nep-ias New Economics Papers
on Insurance Economics
Issue of 2015‒09‒11
fourteen papers chosen by
Soumitra K. Mallick
Indian Institute of Social Welfare and Business Management

  1. Potential Effects of the Affordable Care Act on Loss Calculations By Joshua Congdon-Hohman; Victor Matheson
  2. Assessing Incentives for Adverse Selection in Health Plan Payment Systems By Timothy J. Layton; Randall P. Ellis; Thomas G. McGuire
  3. Insurer Competition in Health Care Markets By Ho, Katherine; Lee, Robin S.
  4. Regulation of Insurance with Adverse Selection and Switching Costs: Evidence from Medicare Part D. By Maria Polyakova
  5. Narrow Framing and Long-Term Care Insurance By Daniel Gottlieb; Olivia S. Mitchell
  6. An Insurance-Led Response to Climate Change By Anthony J. Webster; Richard H. Clarke
  7. On the Optimal Provision of Social Insurance: Progressive Taxation versus Education Subsidies in General Equilibrium By Krueger, Dirk; Ludwig, Alexander
  8. The effects of Contingent Convertible (CoCo) bonds on insurers' capital requirements under Solvency II By Gründl, Helmut; Niedrig, Tobias
  9. Bosnia and Herzegovina: Financial Sector Assessment Program - Insurance Sector—Technical Note By International Monetary Fund. Monetary and Capital Markets Department
  10. United States: Financial Sector Assessment Program-Review of the Key Attributes of Effective Resolution Regimes for the Banking and Insurance Sectors-Technical Note By International Monetary Fund. Monetary and Capital Markets Department
  11. Ireland: Report on Observance of Standards and codes (ROSC) By International Monetary Fund. Monetary and Capital Markets Department
  12. Public Program Sensitivity: Using ROC curves to characterize classification efficiency of State Medicaid Systems By Lisa Frazier
  13. Towards a fiscal union? On the acceptability of a fiscal transfer system in the eurozone By Hebous, Shafik; Weichenrieder, Alfons J.
  14. Assessing the Usability of Encounter Data for Enrollees in Comprehensive Managed Care 2010-2011 By Vivian L.H. Byrd; Allison Hedley Dodd

  1. By: Joshua Congdon-Hohman (Department of Economics, College of the Holy Cross); Victor Matheson (Department of Economics, College of the Holy Cross)
    Abstract: This paper examines how the Affordable Care Act might affect the analysis of future care costs in medical malpractice, product or accident liability, or workplace injury cases. Prior to the ACA, it was reasonable to presume that a great deal of a victim’s future health care costs would be paid for out-of-pocket as there was little guarantee that the plaintiff would have access to affordable insurance. Since January 2014, however, a plaintiff can obtain insurance that will cover a significant portion of any future medical costs. This paper examines the basic structure of the ACA, how it has affected health insurance markets, and provides examples of how the ACA might be introduced into an analysis of future life care costs. In addition, case law regarding the application of the ACA is examined as well as arguments for and against considering the availability of health insurance in medical litigation. Finally, additional details regarding the application of the ACA by the practicing forensic economist are addressed. Length: 20 pages
    Keywords: Affordable Care Act, forensic economics, tort awards, lawsuits, health insurance
    JEL: I13 I18 K41
    Date: 2015–09
  2. By: Timothy J. Layton; Randall P. Ellis; Thomas G. McGuire
    Abstract: Health insurance markets face two forms of adverse selection problems. On the demand side, adverse selection leads to plan price distortions and inefficient sorting of consumers across health plans. On the supply side, adverse selection creates incentives for plans to inefficiently distort benefits to attract profitable enrollees. These problems can be addressed by features of health plan payment systems such as reinsurance, risk adjustment, and premium categories. In this paper, we develop Harberger- type measures of the efficiency consequences of price and benefit distortions under a given payment system. Our measures are valid, that is, based on explicit economic models of adverse selection. Our measures are complete, in that they are able to incorporate multiple features of plan payment systems. Finally, they are practical, in that they are based on the ex ante data available to regulators and researchers during the design phase of payment system development, prior to observing actual insurer and consumer behavior. After developing the measures, we illustrate their use by comparing the performance of the payment system planned for implementation in the ACA Marketplaces in 2017 to several policy alternatives. We show that, in protecting against both types of selection problems, a payment system that incorporates reinsurance and prospective risk adjustment out-performs the planned payment system which includes only concurrent risk adjustment.
