nep-ias New Economics Papers
on Insurance Economics
Issue of 2015‒11‒07
fourteen papers chosen by
Soumitra K. Mallick
Indian Institute of Social Welfare and Business Management

  1. Why Do People Lapse Their Long-Term Care Insurance? By Wenliang Hou; Wei Sun; Anthony Webb
  2. Willingness to Pay for Crop Insurance Premium-A Study on Maize Farmers in India By Kiran, Shashi; Umesh, K.B.
  3. The Efficiency Consequences of Health Care Privatization: Evidence from Medicare Advantage Exits By Mark Duggan; Jonathan Gruber; Boris Vabson
  4. Measuring Health Insurance Benefits: The Case of People with Disabilities By Richard V. Burkhauser; Jeff Larrimore; Sean Lyons
  5. Expectations, Index Qualities and Basis Risks in Explaining Farmers' Pessimism in Purchasing Weather Index Insurance By Chen, Huang
  6. The Pros and Cons of Sick Pay Schemes: Testing for Contagious Presenteeism and Shirking Behavior By Stefan Pichler; Nicolas Ziebarth
  7. The Welfare Gains from Macro-Insurance Against Natural Disasters By Borensztein, Eduardo; Cavallo, Eduardo; Jeanne, Olivier
  8. A proposal for a federalized unemployment insurance mechanism for Europe By Leila E. Davis; Charalampos Konstantinidis; Yorghos Tripodis
  9. What Does a Deductible Do? The Impact of Cost-Sharing on Health Care Prices, Quantities, and Spending Dynamics By Zarek C. Brot-Goldberg; Amitabh Chandra; Benjamin R. Handel; Jonathan T. Kolstad
  10. Formal and informal insurance: experimental evidence from Ethiopia By Berhane, Guush; Dercon, Stefan; Hill, Ruth; Taffesse, Alemayehu
  11. Certain and Uncertain Utility and Insurance Demand: Results From a Framed Field Experiment in Burkina Faso By Serfilippi, Elena; Carter, Michael; Guirkinger, Catherine
  12. On real growth and run-off companies in insurance ruin theory By Harri Nyrhinen
  13. Competing theories of risk preferences and the demand for crop insurance: Experimental evidence from Peru By Petraud, Jean; Boucher, Stephen; Carter, Michael
  14. Optimal Unemployment Insurance and Cyclical Fluctuations By Williams, Noah; Li, Rui

  1. By: Wenliang Hou; Wei Sun; Anthony Webb
    Abstract: Long-term care, including both nursing home and home health care, is a substantial financial risk for most retired households. Yet few buy long-term care insurance, and many who do let the policies lapse even after holding them for years. This brief summarizes a new study that shows more than one third of individuals with long-term care insurance at age 65 will lapse their policies before death, forfeiting all benefits. Economic theory predicts that individuals at high risk of needing care should retain coverage while those at low risk should lapse, but the data show the opposite pattern: people who subsequently use care are more likely to lapse, even though many have a good understanding of their relative risk of going into care. This brief seeks to explain why individuals lapse – specifically whether the decision reflects the financial burden of insurance premiums, a strategic calculation, or a deterioration in cognitive ability. The brief proceeds as follows. The first section presents data on lapse rates. The second section lays out alternative explanations for lapse rates. The third section tests these explanations by examining who lapses and then assesses the consequences of lapsing by exploring who uses long-term care. The final sec­tion concludes that two types of individuals are more likely to lapse: 1) those with low cognitive ability, who may lose the capacity to manage their finances; and 2) those with lower incomes and less wealth, who may find that their policy has become unaffordable.
    Date: 2015–10
  2. By: Kiran, Shashi; Umesh, K.B.
    Abstract: Agricultural activity is subject to a wide range of risks due to the variable economic and biophysical environment in which farming operates. Agriculture risks arise due to uncertainty over factors determining returns to agricultural production. Crop insurance is one of the risk mitigating strategies for farmers. The objective of the study was to estimate WTP by the rainfed maize farmres to crop insurance premium and also factors influencing their WTP. The study revealed that farmers were willing to pay 0.34 percent more premium than the prevailing rate to insure their crop. The average probability of WTP of farmers for crop insurance premium was 0.53. Age was the important factor influencing their WTP. It was observed that farmers' awareness about the products and procedures of crop insurance was poor. Hence, efforts should be made to increase the awareness and help farmers to take advantage of crop insurance.
