nep-ias New Economics Papers
on Insurance Economics
Issue of 2014‒12‒13
fifteen papers chosen by
Soumitra K. Mallick
Indian Institute of Social Welfare and Business Management

  1. Crop Insurance Use and Land Rental Agreements By Kuethe, Todd; Paulson, Nick
  2. Risk Corridors and Reinsurance in Health Insurance Marketplaces: Insurance for Insurers By Timothy J. Layton; Thomas G. McGuire; Anna D. Sinaiko
  3. Contracting in the Presence of Insurance: The Case of Bioenergy Crop Production By Yang, Xi; Miao, Ruiqing; Khanna, Madhu
  4. Home Owners’ Willingness to Buy Flood Insurance in Rural China By Jinzheng, Ren Jr; Longling, Li Jr; H. Holly, Wang Jr
  5. Pricing Flood Insurance: How and Why the NFIP Differs from a Private Insurance Company By Kousky, Carolyn; Shabman, Leonard
  6. Does Privatized Health Insurance Benefit Patients or Producers? Evidence from Medicare Advantage By Marika Cabral; Michael Geruso; Neale Mahoney
  7. Welfare Effects of Short-Time Compensation By Braun, Helge; Brügemann, Björn
  8. Do Health Monitoring Tools and Apps Reduce Health Care Costs? Evidence based on Panel Data from a Health Insurance Company By Burbidge, Linda; Ross, Kara
  9. Federal Crop Insurance and Credit Constraints: Theory and Evidence By Liang, Lu
  10. An Application of Kernel Density Estimation via Diffusion to Group Yield Insurance By Ramsey, Ford
  11. High marginal tax rates on the top 1%? By Kindermann, Fabian; Krueger, Dirk
  12. Systemic Risk in Wheat Yields By Hungerford, Ashley
  13. Controlling Health Care Costs Through Limited Network Insurance Plans: Evidence from Massachusetts State Employees By Jonathan Gruber; Robin McKnight
  14. Are Private Defensive Expenditures against Storm Damages Affected by Public Programs and Natural Barriers? Evidence from the Coastal Areas of Bangladesh By Mahmud, Sakib; Barbier, Edward
  15. Tail Dependence is to be Expected Among Crop Yields By Du, Xiaodong; Hennessy, David; Feng, Hongli

  1. By: Kuethe, Todd; Paulson, Nick
    Keywords: crop insurance, land values, rental agreements, risk balancing, Agricultural Finance, Risk and Uncertainty,
    Date: 2014
  2. By: Timothy J. Layton; Thomas G. McGuire; Anna D. Sinaiko
    Abstract: In order to encourage entry and lower prices, most regulated markets for health insurance include policies that seek to reduce the uncertainty faced by insurers. In addition to risk adjustment of premiums paid to plans, the Health Insurance Marketplaces established by the Affordable Care Act implement reinsurance and risk corridors. Reinsurance limits insurer costs associated with specific individuals, while risk corridors protect against aggregate losses. Both tighten the insurer's distribution of expected costs. This paper considers the economic costs and consequences of reinsurance and risk corridors. Drawing a parallel to individual insurance principles first described by Arrow (1963) and Zeckhauser (1970), we first discuss the optimal insurance policy for insurers. Then, we simulate the insurer's cost distribution under reinsurance and risk corridors using health care utilization data for a group of individuals likely to enroll in Marketplace plans from the Medical Expenditure Panel Survey. We compare reinsurance and risk corridors in terms of insurer risk reduction and incentives for cost containment, finding that one-sided risk corridors achieve more risk reduction for a given level of cost containment incentives than both reinsurance and two-sided risk corridors. We also find that the ACA policies being implemented in the Marketplaces (a mix of reinsurance and two-sided risk corridor policies) substantially limit insurer risk but that they are outperformed by a simpler one-sided risk corridor policy according to our measures of insurer risk and incentives.
    JEL: I11 I13
    Date: 2014–09
  3. By: Yang, Xi; Miao, Ruiqing; Khanna, Madhu
    Keywords: Contract, Insurance, Bioenergy Crop, Resource /Energy Economics and Policy, Q42,
    Date: 2014
  4. By: Jinzheng, Ren Jr; Longling, Li Jr; H. Holly, Wang Jr
    Abstract: In Recent years, flood damage in rural China dramatically increased as a result of more frequent and severe floods. Although the policy-oriented agriculture insurance for natural disasters has been available in China, its coverage only applies to crops and livestock, not residents’ real estate and household property. In this paper, we investigate whether residents in rural China are willing to insure their property against flood damage and what kind of factors influence their willingness to seek insurance protection. Based on the national survey we conducted over 15 provinces in the summer of 2012, with 1322 valid observations, socio-economic, flood risks, insurance experience and region variable are analyzed using different models. The results show that there exists a strong need for flood insurance in rural China, and factors including flood experience in past 30 years, the elapsed time since the latest serious flood, income, and insurance experience influence rural residents’ willingness to participate in flood insurance. Policy suggestions for flood insurance are provided to the insurance industry and Chinese government at the end.
