characteristics and from the same broadcasting company. Using panel data information on both the treatment and the control group we find that giving financial education through such mass media channel has a positive impact on the knowledge of risks individuals face, the number of insurance they know exist and their perceived capability of understanding and handling insurance. No effect however is found on the knowledge of specific concepts of insurance, or their attitudes towards it, in savings behavior or the number of insurance bought. In general results show that delivering financial education through radio is a cost effective alternative in order to improve knowledge on insurance related concepts.
    Keywords: financial education, radio, insurance, randomized control tral (RCT)
    JEL: I20 I25
    Date: 2014–05–22
  11. By: Carlos Guiné (EIOPA)
    Abstract: This paper addresses the issue of systemic risk in the financial sector and its relevance with regard to insurance activities. The initiatives which followed the 2008 global financial crisis to address the risks posed by Systemically Important Financial Institutions are analyzed, with a focus on the Global Systemically Important Insurers Designation Process and Policy Measures, developed by the International Association of Insurance Supervisors and adopted by the Financial Stability Board in July 2013. The potential consequences of the SIFI project for financial stability, in general, and the Global Systemically Important Insurers framework, in particular, are also discussed. The incentives which are being introduced for the reduction of systemic risk may have unintended consequences, such as an increase of moral hazard and intensified uncertainty. The ongoing work regarding the design, calibration and, in some cases, implementation of such policy measures is, therefore, of capital importance.
    Keywords: Systemically Important Financial Institutions, SIFI, systemic risk, insurance
    JEL: G22 G28
    Date: 2014–06
  12. By: Philipp Ager; Antonio Ciccone
    Abstract: Building on the idea that religious communities provide mutual insurance against some idiosyncratic risks, we argue that religious membership is more valuable in societies exposed to greater common risk. In our empirical analysis we exploit rainfall risk as a source of common economic risk in the nineteenth-century United States and show that religious communities were larger in counties where they faced greater rainfall risk. The link between rainfall risk and the size of religious communities is stronger in counties that were more agricultural, that had lower population densities, or that were exposed to greater rainfall risk during the growing season.
    Keywords: Religious community size, agricultural risk, informal insurance.
    Date: 2014–07
  13. By: Guo Li; Sherrill Shaffer
    Abstract: This study provides new evidence regarding reciprocal brokered deposits (RBDs), regulatory responses, and bank risk, contributing to prior studies in four ways. First, using updated financial Call Report data and bank failure data through 2012, we reexamine the moral hazard hypothesis that banks using RBDs exhibit higher risk. Second, we uncover a previously overlooked positive association between RBDs and banks’ cost of failure. Third, we apply Granger causality tests; and finally, we test whether the FDIC’s recent revision of its pricing discourages the use of RBDs and weakens its association with bank risk.
    Keywords: Reciprocal Brokered Deposits, Moral Hazard, cost of failure
    JEL: G21 G22 G28
    Date: 2014–07
  14. By: Angela M. Gerolamo; Jung Y. Kim; Jonathan Brown
    Keywords: Physcial Health Care, Behavioral Health, Pennsylvania, Health
    JEL: I
    Date: 2014–01–30

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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