    Keywords: Risk, Crop insurance, Premium, Willingness to pay, Agricultural Finance, Crop Production/Industries,
    Date: 2015
  3. By: Mark Duggan; Jonathan Gruber; Boris Vabson
    Abstract: There is considerable controversy over the use of private insurers to deliver public health insurance benefits. We investigate the efficiency consequences of patients enrolling in Medicare Advantage (MA), private managed care organizations that compete with the traditional fee-for-service Medicare program. We use exogenous shocks to MA enrollment arising from plan exits from New York counties in the early 2000s, and utilize unique data that links hospital inpatient utilization to Medicare enrollment records. We find that individuals who were forced out of MA plans due to plan exit saw very large increases in hospital utilization. These increases appear to arise through plans both limiting access to nearby hospitals and reducing elective admissions, yet they are not associated with any measurable reduction in hospital quality or patient mortality.
    JEL: H51 I13 I18 L33
    Date: 2015–10
  4. By: Richard V. Burkhauser; Jeff Larrimore; Sean Lyons
    Abstract: Since 2012 the Congressional Budget Office has included an estimate of the market value of government-provided health insurance coverage in its measures of household income. We follow this practice for both public and private health insurance to capture the impact of greater access to government-provided health insurance for working-age people with disabilities, whose value rose in 2010 dollars from $11.7B in 1980 to $114.3B in 2012. We then consider the more general implications of incorporating estimates of the market price of insurance, equivalent to that provided by the government, into policy analyses in a post-Affordable Care Act world.
    JEL: D31 H24 I18 J31
    Date: 2015–10
  5. By: Chen, Huang
    Abstract: This paper attempts to explain why famers exhibit pessimism in purchasing Weather Index Insurance (WII). Three sources of the pessimism are identified: a) if insurers overestimate or farmers underestimate the possibility of future risks, the farmers tend to buy less WII coverage; b) the lower the quality of the index is, the less coverage the famers will purchase; c) the more their productive characteristics deviate from population mean, the higher basis risk they will have, resulting less coverage to be chosen. The second half of this paper empirically compares three kinds of weather indices in measuring long-run yield variation in China’s 26 provinces during 1951 – 2002, and justifies the theoretical findings from releasing the Quality Assumption by simulating hypothesized operations of WII in the last half century in China. The econometric and simulation results corroborate the critical role of the index quality in measuring yield variation and explain the pessimism.
    Keywords: Weather index insurance, Expectation, Index quality, Basis risk, Pessimism, China, Agricultural Finance, Farm Management,
    Date: 2015
  6. By: Stefan Pichler; Nicolas Ziebarth
    Abstract: This paper proposes a test for the existence and degree of contagious presenteeism and negative externalities in sickness insurance schemes. First, we theoretically decompose moral hazard into shirking and contagious presenteeism behavior and derive testable conditions. Then, we implement the test exploiting German sick pay reforms and administrative industry-level data on certiï¬ed sick leave by diagnoses. The labor supply adjustment for contagious diseases is signiï¬cantly smaller than for non-contagious diseases. Lastly, using Google Flu data and the staggered implementation of US sick leave reforms, we show that flu rates decrease after employees gain access to paid sick leave.
    Keywords: sickness insurance, paid sick leave, presenteeism, contagious diseases, infections, negative externalities, shirking, US, Germany
    JEL: I12 I13 I18 J22 J28 J32
    Date: 2015–10
  7. By: Borensztein, Eduardo; Cavallo, Eduardo; Jeanne, Olivier
    Abstract: This paper uses a dynamic optimization model to estimate the welfare gains that a small open economy can derive from insuring against natural disasters with catastrophe (CAT) bonds. We calibrate the model by reference to the risk of earthquakes, floods and storms in developing countries. We find that the countries most vulnerable to these risks would find it optimal to use CAT bonds for insurance only if the cost of issuing these bonds were significantly smaller than it is in the data. The welfare gains from CAT bonds range from small to substantial depending on how insurance affects the country's external borrowing constraint. The option of using CAT bonds may bring a welfare gain of several percentage points of annual consumption by improving external debt sustainability. These large gains disappear if the country can opportunistically default on its external debt.