    Keywords: Agricultural Finance, Risk and Uncertainty, Flood insurance, Willingness to pay, rural property,
  5. By: Kousky, Carolyn (Resources for the Future); Shabman, Leonard (Resources for the Future)
    Abstract: Flood insurance in the United States is offered through the federal National Flood Insurance Program (NFIP). After going deeply into debt following the 2005 hurricane season, pricing in the program has been the subject of debate and two reform bills. Private sector insurance pricing has often been used as a benchmark in these discussions. In this paper, we explain NFIP pricing in the context of actuarial pricing principles, clarify why some polices are priced below what is considered to be the full risk rate, and explain how and, more importantly, why NFIP pricing practices differ from the private sector. NFIP pricing has incorporated other program goals that are at times at odds with the ability to cover all payouts for insured losses without taxpayer support. These multiple programmatic goals make the private sector a questionable analog for the NFIP.
    Keywords: flood insurance, rate-setting, NFIP, premiums
    Date: 2014–10–27
  6. By: Marika Cabral; Michael Geruso; Neale Mahoney
    Abstract: The debate over privatizing Medicare stems from a fundamental disagreement about whether privatization would primarily generate consumer surplus for individuals or producer surplus for insurance companies and health care providers. This paper investigates this question by studying an existing form of privatized Medicare called Medicare Advantage (MA). Using difference-in-differences variation brought about by payment floors established by the 2000 Benefits Improvement and Protection Act, we find that for each dollar in increased capitation payments, MA insurers reduced premiums to individuals by 45 cents and increased the actuarial value of benefits by 8 cents. Using administrative data on the near-universe of Medicare beneficiaries, we show that advantageous selection into MA cannot explain this incomplete pass-through. Instead, our evidence suggests that insurer market power is an important determinant of the division of surplus, with premium pass-through rates of 13% in the least competitive markets and 74% in the markets with the most competition.
    JEL: D4 H22 I11 I13 L1
    Date: 2014–09
  7. By: Braun, Helge (University of Cologne); Brügemann, Björn (VU University Amsterdam)
    Abstract: We study welfare effects of public short-time compensation (STC) in a model in which firms respond to idiosyncratic profitability shocks by adjusting employment and hours per worker. Introducing STC substantially improves welfare by mitigating distortions caused by public unemployment insurance (UI), but only if firms have access to private insurance. Otherwise firms respond to low profitability by combining layoffs with long hours for remaining workers, rather than by taking up STC. Optimal STC is substantially less generous than UI even when firms have access to private insurance, and equally generous STC is worse than not offering STC at all.
    Keywords: short-time compensation, unemployment insurance, welfare
    JEL: J65
    Date: 2014–10
  8. By: Burbidge, Linda; Ross, Kara
    Keywords: Health status, monitoring tools, health trackers, wellness, health insurance claims data, Food Consumption/Nutrition/Food Safety, Health Economics and Policy, Institutional and Behavioral Economics,
  9. By: Liang, Lu
    Keywords: Agricultural and Food Policy, Agricultural Finance,
    Date: 2014
  10. By: Ramsey, Ford
    Abstract: The recent priority given to Federal Crop Insurance as an agricultural policy instrument has increased the importance of rate making procedures. Actuarial soundness requires rates that are actuarially fair: the premium is set equal to expected loss. Formation of this expectation depends, in the case of group or area yield insurance, on precise estimation of the probability density of the crop yield in question. This paper applies kernel density estimation via diffusion to the estimation of crop yield probability densities and determines ensuing premium rates. The diffusion estimator improves on existing methods by providing a cogent answer to some of the issues that plague both parametric and nonparametric techniques. Application shows that premium rates can vary significantly depending on underlying distributional assumptions; from a practical point of view there is value to be had in proper specification.
    Keywords: crop insurance, yield distributions, density estimation via diffusion, nonparametric density estimation, Agricultural and Food Policy, Research Methods/ Statistical Methods, Risk and Uncertainty, C520, Q180, C140,
    Date: 2014
  11. By: Kindermann, Fabian; Krueger, Dirk
    Abstract: In this paper we argue that very high marginal labor income tax rates are an effective tool for social insurance even when households have preferences with high labor supply elasticity, make dynamic savings decisions, and policies have general equilibrium effects. To make this point we construct a large scale Overlapping Generations Model with uninsurable labor productivity risk, show that it has a wealth distribution that matches the data well, and then use it to characterize fiscal policies that achieve a desired degree of redistribution in society. We find that marginal tax rates on the top 1% of the earnings distribution of close to 90% are optimal. We document that this result is robust to plausible variation in the labor supply elasticity and holds regardless of whether social welfare is measured at the steady state only or includes transitional generations.
