nep-ias New Economics Papers
on Insurance Economics
Issue of 2014‒11‒12
thirteen papers chosen by
Soumitra K. Mallick
Indian Institute of Social Welfare and Business Management

  1. Current Crop Insurance Policies By Plastina, Alejandro
  2. Health Effects of Containing Moral Hazard: Evidence from Disability Insurance Reform By Pilar Garcia-Gomez; Anne C. Gielen
  3. Liquidity Substitutes for Unemployment Insurance: Evidence from the Introduction of Home Equity Loans in Denmark (Job Market Paper) By Kristoffer Markwardt; Alessandro Martinello; László Sándor
  4. Basis Risk and the Welfare Gains from Index Insurance: Evidence from Northern Kenya By Jensen, Nathaniel D.; Barrett, Christopher B.; Mude, Andrew G.
  5. Colonial Life Insurance Company Limited - From Growth to Failure: An Analysis of Reported Financial Activity 2003-2008 By Gordon, Leo-Rey
  6. The Perception of Lethal Risks - Evidence from a Laboratory Experiment By Tilman Brück; Manuel Schubert
  7. Systemic risk in a large claims insurance market with bipartite graph structure By Oliver Kley; Claudia Kluppelberg; Gesine Reinert
  8. Human Capital Dynamics and the U.S. Labor Market By Fang, Lei; Nie, Jun
  9. Healthcare Delivery and Stakeholder's Satisfaction under Social Health Insurance Schemes in India: An Evaluation of Central Government Health Scheme (CGHS) and Ex-servicemen Contributory Health Scheme (ECHS) By Sukumar Vellakkal; Shikha Juyal; Ali Mehdi
  10. Services Trade Restrictiveness Index (STRI): Financial Services By Dorothée Rouzet; Hildegunn Kyvik Nordås; Frederic Gonzales; Massimo Geloso Grosso; Iza Lejárraga; Sébastien Miroudot; Asako Ueno
  11. Loss Modification Incentives for Insurers under Expected Utility and Loss Aversion By Adriaan R. Soetevent; Liting Zhou
  12. La quête de la competitivité ouvre la voie de la déflation By Céline Antonin; Christophe Blot; Sabine Le Bayon; Catherine Mathieu
  13. État des lieux statistique des Objectifs du Développement Durable (ODD) dans les PMA et les autres pays vulnérables By Matthieu BOUSSICHAS; Vincent NOSSEK

  1. By: Plastina, Alejandro
    Date: 2014–10–01
  2. By: Pilar Garcia-Gomez; Anne C. Gielen (Erasmus University Rotterdam, the Netherlands)
    Abstract: We exploit an age discontinuity in a Dutch disability insurance (DI) reform to identify the health impact of stricter eligibility criteria and reduced generosity. Women subject to the more stringent rule experience greater rates of hospitalization and mortality. A €1,000 reduction in annual benefits leads to a rise of 4.2 percentage points in the probability of being hospitalized and a 2.6 percentage point higher probability of death more than 10 years after the reform. There are no effects on the hospitalization of men subject to stricter rules but their mortality rate is reduced by 1.2 percentage points. The negative health effect on females is restricted to women with low pre-disability earnings. We hypothesize that the gender difference in the effect is due to the reform tightening eligibility particularly with respect to mental health conditions, which are more prevalent among female DI claimants. A simple back-of-the-envelope calculation shows that every dollar reduction in DI is almost completely offset by additional health care costs. This implies that policy makers considering a DI reform should carefully balance the welfare gains from reduced moral hazard against losses not only from less coverage of income risks but also from deteriorated health.