    JEL: I11 I13 I18
    Date: 2015–09
  3. By: Ho, Katherine; Lee, Robin S.
    Abstract: We analyze the impact of insurer competition on health care markets using a model of premium setting, hospital-insurer bargaining, household demand for insurance, and individual demand for hospitals. Increased insurer competition may lead to lower premiums; it may also increase health providers' leverage to negotiate higher prices, thereby mitigating premium reductions. We use detailed California admissions, claims, and enrollment data from a large benefits manager. We estimate our model and simulate the removal of an insurer from consumers' choice sets. Although premiums rise and annual consumer surplus falls by $50-120 per capita, hospital prices and spending fall in certain markets as remaining insurers negotiate lower rates. Overall, the impact on negotiated prices is heterogeneous, with increases or decreases of up to 15% across markets. We conclude that insurer competition can increase consumer surplus but also generate a redistribution of rents across hospitals and greater medical spending in certain markets.
    Keywords: bargaining; health care markets; vertical contracts
    JEL: I11 L10
    Date: 2015–09
  4. By: Maria Polyakova
    Abstract: I take advantage of regulatory and pricing dynamics in Medicare Part D to empirically explore interactions among adverse selection, switching costs, and regulation. I first document novel evidence of adverse selection and switching costs within Part D using detailed administrative data. I then estimate a contract choice and pricing model in order to quantify the importance of switching costs for risk-sorting, and for policies that may affect risk sorting. I first find that in Part D, switching costs help sustain an adversely-selected equilibrium and are likely to mute the ability of ACA policies to improve risk allocation across contracts, leading to higher premiums for some enrollees. I then estimate that, overall, decreasing the cost of active decision-making in the Part D environment could lead to a substantial gain in consumer surplus of on average $400-$600 per capita, which is around 20%-30% of average annual per capita drug spending.
    JEL: H0 H50 H51 I1 I13 L51 L78
    Date: 2015–09
  5. By: Daniel Gottlieb (The Wharton School, University of Pennsylvania); Olivia S. Mitchell (The Wharton School, University of Pennsylvania)
    Abstract: We propose a model of narrow framing in insurance and test it using data from a new module we designed and fielded in the Health and Retirement Study. We show that respondents subject to narrow framing are substantially less likely to buy long-term care insurance than average. This effect is much larger than the effects of risk aversion or adverse selection, and it offers a new explanation for why people underinsure their later-life care needs.
    Date: 2015–06
  6. By: Anthony J. Webster; Richard H. Clarke
    Abstract: Climate change is widely expected to increase weather related damage and the insurance claims that result from it. This has the undesirable consequence of increasing insurance costs, in a way that is independent of a customer's contribution to the causes of climate change. This is unfortunate because insurance provides a financial mechanism that mitigates some of the consequences of climate change, allowing damage from increasingly frequent events to be repaired. We observe that the insurance industry could reclaim any increase in claims due to climate change, by increasing the insurance premiums on energy producers for example, without needing government intervention or a new tax. We argue that this insurance-led levy must acknowledge both present carbon emissions and a modern industry's carbon inheritance, that is, to recognise that fossil-fuel driven industrial growth has provided the innovations and conditions needed for modern civilisation to exist and develop. The increases in premiums would initially be small, and will require an event attribution (EA) methodology to determine their size. We propose that the levies can be phased in as the science of event attribution becomes sufficiently robust for each claim type, to ultimately provide a global insurance-led response to climate change.
