nep-ias New Economics Papers
on Insurance Economics
Issue of 2016‒02‒12
eleven papers chosen by
Soumitra K. Mallick
Indian Institute of Social Welfare and Business Management

  1. Social Health Insurance: A Quantitative Exploration By Juergen Jung; Chung Tran
  2. The Role of Sickness in the Evaluation of Job Search Assistance and Sanctions By Berg, Gerard van den; Hofmann, Barbara; Uhlendorff, Arne
  3. Young Adult SSI and SSDI Beneficiaries By Maura Bardos; Gina Livermore
  4. Effects of China’s Rural Insurance Scheme on Objective Measures of Health By Slawa Rokicki; Katherine Donato
  5. Social insurance with competitive insurance markets and risk misperception By Cremer, Helmuth; Roeder, Kerstin
  6. Does Biological Endowment Matter for Demand for Financial Services? Evidence from Russian Household Survey By Irina Andrievskaya; Maria Semenova
  7. A Model-Point Approach to Indifference Pricing of Life Insurance Portfolios with Dependent Lives By Christophette Blanchet-Scalliet; Diana Dorobantu; Yahia Salhi
  8. Double Moral Hazard and the Energy Efficiency Gap By Louis-Gaëtan Giraudet; Sébastien Houde
  9. Modeling the relation between income and commuting distance By Giulia Carra; Ismir Mulalic; Mogens Fosgerau; Marc Barthelemy
  10. Estimating Group Support for German Landesbanken By Benjamin Käfer
  11. The Impact of Unemployment Benefit Extensions on Employment: The 2014 Employment Miracle? By Hagedorn, Marcus; Manovskii, Iourii; Mitman, Kurt

  1. By: Juergen Jung (Department of Economics, Towson University); Chung Tran (Research School of Economics, The Australian National University)
    Abstract: We quantify the welfare implications of three alternative approaches to providing social health insurance: (i) a mix of private and public health insurance (US-style), (ii) compulsory universal public health insurance (UPHI), and (iii) private health insurance for workers combined with government subsidies and price regulation. We use a Bewley-Grossman lifecycle model calibrated to match the lifecycle structure of earnings and health risks in the US. For all three systems we find that welfare gains triggered by a combination of improvements in risk sharing and wealth redistribution dominate welfare losses caused by tax distortions and ex-post moral hazard effects. Overall, the UPHI system outperforms the other two systems in terms of welfare gains if the coinsurance rate is properly designed. A switch from the US system to a well-designed UPHI system results in large welfare gains. However, such a radical reform faces political impediments due to opposing welfare effects across different income groups. .
    Keywords: Health capital, lifecycle health risk, incomplete insurance markets, social insurance, optimal policy, dynamic general equilibrium with idiosyncratic shocks.
    JEL: I13 D52 E62 H31
    Date: 2016–02
  2. By: Berg, Gerard van den; Hofmann, Barbara; Uhlendorff, Arne
    Abstract: Unemployment insurance agencies may combat moral hazard by punishing refusals to apply to assigned vacancies. However, the possibility to report sick creates an additional moral hazard, since during sickness spells, minimum requirements on search behavior do not apply. This reduces the ex ante threat of sanctions. We analyze the effects of vacancy referrals and sanctions on the unemployment duration and the quality of job matches, in conjunction with the possibility to report sick. We estimate multi-spell duration models with selection on unobserved characteristics. We find that vacancy referrals increase the transition to work and that these jobs go along with a lower wage. However, we also find a positive effect of receiving a vacancy referral on the probability of reporting sick. This effect is smaller at high durations, which suggests that the value of a vacancy referral increases over the time spent in unemployment. Overall, around 9% of sickness absence during unemployment is induced by vacancy referrals.
    Keywords: monitoring; moral hazard; physician; unemployment; unemployment insurance; vacancy referrals; wage
    JEL: C21 C41 J64 J65
    Date: 2016–01
  3. By: Maura Bardos; Gina Livermore
    Abstract: About 9 percent of working-age beneficiaries of Supplemental Security Income (SSI) and Social Security Disability Insurance (SSDI) are young adults under the age of 30.