    Keywords: disability insurance, moral hazard, health, mortality, regression discontinuity
    JEL: I14 H53 I38
    Date: 2014–08–07
  3. By: Kristoffer Markwardt; Alessandro Martinello; László Sándor
    Abstract: Unemployment insurance programs are particularly valuable for the liquidity the benefits provide during unemployment. Would unemployment insurance be in demand if people had a buffer stock of liquid savings and could make an active choice about insurance?� We show that demand does fall with liquidity, bringing quasi-experimental evidence from the sudden introduction of home equity loans in Denmark, where enrollment in public unemployment insurance schemes is voluntary. The reform provided less levered homeowners with more unexpected liquidity. Using a ten-year long, third-party reported panel dataset drawn from administrative registries, we find that those who were suddenly provided with extra liquidity were less likely to sign up for unemployment insurance afterwards compared to other homeowners. The effects are robust to reparametrization, flexible controls for differences between groups with less and with more equity in their homes, and the persistence of the insurance decision. Placebo tests for earlier years show no differential trends by leverage before the natural experiment. The documented forward-looking financial planning also suggests how functional the demand side of unemployment insurance markets would be in the lack of a government mandate or public provision.
    Date: 2014–10
  4. By: Jensen, Nathaniel D.; Barrett, Christopher B.; Mude, Andrew G.
    Abstract: Index insurance products circumvent many of the transaction costs and asymmetric information problems that obstruct provision of low value conventional insurance policies in developing countries. Recent years have seen tremendous growth in index insurance pilots in developing countries, but there has been little progress in our understanding of the quality of those products. Basis risk, or remaining uninsured risk, is a widely recognized, but rarely measured drawback of index insurance that carries significant implications for the quality of any such product. This research uses a rich longitudinal household dataset to examine basis risk associated with an index based livestock insurance (IBLI) product available to pastoralists in northern Kenya since 2010. We find that IBLI coverage reduces downside risk for most households when purchased at actuarially fair premium rates and has net utility benefits for most even at commercial rates. Examining the components of basis risk, we find that IBLI reduces exposure to covariate risk due to high loss events by an average of 62.8%. The benefits of reduced covariate risk exposure are relatively small, however, due to high exposure to seemingly mostly random idiosyncratic risk, even in this population often thought to suffer largely from covariate shocks. Depending on covariate region, IBLI policy holders are left with an average of between 62.3% and 76.7% of their original risk due to high loss events. This research underscores the need for caution when promoting index insurance as a tool for reducing exposure to risk and the importance of ex post product evaluation.
    Keywords: index insurance, basis risk, pastoralists, Kenya
    JEL: O1 O16
    Date: 2014–09
  5. By: Gordon, Leo-Rey
    Abstract: The collapse of Colonial Life Insurance Company (Trinidad) Limited caused one of the most significant financial events in recent history in the Eastern Caribbean region. The significance of the groups collapse warranted the establishment of a commission to gather information on its root causes. There is however still uncertainty in much of the detail of CLICO’s operations. This paper utilizes evidence presented in the national commission of enquiry of CLICO’s collapse and other associated financial documents to discuss the reported financial activity of the group between 2003 and 2008. The analysis shows investments in unproductive asset expansion, declining income, bleeding cash positions over the period, and a business structure unlike a typical insurance company. The paper provides useful analysis for those in need of information regarding the failure of the region’s most prominent firm.
    Keywords: CLICO Financial Analysis Insurance Caribbean
    JEL: G22 M49
    Date: 2013–12
  6. By: Tilman Brück (Stockholm International Peace Research Institute (SIPRI), Institute for the Study of Labor (IZA) and International Security and Development Center (ISDC)); Manuel Schubert (University of Passau)
    Abstract: We run a novel experiment to explore the relationship between the perception of real-life risks and the demand for risk reduction. Subjects play a series of loss lotteries in which the odds are matched to the likelihood of lethal events in real life. For each risk, subjects can pay premiums in order to reduce the likelihood of total bankruptcy. Our results show a complex interplay of mortality perception and demand for risk reduction. We observe that perceived annual mortality positively affects the demand for risk reduction. Moreover, we find certain risk characteristics to affect perceived mortality, others to drive the demand for risk reduction, and some to alter both. Our findings suggest that 30 percent of all insurance payments are due to biased perceptions of annual mortality while perfect precaution could lower payments by 45 percent. Implications for risk management policies are discussed.