    Date: 2015–09
  7. By: Krueger, Dirk; Ludwig, Alexander
    Abstract: In this paper we compute the optimal tax and education policy transition in an economy where progressive taxes provide social insurance against idiosyncratic wage risk, but distort the education decision of households. Optimally chosen tertiary education subsidies mitigate these distortions. We highlight the quantitative importance of general equilibrium feedback effects from policies to relative wages of skilled and unskilled workers: subsidizing higher education increases the share of workers with a college degree thereby reducing the college wage premium which has important redistributive benefits. We also argue that a full characterization of the transition path is crucial for policy evaluation. We find that optimal education policies are always characterized by generous tuition subsidies, but the optimal degree of income tax progressivity depends crucially on whether transitional costs of policies are explicitly taken into account and how strongly the college premium responds to policy changes in general equilibrium.
    Keywords: education subsidy; progressive taxation; transitional dynamics
    JEL: E62 H21 H24
    Date: 2015–09
  8. By: Gründl, Helmut; Niedrig, Tobias
    Abstract: The Liikanen Group proposes contingent convertible (CoCo) bonds as instruments to enhance financial stability in the banking industry. Especially life insurance companies could serve as CoCo bond holders as they are already the largest purchasers of bank bonds in Europe. The growing number of banks issuing CoCo bonds leads to a rising awareness of these hybrid securities among life insurers as they are increasingly looking for higher-yielding investments into bond-like asset classes during the current low interest rate period. Our contribution provides an insight for life insurance companies to understand the effects of holding CoCo bonds as implied by the Solvency II standards that will become effective by 2016.
    Keywords: Life insurance companies,Coco bonds,Solvency II
    Date: 2015
  9. By: International Monetary Fund. Monetary and Capital Markets Department
    Abstract: EXECUTIVE SUMMARY The insurance sector in Bosnia and Herzegovina (BiH) has been growing in recent years but remains small. The total assets of the insurance companies stood at KM 1.2 billion, or about 5 percent of the financial sector assets as of end-2013. Insurance penetration is low at about 2.1 percent of GDP, resulting in vast uninsured risks. The sector collected KM 527 million in premiums in 2013, a 4.3 percent increase from a year earlier. The nonlife insurance sector collects over 80 percent of the insurance premium, including about two-thirds from the mandatory Motor Third Party liability insurance (MTPL). About half of insurance sector assets are held in bank deposits. Ten insurance companies, accounting for 40 percent of the nonlife market, have low solvency margins and may require supervisory action in the near future. The sector’s resilience could be understated since the Solvency I capital requirements do not incorporate all the relevant risks. While liquidity is not a major risk given the high share of bank deposits in assets, a few insurers are heavily exposed to real estate and hold large amounts of receivables. Life insurance is relatively new and has low interest rate risk. MTPL insurance remains under pressure as market participants are not always compliant with the statutory tariff. In some cases, competition has led to insufficient premiums for the risks assumed. Market participants are bypassing regulations for tariffs and commissions. Technical provisions depend heavily on the views of appointed actuaries working for the companies while the regulations do not call for external actuarial audits. Actuarial reviews are carried out but of independent reviews of technical provisions are necessary. Insurance regulation has improved in both entities but the level of harmonization between entities and with the EU directives is still insufficient. It is expected that the Insurance Agency of Bosnia and Herzegovina (BiH-IA) will enhance the harmonization of entity-level regulations within BiH as well as with the EU insurance directives. While the main laws regulating insurance activities: the Insurance Law, Contract Law, the Law on Intermediaries and the MTPL law do not have significant disparities across the entities there have been occasional differences in the legal framework as the amendments have been carried out at different times. The existing disparities and their implications on the effectiveness and decisiveness of the supervision are reflected in this assessment. Since the 2006 FSAP, each supervisory agency has shown some progress. The previous FSAP found the Insurance Supervision Agency in the Republika Srpska (RS-ISA) not operational. However, commendable progress has been achieved since then: the staff has been doubled and has a mix of professionals with legal and actuarial backgrounds; operational processes and internal controls, as well as supervisory and inspections manuals are in place. As a result, the RS-ISA is well positioned to supervise the market. The FBIH-ISA took over the function of the old Insurance Supervision agency (ISA). While the FBiH-ISA inherited a number of experienced staff, the legacy problems hindered a fresh turn-around for the new agency. Hence, the progress at the FBiH-ISA has been fairly limited.
