nep-ias New Economics Papers
on Insurance Economics
Issue of 2014‒12‒29
fifteen papers chosen by
Soumitra K. Mallick
Indian Institute of Social Welfare and Business Management

  1. Basic Versus Supplementary Health Insurance : Moral Hazard and Adverse Selection By Boone, J.
  2. Limited Deposit Insurance Coverage and Bank Competition By Shy, Oz; Stenbacka, Rune; Yankov, Vladimir
  3. The Tangled Web of Agricultural Insurance: Evaluating the Impacts of Government Policy By Jason Pearcy; Vincent Smith
  4. Basic versus supplementary health insurance: the role of cost effectiveness and prevalence By Boone, Jan
  5. The Impact of Health Insurance on Stockholding: A Regression Discontinuity Approach By Christelis, Dimitris; Georgarakos, Dimitris; Sanz-de-Galdeano, Anna
  6. High Marginal Tax Rates on the Top 1%? Lessons from a Life Cycle Model with Idiosyncratic Income Risk By Kindermann, Fabian; Krueger, Dirk
  7. Church Membership and Social Insurance: Evidence from the American South By Philipp Ager; Casper Worm Hansen; Lars Lønstrup
  8. Hearing on the Impact of the Affordable Care Act (ACA) Employer Mandate's Definition of Full-Time Employee on Jobs and Opportunities By Lanhee Chen
  9. Human Capital Risk, Contract Enforcement, and the Macroeconomy By Krebs, Tom; Kuhn, Moritz; Wright, Mark L. J.
  10. The Double Role of Ethnic Heterogeneity in Explaining Welfare-State Generosity By Markus Jantti; Gerald Jaynes; John E. Roemer
  11. Macroinsurance for Microenterprises: A Randomized Experiment in Post-Revolution Egypt By McKenzie, David
  12. Living with the Merapi Volcano: Risks and Disaster Microinsurance By Aloysius G. Brata; Piet Rietveld; Henri L.F. de Groot; Budy P. Resosudarmo; Wouter Zant
  13. The determinants of annuitization: evidence from Sweden By Hagen, Johannes
  14. Reserve-Dependent Surrender By Kamille Sofie T{\aa}gholt Gad; Jeppe Juhl; Mogens Steffensen
  15. Group Lending Without Joint Liability By Thiemo Fetzer; Maitreesh Ghatak; Jonathan de Quidt

  1. By: Boone, J. (Tilburg University, Center For Economic Research)
    Abstract: This paper introduces a tractable model of health insurance with both moral hazard and adverse selection. We show that government sponsored universal basic insurance should cover treatments with the biggest adverse selection problems. Treatments not covered by basic insurance can be covered on the private supplementary insurance market. Surprisingly, the cost effectiveness of a treatment does not affect its priority to be covered by basic insurance.
    Keywords: universal basic health insurance; voluntary supplementary insurance; public vs private insurance; adverse selection; moral hazard; cost effectiveness
    JEL: I13 D82 H51
    Date: 2014
  2. By: Shy, Oz (Federal Reserve Bank of Boston); Stenbacka, Rune (Hanken School of Economics); Yankov, Vladimir (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: Deposit insurance designs in many countries place a limit on the coverage of deposits in each bank. However, no limits are placed on the number of accounts held with different banks. Therefore, under limited deposit insurance, some consumers open accounts with different banks to achieve higher or full deposit insurance coverage. We compare three regimes of deposit insurance: No deposit insurance, unlimited deposit insurance, and limited deposit insurance. We show that limited deposit insurance weakens competition among banks and reduces total welfare relative to no or unlimited deposit insurance.
    Keywords: Limited deposit insurance coverage; deposit rates; bank competition
    JEL: G21
    Date: 2014–10–15
  3. By: Jason Pearcy (Montana State University); Vincent Smith (Montana State University)
    Abstract: This paper examines the effects of changes in major elements of the U.S. federal crop insurance program on the structure of the agricultural insurance industry. We model the interactions between farmers, insurance agents and insurance companies. Two symmetric equilibria are determined: one with competitive insurance companies and one where insurance companies form a collusive monopsony. We evaluate how marginal changes in government policy (changes in the premium subsidy rate, A&O subsidy rate, and loading factor) affect the insurance premium rate, agent compensation rates, agent effort levels, and market demand for crop insurance. Conditional on no prior government policy, farmers prefer a marginal increase in the premium subsidy rate. This change has the lowest associated net social cost, but is the policy least preferred by insurance companies. The insurance companies’ most preferred policy is a marginal increase in the A&O subsidy rate, which has the highest associated net social cost, the highest cost to the government, and does not benefit farmers. We also evaluate the consequences of changes in crop prices. If the market for insurance agent services is competitive, then a change in crop prices does not change agent compensation rates, but otherwise the agent compensation rate will change. This result suggests an empirical test regarding insurance company market performance.