    Keywords: young adult, SSI, SSDI, Beneficiaries, Disability
    JEL: I J
    Date: 2016–01–30
  4. By: Slawa Rokicki; Katherine Donato
    Abstract: In 2003, the Chinese government established the New Cooperative Medical Scheme (NCMS) with the goal of improving health for the country’s 800 million mostly uninsured rural residents. Using new data on objective health measures, we analyzed the program’s effectiveness in improving health for enrollees. Using longitudinal data from the China Health and Nutritional Survey from 2000 to 2009 (12 080 observations across four waves), we analyzed the impact of the NCMS on objective measures of health such as blood pressure, HbA1c, and cholesterol, as well as use of preventive care. In order to overcome inherent selection bias where less healthy people are more likely to enroll in the voluntary health insurance scheme, we used intent-to-treat and instrumental variable analysis strategies, and offered evidence that these approaches can mitigate this bias. For every additional year of NCMS coverage, the probability of seeking preventive health care increased by 0.6 percentage points (95% CI 0.1-1.0). However, we did not find evidence that the NCMS resulted in consistent improvements in objective measures of health. Sub-group analysis suggested that lower-income communities benefited more from the program, implying that the program may have resulted in some lessening of the wealth-based disparity in health. The NCMS does not appear to significantly improve objective measures of health. This is consistent with evaluations of health insurance programs in other countries, but in contrast to some previously reported improvements in self-reported health resulting from the NCMS.
    Keywords: China, Health insurance, Biomarkers, Objective health
    JEL: I13 I15
    Date: 2016–02
  5. By: Cremer, Helmuth; Roeder, Kerstin
    Abstract: This paper considers an economy where individuals differ in productivity and in risk. Rochet (1991) has shown that when private insurance markets offer full coverage at fair rates, social insurance is desirable if and only if risk and productivity are negatively correlated. This condition is usually shown to be satisfied for many health risks, but it appears to be violated for the old age dependency risk (mainly because longevity in turn is positively correlated with productivity). We examine the role of uniform and nonuniform social insurance to supplement a general income tax when neither public nor private insurers can observe individual risk and when it is positively correlated with wages. Consequently, a Rothschild and Stiglitz (1971) equilibrium emerges in the private insurance market and low-wage/low-risk individuals are not fully insured. We show that even when social insurance provided to the poor has a negative incentive effect, it also increases their otherwise insufficient insurance coverage. Social insurance to the rich produces exactly the opposite effects. Whichever of these effects dominates, some social insurance is always desirable. Finally, we introduce risk misperception which exacerbates the failure of private markets. The insurance term now reflects the combined failure brought about by adverse selection and misperception. Now the low-risk individuals are not only underinsured, but also pay a higher than fair rate. However, and rather surprisingly, it turns out that this does not necessarily strengthen the case for public insurance.
    Keywords: adverse selection; long-term care; optimal taxation; overconfidence; social insurance
    JEL: D82 H21 H51
    Date: 2016–01
  6. By: Irina Andrievskaya (National Research University Higher School); Maria Semenova (National Research University Higher School)
    Abstract: There are many studies revealing factors which influence the demand for financial services. However genetic features, determining the individual’s overall postnatal behaviour, have not been studied within this context. This paper extends the previous literature by studying to what extent individual biological endowment, proxied by prenatal testosterone (PT) (measured by the 2D:4D ratio), can determine personal demand for bank services and insurance. We use data from the Russian Longitudinal Monitoring Survey of 2011–2012. Our findings confirm the existence of the link between inherent biological variation and financial inclusion: PT affects the use of bank cards, intention to take out a loan, having a bank deposit and the consumption of insurance products
    Keywords: prenatal testosterone, 2D:4D ratio, financial inclusion, household, RLMS, Russia
    JEL: D14 D81 G21 G22 O16 P34
    Date: 2016
  7. By: Christophette Blanchet-Scalliet (ICJ - Institut Camille Jordan [Villeurbanne] - ECL - École Centrale de Lyon - UCBL - Université Claude Bernard Lyon 1 - Université Jean Monnet - Saint-Etienne - INSA - Institut National des Sciences Appliquées - CNRS - Centre National de la Recherche Scientifique); Diana Dorobantu (ICJ - Institut Camille Jordan [Villeurbanne] - ECL - École Centrale de Lyon - UCBL - Université Claude Bernard Lyon 1 - Université Jean Monnet - Saint-Etienne - INSA - Institut National des Sciences Appliquées - CNRS - Centre National de la Recherche Scientifique); Yahia Salhi (SAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1)
    Abstract: In this paper, we study the pricing of life insurance portfolios in the presence of dependent lives. We assume that an insurer with an initial exposure to n mortality-contingent contracts wanted to acquire a second portfolio constituted of m individuals. The policyhold-ers' lifetimes in these portfolios are correlated with a Farlie-Gumbel-Morgenstern (FGM) copula, which induces a dependency between the two portfolios. In this setting, we compute the indifference price charged by the insurer endowed with an exponential utility. The optimal price is characterized as a solution to a backward differential equation (BSDE). The latter can be decomposed into (n − 1)n! auxiliary BSDEs. In this general case, the derivation of the indifference price is computationally infeasible. Therefore, while focusing on the example of death benefit contracts, we develop a model point based approach in order to ease the computation of the price. It consists on replacing each portfolio with a single policyholder that replicates some risk metrics of interest. Also, the two representative agents should adequately reproduce the observed dependency between the initial portfolios.