    Keywords: CAT bonds; insurance; natural disaster
    JEL: F3 G22
    Date: 2015–11
  8. By: Leila E. Davis; Charalampos Konstantinidis; Yorghos Tripodis
    Abstract: The ongoing crisis in the Eurozone, together with growing evidence of structural imbalances, points to a role for new institutions to support a more stable EMU structure. As is well established in the context of monetary union when business cycles are not synchronized, a system of fiscal transfers can support monetary union. Unemployment insurance (UI) is, in particular, a key component of fiscal crisis management. UI supports household incomes during downturns, and also acts as an automatic stabilizer, thereby helping individual countries respond to asymmetric shocks. This paper proposes a `federalized’ EMU-level UI mechanism as one program that can contribute to a system of fiscal transfers in the EMU, and estimates the cost of the proposed system under different financing and eligibility scenarios. We find that, under a variety of reasonable institutional parameters, such a system is fiscally feasible with limited reason to expect adverse employment effects in member countries. We conclude that fiscal transfers extended via automatic stabilizers are a productive avenue towards a more stable Eurozone architecture.
    Keywords: Eurozone, unemployment insurance, fiscal transfers
    JEL: E51 E62
    Date: 2015–10
  9. By: Zarek C. Brot-Goldberg; Amitabh Chandra; Benjamin R. Handel; Jonathan T. Kolstad
    Abstract: Measuring consumer responsiveness to medical care prices is a central issue in health economics and a key ingredient in the optimal design and regulation of health insurance markets. We study consumer responsiveness to medical care prices, leveraging a natural experiment that occurred at a large self-insured firm which forced all of its employees to switch from an insurance plan that provided free health care to a non-linear, high deductible plan. The switch caused a spending reduction between 11.79%-13.80% of total firm-wide health spending ($100 million lower spending per year). We decompose this spending reduction into the components of (i) consumer price shopping (ii) quantity reductions (iii) quantity substitutions, finding that spending reductions are entirely due to outright reductions in quantity. We find no evidence of consumers learning to price shop after two years in high-deductible coverage. Consumers reduce quantities across the spectrum of health care services, including potentially valuable care (e.g. preventive services) and potentially wasteful care (e.g. imaging services). We then leverage the unique data environment to study how consumers respond to the complex structure of the high-deductible contract. We find that consumers respond heavily to spot prices at the time of care, and reduce their spending by 42% when under the deductible, conditional on their true expected end-of-year shadow price and their prior year end-of-year marginal price. In the first-year post plan change, 90% of all spending reductions occur in months that consumers began under the deductible, with 49% of all reductions coming for the ex ante sickest half of consumers under the deductible, despite the fact that these consumers have quite low shadow prices. There is no evidence of learning to respond to the true shadow price in the second year post-switch.
    JEL: D12 G22 H51 I11 I13
    Date: 2015–10
  10. By: Berhane, Guush; Dercon, Stefan; Hill, Ruth; Taffesse, Alemayehu
    Abstract: We examine the impact of formal insurance and informal risk-sharing institutions on welfare, and the complementarity between these forms of formal and informal insurance. As in a number of other studies, formal rainfall index insurance was offered to farmers. However in this study support to local risk sharing institutions—iddirs—was also provided to strengthen the extent to which they were able to insure members against idiosyncratic shocks. Access to insurance and support to iddirs was randomized across villages during two agricultural seasons. Results show that formal insurance has a significant impact on encouraging productive investments, particularly investments in fertilizer, replicating the results found in Ghana in Karlan et al (2013). Strengthening risk-sharing through iddirs increases formal insurance demand (consistent with the results in Dercon et al 2013) and some welfare outcomes, but does not cause insurance to have any additional effect on productive outcomes. There is also some evidence that strengthening risk-sharing through local institutions reduces individual bilateral transfers.