    Keywords: Bosnia and Herzegovina;Financial Sector Assessment Program;Corporate governance;Insurance;Insurance regulations;Insurance supervision;Risk management;market, share, monetary fund, market structure
    Date: 2015–08–03
  10. By: International Monetary Fund. Monetary and Capital Markets Department
    Abstract: This Technical Note reviews the key attributes of effective resolution regimes for the banking and insurance sectors in the United States. The United States’ resolution regime for financial institutions has been significantly enhanced since the financial crisis. Over the past several years, the U.S. authorities have undertaken significant efforts to develop the capability to deploy the Orderly Liquidation Authority, if and when needed, to safeguard financial stability. Of particular importance is the development of the so-called single point of entry strategy, designed to take advantage of most systemically important financial institutions in the United States being organized under a holding company structure.
    Keywords: Banking sector;Bank resolution;Deposit insurance;Financial Sector Assessment Program;Insurance regulations;Insurance supervision;United States;insurance, insurance companies, holding company, financial institutions, financial stability
    Date: 2015–07–07
  11. By: International Monetary Fund. Monetary and Capital Markets Department
    Abstract: This paper discusses findings and recommendations of the Report on Observance of Standards and codes for Ireland. The Central Bank of Ireland (CBI) is the integrated financial supervisor in Ireland. As the primary regulator of the Irish financial system, CBI has overall responsibility for the supervision of insurers and insurance intermediaries authorized in Ireland. The authorities need to address the significant challenges faced by CBI in attracting and retaining supervisors and to enhance the CBI’s independence. CBI is also advised to review the supervisory risk appetite underpinning Probability Risk Impact Supervisory System, including potential reputational risks.
    Keywords: Bank supervision;Central banks;Insurance;Insurance supervision;Ireland;Reports on the Observance of Standards and Codes;insurers, risk, reinsurers, life insurers
    Date: 2015–05–13
  12. By: Lisa Frazier (John Glenn College of Public Affairs, the Ohio State University)
    Abstract: Despite being the largest single source of health care coverage in the US, Medicaid fails to capture all eligible citizens. This is a well-known problem among means-tested programs like Medicaid; discussions of take-up and churning attend to this failure. Cases of fraud in programmatic enrollments represent another classification failure in these systems. Reports on rates of fraud, take-up, and churn rarely acknowledge that such outcomes are ultimately features of the same tradeoff function: the sorting of citizens into benefit groups on the basis of membership to some a priori category. This research elucidates the implicit tradeoffs being made in the Medicaid citizen sorting mechanism by using administrative data to construct ROC curves for each State Medicaid system before and after the passage of the Affordable Care Act.
    Date: 2015–08–02
  13. By: Hebous, Shafik; Weichenrieder, Alfons J.
    Abstract: There is a large, but yet growing debate about the need to complement the European monetary union with a stronger fiscal union. This paper reviews the potential trade-offs between effectiveness, moral hazard problems, and permanent redistribution. In particular, we contribute to the question of how member states may be willing to enter into a stronger fiscal union if the evolution of this union may imply large redistribution under incomplete contracting. We discuss clawback mechanisms that have been suggested in the literature, but conclude that clawbacks are undesirable, as they would essentially destroy the insurance value of a fiscal union. Instead, we propose that a clearly defined exit option as a guarantee against involuntary redistribution can make entry into a stronger fiscal union less risky and hence more attractive for member states.
    Keywords: EMU,Eurozone,European unemployment insurance,fiscal transfers
    JEL: H1 H7
    Date: 2015
  14. By: Vivian L.H. Byrd; Allison Hedley Dodd
    Abstract: As growing numbers of Medicaid enrollees receive health benefits through comprehensive managed care (CMC), researchers and policymakers seeking to understand the service use of these enrollees must rely on encounter data that states receive from managed care plans.
    Keywords: Medicaid, Medicaid managed care, encounter data, encounter data quality and availability
    JEL: I
    Date: 2015–08–28

This nep-ias issue is ©2015 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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