nep-ias New Economics Papers
on Insurance Economics
Issue of 2014‒12‒24
eight papers chosen by
Soumitra K. Mallick
Indian Institute of Social Welfare and Business Management

  1. Work and tax evasion incentive effects of social insurance programs. Evidence from an employment-based benefit extension By Marcelo Bérgolo; Guillermo Cruces
  2. Universal Basic Income versus Unemployment Insurance By Alice Fabre; Stéphane Pallage; Christian Zimmermann
  3. Natural Disasters in MENA : A Regional Overview By Franck Bousquet
  4. Front-loading the Payment of Unemployment Benefits By Etienne Lalé
  5. “They do know what they are doing ... at least most of them.†Asymmetric Information in the (private) Disability Insurance* By Spindler, M.;
  6. AIG in Hindsight By McDonald, Robert; Paulson, Anna L.
  7. Wie wirkt sich das Niedrigzinsumfeld auf die Solvabilität der deutschen Lebensversicherer aus? By Kablau, Anke; Weiß, Matthias
  8. Can Unemployment Insurance Spur Entrepreneurial Activity? By Johan Hombert; Antoinette Schoar; David Sraer; David Thesmar

  1. By: Marcelo Bérgolo (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía); Guillermo Cruces (CEDLAS-UNLP)
    Abstract: This article studies how social insurance programs shape individual’s incentives to take up registered employment and to report earnings to the tax authorities. The analysis is based on a social insurance reform in Uruguay that extended healthcare coverage to the dependent children of registered private/sector workers. The identification strategy relies on a comparison between individuals with and without dependent children before and after the reform. The reform increased benefit-eligible registered employment by 1.6 percentage points (about 5 percent above the prereform level), mainly due to an increase in labor force participation rather than to movement from unregistered to registered employment. The shift was greater for parents with younger children and for cohabiting adults whose partners’ jobs did not provide the couples’ children with access to the benefit. Finally, the reform increased the incidence of underreporting of salaried earnings by about 4 percentage points (25 percent higher than the pre-reform level), mostly for workers employed at small firms. The increase in fiscal revenue from higher levels of registered employment was several orders of magnitude greater than the loss of revenue due to an increase in underreporting.
    Keywords: labor supply, work incentives, social insurance, tax evasion
    JEL: J22 H26 O17
    Date: 2014–12
  2. By: Alice Fabre (Aix Marseille University (Aix Marseille School of Economics, CNRS & EHESS)); Stéphane Pallage (ESG UQAM, CIRPEE and Département des Sciences Economiques, Université du Québec `a Montréal); Christian Zimmermann (Federal Reserve Bank of St-Louis, IZA, RCEA and CESifo)
    Abstract: In this paper we compare the welfare effects of unemployment insurance (UI) with an universal basic income (UBI) system in an economy with idiosyncratic shocks to employment. Both policies provide a safety net in the face of idiosyncratic shocks. While the unemployment insurance program should do a better job at protecting the unemployed, it suffers from moral hazard and substantial monitoring costs, which may threaten its usefulness. The universal basic income, which is simpler to manage and immune to moral hazard, may represent an interesting alternative in this context. We work within a dynamic equilibrium model with savings calibrated to the United States for 1990 and 2011, and provide results that show that UI beats UBI for insurance purposes because it is better targeted towards those in need.
    Keywords: universal basic income, idiosyncratic shocks, unemployment insurance, heterogeneous agents, Moral Hazard
    JEL: E24 D7 J65
    Date: 2014–11–14
  3. By: Franck Bousquet
    Keywords: Insurance and Risk Mitigation Urban Development - Hazard Risk Management Environment - Natural Disasters Conflict and Development - Disaster Management Health, Nutrition and Population - Population Policies Finance and Financial Sector Development
    Date: 2013–09
  4. By: Etienne Lalé
    Abstract: We study the effects of front-loading the payment of unemployment benefits in general equilibrium economies with imperfect labor and insurance markets, focusing on the trade-off between improved re-employment rates and the potential welfare losses accruing from consumption-smoothing problems. The calibration to U.S. data shows that these losses are large, enough to offset most gains from front-loading the benefit system. The nature of labor market frictions – i.e. stemming from workers’ search efforts or firms’ vacancy posting – changes the underlying mechanisms, but not the overall welfare figures. We discuss robustness to changing the generosity, duration and eligibility of unemployment insurance.
    Keywords: Unemployment Insurance, Precautionary Savings, Labor-Market Frictions, Welfare Effect.
    JEL: E21 I38 J63 J65
    Date: 2014–12
  5. By: Spindler, M.;