    Keywords: index insurance, risk sharing institutions, impact, International Development, Risk and Uncertainty,
    Date: 2015
  11. By: Serfilippi, Elena; Carter, Michael; Guirkinger, Catherine
    Abstract: In this paper, we argue that discontinuous preference over certain and uncertain outcomes (as in Andreoni and Sprenger, 2009; 2012) have a dampening effect on the demand for insurance. The intuition is that if agents exhibit a disproportionate preference for certain outcomes, they would undervalue uncertain insurance indemnity payments compared to certain premium cost and exhibit lower demand for insurance compared to a classic expected utility maximizer. Inspired by the seminal work of Andreoni and Sprenger, we design games to identify agents with a disproportionate preference for certain outcomes and play them with 571 cotton farmers in Western Burkina-Faso. We then provide experimental evidence that this is a powerful framework to understand demand for micro-insurance. Specifically we show that agents with discontinuous preference respond positively to an alternative presentation of a classic insurance contract: they are willing to pay more for a given contract if the premium cost is artificially made uncertain by being directly deducted from indemnity payments. We also explore alternative behavioral arguments such as loss aversion but argue that they offer less appealing framework to understand the full set of our results. Our results have practical implications for the design of insurance contracts.
    Keywords: Index Insurance, Risk and Uncertainty, Discontinuity of preferences, Field Experiments, Crop Production/Industries, Q12, D03,
    Date: 2015
  12. By: Harri Nyrhinen
    Abstract: We study solvency of insurers in a comprehensive model where various economic factors affect the capital developments of the companies. The main interest is in the impact of real growth to ruin probabilities. The volume of the business is allowed to increase or decrease. In the latter case, the study is focused on run-off companies. Our main results give sharp asymptotic estimates for infinite time ruin probabilities.
    Date: 2015–11
  13. By: Petraud, Jean; Boucher, Stephen; Carter, Michael
    Abstract: Low demand for index insurance in several recent pilot programs has created a puzzle for development economists and policy makers concerned with enhancing farmers risk management capacity in low-income economies. This paper contributes to the resolution of this puzzle by providing empirical evidence on the relative effectiveness of two primary frameworks for modeling decision-making under uncertainty. Specifically, we test whether features of Cumulative Prospect Theory (CPT), or Expected Utility Theory (EUT), better predict farmers' demand for crop insurance. Whereas in EUT, risk preferences can be represented by a single risk aversion parameter, in CPT they are determined by at least four components: probability weighting, the curvature of a utility function, a reference income and loss aversion. The data come from a series of unframed and framed lotteries played with 480 small-holder cotton farmers in southern Peru. The unframed risk games allow us to measure individual-specific preference parameters, for both theories. We use these parameters to generate predictions of farmers' choices in two framed insurance games in which farmers choose to purchase one of two available insurance contracts or to purchase no insurance. In the first game, farmers' earnings are framed as gross revenues and are always positive, i.e., this game is played over gains. In the second game, earnings are framed as net revenues and may be either positive or negative so that this is a game played over mixed prospects. We test the relative performance of the two theories by comparing the predictions of farmers' choices versus their actual choices in the insurance games. An important finding with respect to marketing of insurance contracts is that framing incomes as net revenues instead of gross revenues increases the CPT predicted demand by 24%. In the actual insurance games however, only 8% more farmers chose insurance in the net revenues frame. We find that neither theory is a particularly strong predictor of insurance choices, although EUT fares better than CPT for better educated farmers.
    Keywords: Crop Production/Industries,
    Date: 2015
  14. By: Williams, Noah (University of Wisconsin–Madison); Li, Rui (University of Massachusetts–Boston)
    Abstract: The authors study the design of optimal unemployment insurance in an environment with moral hazard and cyclical fluctuations. The optimal unemployment insurance contract balances the insurance motive to provide consumption for the unemployed with the provision of incentives to search for a job. This balance is affected by aggregate conditions, as recessions are characterized by reductions in job finding rates. We show how benefits should vary with aggregate conditions in an optimal contract. In a special case of the model, the optimal contract can be solved in closed form. We show how this contract can be implemented in a rather simple way by allowing unemployed workers to borrow and save in a bond (whose return depends on the state of the economy), providing flow payments that are constant over an unemployment spell but vary with the aggregate state, and giving additional lump-sum payments (or charges) upon finding a job or when the aggregate state switches. We then consider a calibrated version of the model and study the quantitative impact of changing from the current unemployment system to the optimal one. In a recession, the optimal system reduces unemployment rates by roughly 2.5 percentage points and shortens the duration of unemployment by about 50 percent.
    Keywords: optimal contract; unemployment benefits; lump-sum payments; welfare; unemployment durations
    JEL: E32
    Date: 2015–08–01

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