    Keywords: Crop Insurance, Agriculture Subsidy, Vertical Restraints
    JEL: Q18 H53 L10
    Date: 2014–07–29
  4. By: Boone, Jan
    Abstract: In a model where patients face budget constraints that make some treatments unaffordable, we ask which treatments should be covered by universal basic insurance and which by private voluntary insurance. We argue that both cost effectiveness and prevalence are important if the government wants to maximize the health gain that it gets from its health budget. In particular, basic insurance should cover treatments that are used by people who at the margin buy treatments that are highly cost effective. This is not the same as covering treatments that are themselves highly cost effective
    Keywords: access to care; cost effectiveness; public vs private insurance; universal basic health insurance; voluntary supplementary insurance
    JEL: D82 H51 I13 I14
    Date: 2014–11
  5. By: Christelis, Dimitris (University of Naples Federico II); Georgarakos, Dimitris (Goethe University Frankfurt); Sanz-de-Galdeano, Anna (Universitat Autònoma de Barcelona)
    Abstract: Using data from the US Health and Retirement Study, we study the causal effect of increased health insurance coverage through Medicare and the associated reduction in health-related background risk on financial risk-taking. Given the onset of Medicare at age 65, we identify our effect of interest using a regression discontinuity approach. We find that getting Medicare coverage induces stockholding for those with at least some college education, but not for their less-educated counterparts. Hence, our results indicate that a reduction in background risk induces financial risk-taking in individuals for whom informational and pecuniary stock market participation costs are relatively low.
    Keywords: health insurance, Medicare, stockholding, regression discontinuity, household finance
    JEL: D14 I13 G11
    Date: 2014–11
  6. 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: income inequality; progressive taxation; social insurance; top 1%
    JEL: E62 H21 H24
    Date: 2014–10
  7. By: Philipp Ager (Department of Business and Economics, University of Southern Denmark.); Casper Worm Hansen (Department of Economics, Copenhagen University); Lars Lønstrup (Department of Business and Economics, University of Southern Denmark.)
    Abstract: We examine the effect of increased demand for social insurance on church membership.Our empirical strategy exploits the differential impact of the Great Mississippi Flood of 1927 across counties to identify a shock to the demand for social insurance. We find that flooded counties experienced a significant increase in church membership. Consistent with economic theories about determinants of membership of religious organizations, our result suggests that local churches provided ex-post insurance for the needy and in return gained new members.
    Keywords: Religion, Informal Insurance, Club Goods, Natural Disasters
    JEL: D70 E20 H40
    Date: 2014–11–24
  8. By: Lanhee Chen
    Abstract: This testimony before the Committee on Ways and Means before the United States House of Representatives examines the effect of the Affordable Care Act's 30-Hour Rule on employer-based health insurance coverage in the workforce.
    Date: 2014–01
  9. By: Krebs, Tom (University of Mannheim); Kuhn, Moritz (Dept. of Economics, Adenauer); Wright, Mark L. J. (Federal Reserve Bank of Chicago)
    Abstract: We use data from the Survey of Consumer Finance and Survey of Income Program Participation to show that young households with children are under-insured against the risk that an adult member of the household dies. We develop a tractable macroeconomic model with human capital risk, age-dependent returns to human capital investment, and endogenous borrowing constraints due to the limited pledgeability of human capital (limited contract enforcement). We show analytically that, consistent with the life insurance data, in equilibrium young households are borrowing constrained and under-insured against human capital risk. A calibrated version of the model can quantitatively account for the life-cycle variation of life-insurance holdings, financial wealth, earnings, and consumption inequality observed in the US data. Our analysis implies that a reform that makes consumer bankruptcy more costly, like the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, leads to a substantial increase in the volume of both credit and insurance.
    Keywords: Human Capital Risk; Limited Enforcement; Life Insurance
    JEL: D52 E21 E24 J24
    Date: 2014–10–22
  10. By: Markus Jantti (Stockholm University); Gerald Jaynes (Dept. of Economics, Yale University); John E. Roemer (Dept. of Political Science & Cowles Foundation, Yale University)
    Abstract: Based on theoretical models of budget-balanced social insurance and individual choice, we argue that in addition to the well-known empathy mechanism whereby ethnic heterogeneity undermines sentiments of solidarity among a citizenry to reduce welfare generosity, population heterogeneity affects the generosity of a polity's social insurance programs through another distinct mechanism, political conflict. Ethnic heterogeneity likely intensifies political conflict and reduces welfare generosity because heterogeneity of unemployment risk makes it more difficult to achieve social consensus concerning tax-benefit programs. Utilizing two separate regression analyses covering highly diverse polities, the 50 U.S. states and District of Columbia (CPS data), and 13 OECD countries (LIS data), we find strong evidence that empirically distinct empathy and political conflict effects on unemployment insurance programs characterize contemporary politics. Our findings suggest existing analyses of the negative relationship between ethnic heterogeneity and the size of the welfare state likely over- or underestimate the empathy effect. For example, perhaps surprisingly, had our analysis of US data omitted a measure of unemployment dispersion, the negative effect of ethnic fractionalization would have been underestimated.
