nep-ias New Economics Papers
on Insurance Economics
Issue of 2016‒04‒16
seven papers chosen by
Soumitra K. Mallick
Indian Institute of Social Welfare and Business Management

  1. Short-termism of long-term investors? The investment behaviour of Dutch insurance companies and pension funds By Patty Duijm; Sophie Steins Bisschop
  2. Can a bank run be stopped? Government guarantees and the run on Continental Illinois By Mark A Carlson; Jonathan Rose
  3. Beyond Job Lock: Impacts of Public Health Insurance on Occupational and Industrial Mobility By Farooq, Ammar; Kugler, Adriana
  4. Key Determinants of Demand, Credit Underwriting, and Performance on Government-Insured Mortgage Loans in Russia By Lozinskaia Agata; Ozhegov Evgeniy
  5. Utility, Risk, and Demand for Incomplete Insurance: Lab Experiments with Guatemalan Cooperatives By McIntosh, Craig; Povel, Felix; Sadoulet, Elisabeth
  6. The Role of Culture in Long-term Care By Elena Gentili; Giuliano Masiero; Fabrizio Mazzonna
  7. Subsidy Policies with Learning from Stochastic Experiences By Cai, Jing; de Janvry, Alain; Sadoulet, Elisabeth

  1. By: Patty Duijm; Sophie Steins Bisschop
    Abstract: Countercyclical long-term investment strategies of insurance companies and pension funds (ICPFs) can support the stability of the financial system. Yet there is limited understanding of how ICPFs invest during market shocks, such as the global financial crisis and the European sovereign debt crisis. The intention of this paper is to fill that lacuna by investigating Dutch ICPFs' equity and sovereign bond portfolios. A first analysis shows that while ICs massively sold equities during the crisis, PFs kept buying equities as markets tumbled. Results from our regression analysis over a longer time horizon suggest procyclical behaviour by ICs, while for PFs we do not find evidence for procyclical or countercyclical investment behaviour. Moreover, both ICs and PFs sold their affected sovereign bonds prior to a rating downgrade. This could be considered as destabilising at a macro-level, as it may accelerate the deteriorating financing conditions of the affected countries.
    Keywords: microprudential; macroprudential; investment behaviour; pension funds; insurance companies; procyclicality; Solvency II; global financial crisis
    JEL: E44 G01 G11 G22 G28
    Date: 2015–12
  2. By: Mark A Carlson; Jonathan Rose
    Abstract: This paper analyzes the run on Continental Illinois in 1984. We find that the run slowed but did not stop following an extraordinary government intervention, which included the guarantee of all liabilities of the bank and a commitment to provide ongoing liquidity support. Continental's outflows were driven by a broad set of US and foreign financial institutions. These were large, sophisticated creditors with holdings far in excess of the insurance limit. During the initial run, creditors with relatively liquid balance sheets nevertheless withdrew more than other creditors, likely reflecting low tolerance to hold illiquid assets. In addition, smaller and moredistant creditors were more likely to withdraw. In the second and more drawn out phase of the run, institutions with relative large exposures to Continental were more likely to withdraw, reflecting a general unwillingness to have an outsized exposure to a troubled institution even in the absence of credit risk. Finally, we show that the concentration of holdings of Continental's liabilities was a key dynamic in the run and was importantly linked to Continental's systemic importance.
    Keywords: bank runs, deposit insurance, deposit guarantee, financial crisis
    Date: 2016–03
  3. By: Farooq, Ammar (Georgetown University); Kugler, Adriana (Georgetown University)
    Abstract: We examine whether greater Medicaid generosity encourages mobility towards riskier but better jobs in higher paid occupations and industries. We use Current Population Survey Data and exploit variation in Medicaid thresholds across states and over time through the 1990s and 2000s. We find that moving from a state in the 10th to the 90th percentile in terms of Medicaid income thresholds increases occupational and industrial mobility by 7.6% and 7.8%. We also find that higher income Medicaid thresholds increase mobility towards occupations and industries with greater wage spreads and higher separation probabilities, but with higher wages and higher educational requirements.
    Keywords: Medicaid, job lock, public health insurance occupational mobility, industrial mobility, occupational mismatch
    JEL: I13 J6
    Date: 2016–03
  4. By: Lozinskaia Agata; Ozhegov Evgeniy