    Abstract: In this paper we analyze asymmetric information in the (private) disability insurance, which has not been analyzed before in the literature, but covers one of the most important risks faced by individuals in modern society, namely the loss of human capital. We show that there is asymmetric information, but the extent depends on the amount of coverage. Most importantly, the test with ‘unused’ observables allows us also to establish the existence of adverse selection which is of importance for contract design and public policy. Moreover, the option of choosing an annual adjustment of the insured sum, which is not used for risk classification, has strong predictive power both for the occurrence of an accident and the chosen coverage, although it should be irrelevant from the point of theory. This result shows new ways to design contracts and variable selection for risk classification. In contrast to most previous studies, we also explicitly take into consideration unobserved heterogeneity by applying finite mixture models and so called ‘unused’ observables.
    Keywords: asymmetric information; disability insurance; accident insurance; unused observables; positive correlation; finite mixture model;
    JEL: D82 G22 C12 C14
    Date: 2014–08
  6. By: McDonald, Robert (Federal Reserve Bank of Chicago); Paulson, Anna L. (Federal Reserve Bank of Chicago)
    Abstract: The near-failure on September 16, 2008, of American International Group (AIG) was an iconic moment in the financial crisis. The decision to rescue AIG was controversial at the time and remains so. Large bets on real estate pushed AIG to the brink of bankruptcy. In one case, AIG used securities lending to transform insurance company assets into residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs), ultimately losing at least $21 billion and threatening the solvency of the life insurance companies. AIG also sold insurance on multi-sector CDOs, backed by real estate assets, ultimately losing more than $30 billion. These activities were apparently motivated by a belief that AIG’s real estate bets would not suffer defaults and were “money-good.” We find that these securities have in fact suffered write-downs and that the stark “money-good” claim can be rejected.
    Keywords: American International Group (AIG); Bankruptcy; Insurance
    JEL: G22 G23
    Date: 2014–10–22
  7. By: Kablau, Anke; Weiß, Matthias
    Abstract: Die Lebensversicherer sind von den Auswirkungen des Niedrigzinsumfelds unmittelbar betroffen. Damit sie die zugesicherten Garantien erfüllen können, müssen sie unter Umständen Eigenmittel aufwenden. Dies ist dann der Fall, wenn die von den Unternehmen festgelegte Überschussbeteiligung oder sogar die garantierten Leistungen nicht mehr aus den laufenden Erträgen erwirtschaftet werden können. Dadurch kann ihre Solvabilität gefährdet sein. Mit Hilfe einer Szenarioanalyse wird untersucht, zu welchem Zeitpunkt die deutschen Lebensversicherer aufgrund des Niedrigzinsumfelds die derzeit gültigen Eigenmittelanforderungen nach Solvency I nicht mehr erfüllen können. Im Gegensatz zur übrigen Literatur in diesem Bereich kann für die Analyse auf regulatorische Einzeldaten von 85 deutschen Lebensversicherern zurückgegriffen werden. Die Untersuchung zeigt, dass bereits in einem milden Stressszenario zwölf Lebensversicherer mit einen Marktanteil von rund 14% bis zum Jahr 2023 die Eigenmittelanforderungen nicht mehr erfüllen könnten. Unter verschärften Stressbedingungen, insbesondere wenn auch die Renditen auf andere Anlagenverstärkt unter Druck gerieten, würden 32 Unternehmen die Eigenmittelanforderungen nach Solvency I nicht mehr erfüllen. Dies weist auf ein Gefährdungspotenzial für die Solvabilität der Lebensversicherungsbranche hin.
    Abstract: Life insurance companies are affected directly by the impact of the low-interestrate environment. To fulfil promised guarantees they may be forced to tap into their own funds, say if the current income generated is no longer sufficient to cover the policyholders' profit participation share as defined by the enterprises or even guaranteed benefits. They may then find themselves in a position in which their solvency is at risk. A scenario analysis is used to examine the stage at which German life insurers would no longer be able to fulfil the currently prevailing Solvency I own funds requirements owing to the low-interest-rate environment. In contrast to other literature in this field of research we use prudential individual data from 85 German life insurers. Even in a mild stress scenario 12 life insurers, with a combined market share of some 14%, would no longer be able to fulfil the own funds requirements by 2023. Under more severe stress conditions, especially if yields on investments were also to come under pressure, 32 enterprises would no longer be able to meet the Solvency I own funds requirements. This points to a potential solvency risk in the life insurance industry.
    Keywords: life insurance,low-interest rate environment,financial stability
    JEL: G17 G22 G28
    Date: 2014
  8. By: Johan Hombert; Antoinette Schoar; David Sraer; David Thesmar
    Abstract: We study a large-scale French reform that provided generous downside insurance for unemployed individuals starting a business. We study whether this reform affects the composition of people who are drawn into entrepreneurship. New firms started in response to the reform are, on average, smaller, but have similar growth expectations and education levels compared to start-ups before the reform. They are also as likely to survive or to hire. In aggregate, the effect of the reform on employment is largely offset by large crowd-out effects. However, because new firms are more productive, the reform has the impact of raising aggregate productivity. These results suggest that the dispersion of entrepreneurial abilities is small in the data, so that the facilitation of entry leads to sizable Schumpeterian dynamics at the firm-level.
    JEL: G3 H25 J65
    Date: 2014–11

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