    Keywords: risk perception, lethal risks, experiment, insurance
    JEL: C9 D81
    Date: 2014–10
  7. By: Oliver Kley; Claudia Kluppelberg; Gesine Reinert
    Abstract: We model business relationships exemplified for a (re)insurance market by a bipartite graph which determines the sharing of severe losses. Using Pareto-tailed claims and multivariate regular variation we obtain asymptotic results for the Value-at-Risk and the Conditional Tail Expectation. We show that the dependence on the network structure plays a fundamental role in their asymptotic behaviour. As is well-known, if the Pareto exponent is larger than 1, then for the individual agent (re-insurance company) diversification is beneficial, whereas when it is less than 1, concentration on a few objects is the better strategy. The situation changes, however, when systemic risk comes into play. The random network structure has a strong influence on diversification effects, which destroys this simple individual agent's diversification rule. It turns out that diversification is always beneficial from a macro-prudential point of view creating a conflicting situation between the incentives of individual agents and the interest of some superior entity to keep overall risk small. We explain the influence of the network structure on diversification effects in different network scenarios.
    Date: 2014–10
  8. By: Fang, Lei (Federal Reserve Bank of Atlanta); Nie, Jun (Federal Reserve Bank of Kansas City)
    Abstract: The high U.S. unemployment rate after the Great Recession is usually considered to be a result of changes in factors influencing either the demand side or the supply side of the labor market. However, no matter what factors have caused the changes in the unemployment rate, these factors should have influenced workers' and firms' decisions. Therefore, it is important to take into account workers' endogenous responses to changes in various factors when seeking to understand how these factors affect the unemployment rate. To address this issue, we estimate a Mortensen-Pissarides style of labor-market matching model with endogenous separation decisions and stochastic changes in workers' human capital. We study how agents' endogenous choices vary with changes in the exogenous shocks and changes in labor-market policy in the context of human capital dynamics. We reach four main findings. First, once workers have accounted for and are able to optimally respond to possible human capital loss, the unemployment rate in an economy with human capital loss during unemployment will not be higher than in an economy with no human capital loss. The reason is that the increase in the unemployment rate led by human capital loss is more than offset by workers' endogenous responses to prevent them from being unemployed. Second, human capital accumulation on the job is more important than human capital loss during unemployment for both the unemployment rate and output. Third, workers' endogenous separation rates will decline when job-finding rates fall. Fourth, taking into account the endogenous responses, unemployment insurance extensions contributed 0.5 percentage point to the increase in the aggregate unemployment rate in the 2008–12 period.
    Keywords: unemployment; unemployment insurance benefits; matching model; human capital; labor market
    JEL: E24 J08 J24 J45
    Date: 2014–02–01
  9. By: Sukumar Vellakkal (Indian Council for Research on International Economic Rela); Shikha Juyal (Indian Council for Research on International Economic Rela); Ali Mehdi
    Abstract: This study attempted to evaluate the working of the Central Government HealthScheme (CGHS) and Ex-servicemen Contributory Health Scheme (ECHS) byassessing patient satisfaction as well as the issues and concerns of empanelled privatehealthcare providers.The study is based on a primary survey of 1,204 CGHS and 640 ECHS principalbeneficiaries, 100 empanelled private healthcare providers and 100 officials of theschemes across 12 Indian cities.We have found that patients are reasonably well satisfied with the healthcare servicesof both empanelled private healthcare providers and the dispensaries-polyclinics butare relatively more satisfied with the former than the latter. We also found thatbeneficiaries are willing to pay more for better quality services. Though the schemesprovide comprehensive healthcare services, the beneficiaries incur some out-ofpockethealth expenditure while seeking healthcare. Furthermore, beneficiaries are notin favour of the recent proposal to replace the schemes with health insurance forseveral reasons. The empanelled private healthcare providers are dissatisfied with theterms and conditions of empanelment, especially the low tariffs for their services ascompared to prevailing market rates and the delays in reimbursements from theschemes.We suggest that appropriate efforts be undertaken to enhance the quality of healthcareservice provided in the dispensaries-polyclinics of the CGHS and ECHS as well as toaddress the issues and concerns of empanelled private healthcare providers to ensurebetter healthcare delivery and for a long-term, sustainable public-private partnership
    Keywords: CGHS, ECHS, patient satisfaction, willingness to pay, empanelled private, healthcare providers
    JEL: H30 H51 H53 I19
  10. By: Dorothée Rouzet; Hildegunn Kyvik Nordås; Frederic Gonzales; Massimo Geloso Grosso; Iza Lejárraga; Sébastien Miroudot; Asako Ueno
    Abstract: This paper presents the services trade restrictiveness indices (STRIs) for financial services. The STRIs are composite indices taking values between zero and one, zero representing an open market and one a market completely closed to foreign services providers. The indices are calculated for 40 countries, the 34 OECD members and Brazil, China, India, Indonesia, Russia and South Africa. The STRIs capture de jure restrictions. This report presents the first vintage of indicators for commercial banking and insurance services and captures regulations in force in 2013. The scores in commercial banking range between 0.06 and 0.55, with a sample average of 0.19. The scores in insurance services range between 0.05 and 0.63, with a sample average of 0.20. The results are mainly driven by restrictions on market entry, where significant impediments remain in the form of foreign equity limits, restrictions on legal form, discriminatory licensing criteria and restrictions on cross-border transactions. Barriers to competition, including regulation of products and prices and preferential treatment granted to state-owned financial institutions, also make a substantive contribution to the index values. The paper presents the list of measures included in the indices, the scoring and weighting system for calculating the indices and an analysis of the results.