    Keywords: Progressive Taxation,Top 1%,Social Insurance,Income Inequality
    JEL: E62 H21 H24
    Date: 2014
  12. By: Hungerford, Ashley
    Abstract: In 2011 and 2012 severe droughts caused extensive damage in crops throughout the Midwest. These conditions combined with concerns for climate change have led to a growing focus on risk management in agriculture. The increasing emphasis on risk management is reflected in the 2014 Farm Bill, which replaces direct payments with shallow loss programs. For this paper we turn our attention to winter wheat production in Kansas and explore the ratings of the crop insurance policies as well as predicted payouts from the new Agricultural Risk Coverage program established under the 2014 Farm Bill. Using spatial models we simulate yields of non-irrigated winter wheat and irrigated winter wheat to estimate crop insurance premium rates as well as payouts from the Agricultural Risk Coverage program.
    Keywords: Spatial, Crop Insurance, Farm Bill, Crop Production/Industries, Production Economics, Risk and Uncertainty, Q1,
    Date: 2014–05–21
  13. By: Jonathan Gruber; Robin McKnight
    Abstract: Recent years have seen enormous growth in limited network plans that restrict patient choice of provider, particularly through state exchanges under the ACA. Opposition to such plans is based on concerns that restrictions on provider choice will harm patient care. We explore this issue in the context of the Massachusetts GIC, the insurance plan for state employees, which recently introduced a major financial incentive to choose limited network plans for one group of enrollees and not another. We use a quasi-experimental analysis based on the universe of claims data over a three-year period for GIC enrollees. We find that enrollees are very price sensitive in their decision to enroll in limited network plans, with the state's three month "premium holiday" for limited network plans leading 10% of eligible employees to switch to such plans. We find that those who switched spent considerably less on medical care; spending fell by almost 40% for the marginal complier. This reflects both reductions in quantity of services used and prices paid per service. But spending on primary care actually rose for switchers; the reduction in spending came entirely from spending on specialists and on hospital care, including emergency rooms. We find that distance traveled falls for primary care and rises for tertiary care, although there is no evidence of a decrease in the quality of hospitals used by patients. The basic results hold even for the sickest patients, suggesting that limited network plans are saving money by directing care towards primary care and away from downstream spending. We find such savings only for those whose primary care physicians are included in limited network plans, however, suggesting that networks that are particularly restrictive on primary care access may fare less well than those that impose only stronger downstream restrictions.
    JEL: I13
    Date: 2014–09
  14. By: Mahmud, Sakib; Barbier, Edward
    Abstract: This paper introduces a household model of private investment in storm protection under an endogenous risk framework to determine how ex-ante self-protection and ex-post self-insurance spending by coastal households to mitigate storm-inflicted damages are affected by the availability of public programs and the presence of a mangrove forest. The theoretical results show that ex-ante publicly constructed physical barriers and mangroves are complements to self-protection but substitutes to self-insurance. However, ex-post public disaster relief and rehabilitation programs are substitutes to self-protection but complements to self-insurance. Our empirical analysis of coastal households in Bangladesh impacted by Cyclone Sidr reveals partial support for crowding out and crowding in effects of public investments and programs. Households located in a mangrove protected area invest more in self-protection and less in self-insurance. Other controls, such as household socioeconomic characteristics, also influence and add a degree of complexity to the relationship.
    Keywords: self-protection; self-insurance; Cyclone Sidr; mangroves; Bangladesh
    JEL: D81 Q51 Q54
    Date: 2014–04–14
  15. By: Du, Xiaodong; Hennessy, David; Feng, Hongli
    Abstract: Rate setting methods for crop yield and revenue contracts employ methods that presume that correlations are state invariant. Whether this is true matters. If yield-yield correlations strengthen when crops are subject to widespread stress then diversification opportunities for private insurers weaken when most needed. For the government’s book of business, such tail dependence will increase the transactions and political costs of inter-agency reallocation of funds. In this paper we propose a simple model of yields according to interactions between the weather outcome and land limitations as in the United States Soil Conservation Service’s land capability classification. Our model shows that yield-yield tail dependence is to be expected and, furthermore, should take a particular form. Yield correlations should be stronger in the left and right tails than in the center, i.e., U shaped state-conditional correlation is hypothesized. Using Risk Management Agency unit level data and a variety of statistics, we find strong evidence in favor of the U shaped tail dependence hypothesis. But the goodness-of-fit test fails to reject the standard Gaussian Copula model, which can be due to power of the tests, sampling error, and/or relatively weak tail dependence over the sample years. We conclude that existing RMA rate-setting methods are deficient.
    Keywords: actuarial fairness, crop insurance, Gaussian copula, reinsurance, systemic risk, Crop Production/Industries, Risk and Uncertainty, G12, H2, Q18.,
    Date: 2014

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