    Keywords: life insurance, utility maximization,indifference pricing, representative contract
    Date: 2016–01–19
  8. By: Louis-Gaëtan Giraudet (CIRED - Centre International de Recherche sur l'Environnement et le Développement - CNRS - Centre National de la Recherche Scientifique - CIRAD - Centre de coopération internationale en recherche agronomique pour le développement - EHESS - École des hautes études en sciences sociales - École des Ponts ParisTech (ENPC) - AgroParisTech - AgroParisTech); Sébastien Houde (University of Maryland)
    Abstract: We investigate how moral hazard problems can cause sub-optimal investment in energy efficiency, a phenomenon known as the energy efficiency gap. We focus on contexts where both the seller and the buyer of an energy saving technology can take hidden actions. For instance, a home retrofit contractor may cut on the quality of installation to save costs, while the homeowner may increase her use of energy service when provided with higher energy efficiency. As a result, neither energy efficiency quality nor energy use are fully contractible. We formalize the double moral hazard problem and discuss how it can help rationalize the energy efficiency gap. We then compare two policy instruments: minimum quality standards and energy-savings insurance. Their relative efficiency depends on the balance between the monitoring costs associated with the former and the deadweight loss of the consumer's action induced by the latter. Calibrating the model to the U.S. retrofit industry, we find that at current market conditions, standards tend to outperform insurance. We also find that the welfare gains from undoing the double moral hazard are substantially larger than those from internalizing carbon dioxide externalities associated with underlying energy use.
    Keywords: Energy efficiency gap, moral hazard, energy-savings insurance, minimum quality standard, credence good, rebound effect.
    Date: 2015–04–30
  9. By: Giulia Carra; Ismir Mulalic; Mogens Fosgerau; Marc Barthelemy
    Abstract: We discuss the distribution of commuting distances and its relation to income. Using data from Great Britain, US and Denmark, we show that the commuting distance is (i) broadly distributed with a tail decaying typically as $1/r^\gamma$ with $\gamma \approx 3$ and (ii) an average growing slowly as a power law with an exponent less than one that depends on the country considered. The classical theory for job search is based on the idea that workers evaluate potential jobs on the wage as they arrive sequentially through time. Extending this model with space, we obtain predictions that are strongly contradicted by our empirical findings. We then propose an alternative model that is based on the idea that workers evaluate potential jobs based on a quality aspect and that workers search for jobs sequentially across space. We assume that the density of potential jobs depends on the skills of the worker and decreases with the wage. The predicted distribution of commuting distances decays as $1/r^3$ and is independent of the distribution of the quality of jobs. We find our alternative model to be in agreement with our data. This type of approach opens new perspectives for the modeling of urban phenomena.
    Date: 2016–02
  10. By: Benjamin Käfer (University of Kassel)
    Abstract: This paper estimates the funding advantage afforded by the joint liability scheme to German Landesbanken. The advantage is estimated by computing the difference between Moody’s baseline credit assessment (BCA), representing the stand-alone rating, and the adjusted BCA incorporating group support assumptions. This notch advantage is then multiplied by time-varying yield spreads between the respective notches and the rating-dependent liabilities. Our methodology estimates the funding advantage that remains when governmental support for banks formerly considered ‘Too Big to Fail’ (TBTF) is substantially reduced or even abolished. We find a substantial monetary funding advantage due to group support assumptions, amounting on average to a multiple of the Landesbanken’s aggregated annual profits. The aggregated observations mask a distinct heterogeneity, with some of the banks being significantly more exposed to the funding advantage than others.
    Keywords: Too big to fail, implicit guarantee, support rating, systemic risk, Landesbanken, Haftungsverbund, joint liability scheme, institutional protection scheme, deposit insurance
    JEL: G12 G21 G24
    Date: 2015
  11. By: Hagedorn, Marcus; Manovskii, Iourii; Mitman, Kurt
    Abstract: We measure the aggregate effect of unemployment benefit duration on employment and the labor force. We exploit the variation induced by Congress' failure in December 2013 to reauthorize the unprecedented benefit extensions introduced during the Great Recession. Federal benefit extensions that ranged from 0 to 47 weeks across U.S. states were abruptly cut to zero. To achieve identification we use the fact that this policy change was exogenous to cross-sectional differences across U.S. states and we exploit a policy discontinuity at state borders. Our baseline estimates reveal that a 1% drop in benefit duration leads to a statistically significant increase of employment by 0.019 log points. In levels, 2.1 million individuals secured employment in 2014 due to the benefit cut. More than 1.1 million of these workers would not have participated in the labor market had benefit extensions been reauthorized.
    Keywords: aggregate employment; labor force; macroeconomic stabilization; search and matching; unemployment insurance
    JEL: E24 E62 E65 J65
    Date: 2016–01

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