    Keywords: trade policy, bank, trade in services, services trade restrictions, regulation, insurance, regulatory reform, services liberalisation
    JEL: F13 F14 F21 G21 G22 G28 L88
    Date: 2014–11–04
  11. By: Adriaan R. Soetevent (University of Groningen, the Netherlands); Liting Zhou (University of Amsterdam, the Netherlands)
    Abstract: Given the possibility to modify the probability of a loss, will a profit-maximizing insurer engage in loss prevention or is it in his interest to increase the loss probability? This paper investigates this question. First, we calculate the expected profit maximizing loss probability within an expected utility framework. We then use Köszegi and Rabin's (2006, 2007) loss aversion model to answer the same question for the case where consumers have reference-dependent preferences. Largely independent of the adopted framework, we find that the optimal loss probability is sizable and for many commonly used parameterizations much closer to 1/2 than to 0. Previous studies have argued that granting insurers market power may incentivize them to engage in loss prevention activities, this to the benefit of consumers. Our results show that one should be cautious in doing so because there are conceivable instances where the insurer's interests in modifying the loss probability to against those of consumers.
    Keywords: loss modification, expected utility, reference-dependent preferences, insurance
    JEL: D11 D42 D81 L12
    Date: 2014–08–21
  12. By: Céline Antonin (OFCE); Christophe Blot (OFCE); Sabine Le Bayon (OFCE); Catherine Mathieu (OFCE)
    Abstract: La crise de la zone euro a mis au grand jour la question des déséquilibres courants qui s’étaient amplifiés jusqu’en 2007. Un débat s’est engagé depuis pour déterminer l’origine de ces déséquilibres, certains y voyant le résultat d’une divergence accrue en matière de compétitivité. Depuis, la réforme de la gouvernance européenne tient explicitement compte de la situation macroéconomique de chaque État membre au-delà des seuls critères de finances publiques. La Commission a établi à cette fin un tableau de bord permettant d’exercer une surveillance macroéconomique élargie en intégrant notamment les évolutions de la compétitivité et des parts de marché à l’exportation. De fait, depuis 2007, les déséquilibres se sont résorbés, principalement en raison d’une réduction des déficits courants de l’Italie, l’Espagne, l’Irlande, le Portugal et la Grèce. Dans le même temps, le contexte macroéconomique marqué par la consolidation budgétaire et les mesures prises par ces différents pays, en vue notamment de rendre le marché du travail plus flexible, ont pu avoir un effet sur la compétitivité. Les effets sur la compétitivité pourraient être de deux ordres. D’une part, le maintien d’un niveau de chômage élevé crée des pressions déflationnistes. D’autre part, la baisse ou le gel des rémunérations, la réduction de la protection de l’emploi ou la décentralisation des négociations salariales pourraient également réduire les coûts salariaux unitaires. Les effets de ces réformes restent cependant débattus. Surtout ces réformes renforcent, à court terme, les pressions déflationnistes qui représentent dès lors le principal vecteur d’amélioration de la compétitivité. Certains pays ont d’ores et déjà regagné des parts de marché depuis le déclenchement de la crise, ce que corroborent les estimations d’équations de commerce. Il reste que la réduction des déficits courants résulte en grande partie de la baisse des importations liée à l’effondrement de la demande. Enfin, à terme, cette stratégie de recherche de compétitivité pourrait constituer une menace pour la croissance dans la zone euro en favorisant la généralisation du risque déflationniste.