    Abstract: This research analyses the process of lending from Russian state-owned mortgage provider. Two-level lending and insurance of mortgage system lead to substantially higher default rates for insured loans. This means that underwriting incentives for regional operators of government mortgage loans perform poorly. We use loan-level data of issued mortgage by one regional government mortgage provided in order to understand the interdependence between underwriting, choice of contract terms including loan insurance by borrower and loan performance. We found an evidence of a difference in credit risk measures for insured and uninsured loans and interest income.
    JEL: C36 D12 R20
    Date: 2016–03–24
  5. By: McIntosh, Craig; Povel, Felix; Sadoulet, Elisabeth
    Abstract: We play a series of incentivized laboratory games with risk-exposed cooperative- based coffee farmers in Guatemala to understand the demand for index-based rainfall insurance. We show that insurance demand goes up as increasingly severe risk makes insurance payouts more partial (payouts are smaller than losses), but demand is ad- versely effected by more complex risk structures in which payouts are probabilistic (it is possible that a shock occurs with no payout). We use numerical techniques to esti- mate a flexible utility function for each player and consequently can put exact dollar values on the magnitude of the behavioral response triggered by probabilistic insur- ance. Exploiting the group structure of the cooperative, we investigate the possibility of using group loss adjustment to smooth idiosyncratic risk. Our results suggest that consumers value probabilistic insurance using a prospect-style utility function that is concave both in probabilities and in income, and that group insurance mechanisms are unlikely to solve the issues of low demand that have bedeviled index insurance markets.
    Keywords: Social and Behavioral Sciences, Risk, Index Insurance, Utility Estimation
    Date: 2015–01–01
  6. By: Elena Gentili (Institute of Economics (IdEP), Università della Svizzera Italiana (USI), Switzerland); Giuliano Masiero (Institute of Economics (IdEP), Università della Svizzera Italiana (USI), Switzerland; Department of Management, Information and Production Engineering (DIGIP), University of Bergamo, Italy); Fabrizio Mazzonna (Institute of Economics (IdEP), Università della Svizzera Italiana (USI), Switzerland)
    Abstract: The aim of this paper is to assess the role of culture in shaping individual preferences to- wards different long-term care (LTC) arrangements. The analysis uses Swiss data from two administrative databases covering the universe of formal LTC providers between 2007 and 2013. Switzerland is a multi-cultural confederation where state administrative borders do not always coincide with cultural groups. For this reason, we exploit the within-state variation in cultural groups to show evidence about cultural differences in LTC use. In particular, we use spatial regression discontinuity design (RDD) at the language border between French-speaking and German-speaking individuals living in bilingual cantons to provide causal interpretation of the differences in formal LTC use between these two main cultural groups. Our results suggest a strong role of culture in shaping household decisions about formal LTC use. In particular, elderly people residing in regions speaking a Latin language (French, Italian and Romansh) use home-based care services more intensely and enter in nursing homes at older ages and in worse health conditions with respect to elderly people in German regions. This difference across the two cultural groups are driven by different preferences towards LTC arrangements.
    Keywords: Long-term care, Culture, Spatial RDD
    JEL: I11 I18 C26
    Date: 2016–04–04
  7. By: Cai, Jing; de Janvry, Alain; Sadoulet, Elisabeth
    Abstract: Many new products presumed to be privately beneficial to the poor have a high price elasticity of demand and ultimately zero take-up rate at market prices. This has led gov- ernments and donors to provide subsidies to increase the take-up, with the hope of reducing the subsidies once the value of the product is better known. In this study, we use data from a two-year field experiment in rural China to define the optimum subsidy scheme that can insure a given take-up for a new weather insurance product for rice producers. We estimate both reduced form causal channels and a structural model of learning from stochastic expe- rience which we use to conduct policy simulations. Results show that the optimum current subsidy necessary to achieve a desired level of take-up rate depends on both past subsidy levels and past payout rates, implying that subsidy levels should vary locally year-to-year.
    Keywords: Social and Behavioral Sciences, Subsidy, Insurance, Take-up, Stochastic Learning
    Date: 2016–04–11

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