    Keywords: Political economy, Welfare state, Social insurance, Ethnic fractionalization
    JEL: H53
    Date: 2014–12
  11. By: McKenzie, David
    Abstract: Firms in many developing countries cite macroeconomic instability and political uncertainty as major constraints to their growth. Economic theory suggests uncertainty can cause firms to delay investments until uncertainty is resolved. We conduct a randomized experiment in post-revolution Egypt to measure the impact of insuring microenterprises against macroeconomic and political uncertainty. Demand for macroeconomic shock insurance was high; 36.7 percent of microentrepreneurs in the treatment group purchased insurance. However, purchasing insurance does not change the likelihood that a business takes a new loan, the size of the loan, or how they invest this loan. We attribute this lack of effect to microenterprises largely investing in inventories and raw materials rather than irreversible investments like equipment. These results suggest that, contrary to what they profess, macroeconomic and political risk is not inhibiting the investment behavior of microenterprises. However, insurance may still be of value to them to help cope with shocks when they do occur, but we are unable to examine this dimension as our insurance product did not pay out over the course of the pilot.
    Keywords: Egypt; insurance; microenterprises; political instability; risk; uncertainty
    JEL: C93 D22 G22 O12 O16
    Date: 2014–10
  12. By: Aloysius G. Brata; Piet Rietveld; Henri L.F. de Groot; Budy P. Resosudarmo; Wouter Zant
    Abstract: This paper investigates the influence of perception of natural disaster risks on the probability of local people to participate in a hypothetical disaster microinsurance. We use household data for a specific disaster risk of the Mount Merapi in Java. We find that respondent's perception of natural disaster risk is in line with experts' risk assessment. Estimation results show that this perception positively influences the interest to participate in disaster microinsurance. We also find that insurance literacy has a strong positive relationship with the respondent's interest to participate in disaster microinsurance.
    Keywords: perception of risks, eruptions, microinsurance, Merapi
    JEL: Q54 G21 D12
    Date: 2014
  13. By: Hagen, Johannes (Uppsala Center for Fiscal Studies)
    Abstract: This paper uses unique micro data from a Swedish occupational pension plan to study the determinants of annuitization. The data is merged with national administrative data to create a large data set with rich individual background characteristics. The pension can either be withdrawn as a life annuity or during a fixed number of years with a minimum of five years. Low accumulation of assets is strongly associated with the choice of the 5-year payout. Consistent with the predictions of a life-cycle model, retirees who choose the 5-year payout are in worse health and exhibit higher ex-post mortality rates than annuitants. I also find that the parents of annuitants live longer than the parents of those who choose the 5- year payout. This suggests that individuals form expectations about how long they are likely to live based on the life-span patterns of their parents and take this into account when they decide whether to annuitize or not.
    Keywords: Annuity puzzle; Longevity insurance; Occupational pension; Adverse selection
    JEL: D91 H55 J26 J32
    Date: 2014–11–14
  14. By: Kamille Sofie T{\aa}gholt Gad; Jeppe Juhl; Mogens Steffensen
    Abstract: We study the modelling and valuation of surrender and other behavioural options in life insurance and pension. We place ourselves in between the two extremes of completely arbitrary intervention and optimal intervention by the policyholder. We present a method that is based on differential equations and that can be used to approximate contract values when policyholders exhibit optimal behaviour. This presentation includes a specification of sufficient conditions for both consistency of the model and convergence of the contract values. When not going to the limit in the approximation we obtain a technique for balancing off arbitrary and optimal behaviour in a simple, intuitive way. This leads to our suggestions for intervention models where one single parameter reflects the extent of rationality among policyholders. In a series of numerical examples we illustrate the impact of the rationality parameter on the contract values.
    Date: 2014–12
  15. By: Thiemo Fetzer; Maitreesh Ghatak; Jonathan de Quidt
    Abstract: This paper contrasts individual liability lending with and without groups to joint liability lending. By doing so, we shed light on an apparent shift away from joint liability lending towards individual liability lending by some microfinance institutions First we show that individual lending with or without groups may constitute a welfare improvement so long as borrowers have sufficient social capital to sustain mutual insurance. Second, we explore how a purely mechanical argument in favor of the use of groups - namely lower transaction costs - may actually be used explicitly by lenders to encourage the creation of social capital. We also carry out some simulations to evaluate quantitatively the welfare impact of alternative forms of lending, and how they relate to social capital.
    Keywords: microfinance, group lending, joint liability, mutual insurance
    JEL: G11 G21 O12 O16
    Date: 2013–07

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