    Keywords: compétitivité; déflation
    Date: 2013–05
  13. By: Matthieu BOUSSICHAS (Ferdi); Vincent NOSSEK (Ferdi)
    Abstract: Ce document propose une comparaison statistique des objectifs du développement durable (ODD) et de leurs principales cibles dans les PMA, les autres pays vulnérables et les autres pays en développement. Il se base sur les ODD proposés le 19 juillet 2014 par le Groupe de travail ouvert de l’Assemblée générale des Nations Unies sur les objectifs de développement durable. Alors que le nouvel agenda post-2015 sera universel, la grande hétérogénéité des pays pose la question de la différenciation de l’agenda en fonction des spécificités, notamment celles des pays vulnérables. Un élément de réponse tient dans l’identification de ces spécificités pour les objectifs et cibles proposés. Ce document compare ainsi les Pays les Moins Avancés (PMA), les Pays en Développement Sans Littoral (PDSL) et les Petits Etats Insulaires en Développement (PEID) aux pays en développement hors-PMA ou aux pays à revenu intermédiaires (PRI) selon la disponibilité des données. Ce travail s’inscrit dans la continuité du document de travail P77 de la Ferdi (Boussichas, Coudert, & Gillot, 2013) qui établit un bilan factuel par OMD (objectifs du Millénaire pour le développement) pour les pays vulnérables et compare les résultats obtenus par chaque catégorie à ceux des pays en développement hors-PMA. A l’instar de ce que le bilan des OMD permet d’observer, il apparaît que, globalement, les pays vulnérables et en particulier les PMA se distinguent par un retard significatif sur la majorité des nouveaux objectifs et cibles de l’agenda post-2015. La crainte qu’un élargissement de l’agenda du développement au développement durable ne dilue à l’avenir la priorité donnée jusqu’à maintenant à ces pays ne peut être alimentée par les statistiques tant les besoins des pays vulnérables en matière de développement durable apparaissent globalement plus importants que ceux des autres catégories de pays. Afin de prendre en compte les niveaux initiaux des pays dans l’évaluation des progrès, ce travail introduit, lorsque cela est possible et pertinent, une évaluation non linéaire des progrès constatés depuis 2000 sur les possibles futurs objectifs. Ainsi, bien que leurs niveaux d’éducation et de santé restent plus faibles, la performance des PMA dans ces deux secteurs s’avère relativement meilleure que celle des autres PED. Le même constat peut être fait pour l’utilisation d’énergies alternatives et renouvelables. En revanche, les progrès des PMA sont décevants en matière de lutte contre la pauvreté et la malnutrition au regard de ce qu’a été la performance des autres PED. Ces résultats montrent deux choses : 1/ L’approche OMD a probablement permis aux PMA de rattraper en partie (mais en partie seulement) leur retard en matière de capital humain. Ce constat encourageant milite pour une différenciation renouvelée à leur égard, notamment dans les efforts spécifiques de la communauté internationale dont ils bénéficient ; 2/ Les PMA se distinguant cependant par une mauvaise performance en matière de pauvreté et de malnutrition, il est important de considérer spécifiquement ces pays sur l’ensemble des facteurs concourant à cette mauvaise performance. Nombre de ces facteurs sont précisément parmi ceux nouvellement pris en compte dans l’agenda post-2015. Or, les PMA accusent un retard significatif pour la plupart de ces facteurs. Afin de rééditer pour les autres facteurs du développement la relative bonne performance des PMA en matière de capital humain, les pays vulnérables doivent continuer à bénéficier d’un support particulier de la communauté internationale.
    JEL: F35 I32 I38 O11 E61
    Date: 2014–10

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.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.