nep-ias New Economics Papers
on Insurance Economics
Issue of 2016‒04‒30
sixteen papers chosen by
Soumitra K. Mallick
Indian Institute of Social Welfare and Business Management

  1. The price Ain’t right? hospital prices and health spending on the privately insured By Zack Cooper; Stuart Craig; Martin Gaynor; John Van Reenen
  2. Risk, Agricultural Production, and Weahter Index Insurance in Village South Asia By Michler, Jeffrey D.; Viens, Frederi; Shively, Gerald
  3. Avaluating Alternative Risk Transfer as a Crop Insurance Policy under Stochastic Yields and Prices By Mare, Frikkie; Grove, Bennie; Willemse, Barend
  4. 2014 FARM BILL COMMODITY PROGRAM AND THE CROP INSURANCE CHOICE INTERACTIONS By Bradley, Jason; Jones, Rodney; DeVuyst, Eric A.; Riley, John Michael; Doye, Damona
  5. Costs of Meeting the Cellulosic Biofuel Mandate with an Energy Crop with Establishment Cost and Yield Risk: Implications for Policy By Miao, Ruiqing; Khanna, Madhu
  6. Stochastic Analysis of Margin Protection (MP) Crop Insurance in Arkansas Rice Production By Mane, Ranjitsinh; Watkins, Bradley
  7. Cotton Premium Rate Heterogeneities and Implications under Climate Change By Siameh, Celestine; Tack, Jesse; Barnett, Barry J.; Harri, Ardian
  8. Community-level Flood Mitigation Effects on Household Flood Insurance and Damage Claims By Frimpong, Eugene; Petrolia, Daniel
  9. Disincentive Effects of Unemployment Benefits and the Role of Caseworkers By Schmieder, Johannes F.; Trenkle, Simon
  10. Evaluate the economic consequences of revenue insurance programs in Spain using copula models. The case of orange and apple By Ahmed, Osama; Serra, Teresa
  11. Effect of financial literacy on willingness to pay for micro-insurance by commercial market business operators in Ghana By Yeboah, Augustine Kwadwo; Obeng, Camara Kwasi
  12. Temporary Migration and Endogenous Risk Sharing in Village India By Melanie Morten
  13. Credence Goods, Risk Averse, and Optimal Insurance By Ouyang, Yaofu
  14. The Value of Social Security: Are Formal Jobs Better? By Madrigal, Lucia; Pagés, Carmen; Suaya, Agustina
  15. Sustainability of Regional Food Reserves When Default is Possible By Romero-Aguilar, Randall; Miranda, Mario J.; Glauber, Joseph W.
  16. What Do Farmers Want from Crop Insurance Schemes: A Stated Preference Approach By Olila, Dennis; Nyikal, Rose; Otieno, David

  1. By: Zack Cooper; Stuart Craig; Martin Gaynor; John Van Reenen
    Abstract: We use insurance claims data for 27.6 percent of individuals with private employer-sponsored insurance in the US between 2007 and 2011 to examine the variation in health spending and in hospitals’ transaction prices. We document the variation in hospital prices within and across geographic areas, examine how hospital prices influence the variation in health spending on the privately insured, and analyze the factors associated with hospital price variation. Four key findings emerge. First, health care spending per privately insured beneficiary varies by a factor of three across the 306 Hospital Referral Regions (HRRs) in the US. Moreover, the correlation between total spending per privately insured beneficiary and total spending per Medicare beneficiary across HRRs is only 0.14. Second, variation in providers’ transaction prices across HRRs is the primary driver of spending variation for the privately insured, whereas variation in the quantity of care provided across HRRs is the primary driver of Medicare spending variation. Consequently, extrapolating lessons on health spending from Medicare to the privately insured must be done with caution. Third, we document large dispersion in overall inpatient hospital prices and in prices for seven relatively homogenous procedures. For example, hospital prices for lower-limb MRIs vary by a factor of twelve across the nation and, on average, two-fold within HRRs. Finally, hospital prices are positively associated with indicators of hospital market power. Even after conditioning on many demand and cost factors, hospital prices in monopoly markets are 15.3 percent higher than those in markets with four or more hospitals.
    Keywords: healthcare; health spending; prices; price dispersion; competition; market structure
    JEL: J1
    Date: 2015–12
  2. By: Michler, Jeffrey D.; Viens, Frederi; Shively, Gerald
    Abstract: We investigate the sources of variance in crop output and measure their relative im- portance in the context of weather index insurance for smallholder farmers. We use parcel-level panel data from South Asia and a multilevel modeling approach to isolate the di erent sources of variance. We then measure how large a role weather plays in explaining variance in yields. Using Bayesian methods, we draw the underlying distri- bution of the random error term responsible for weather uncertainty, which is highly skewed and non-normal. We nd that variance in weather accounts for a small but important fraction of total variance in crop output. We also derive pricing and payout schedules for actuarially fair weather index insurance. Our results shed light on the low uptake rates of index insurance in South Asia and provide direction for designing index insurance with less basis risk for farmers.
    Keywords: Agricultural and Food Policy, Environmental Economics and Policy, Risk and Uncertainty,
    Date: 2015
  3. By: Mare, Frikkie; Grove, Bennie; Willemse, Barend
    Abstract: The purpose is to evaluate Alternative Risk Transfer (ART) against Short-term Crop Hail Insurance (SCHI) to provide cost effective and constant cover against hail risk under stochastic yields and prices. A farm financial simulation model was developed to simulate the influence of hail damage and the different crop insurance policies on a maize farm with variable levels of yields and prices. The yield and price data were simulated with the procedure for estimating and simulating multivariate empirical (MVE) probability distributions. The risk efficiency was analysed with stochastic efficiency with respect to a function (SERF). The insurance options with the largest net benefit to the enterprise were ART in the low hail risk area and SCHI in the high hail risk area. It was found that both SCHI and ART might be effective measures for the mitigation of hail damage, depending on the amount of hail risk present in certain area.
    Keywords: Risk, Insurance, Alternative Risk Transfer, Simulation Model, SERF, Certainty Equivalent, Utility Weighted Risk Premium, Crop Production/Industries, Risk and Uncertainty,
    Date: 2015
  4. By: Bradley, Jason; Jones, Rodney; DeVuyst, Eric A.; Riley, John Michael; Doye, Damona
    Abstract: With the announcement of the 2014 Farm Bill, agricultural producers were faced with many changes in the various programs available to agricultural producers through various government agencies. When these programs opened for enrollment, producers faced complex decisions regarding which of the program combinations would best suit their operational needs. One of the decisions faced by producers was the selection of crop insurance type and coverage level. The objective of this research is to evaluate what factors influenced producer’s crop insurance program decisions after the introduction of new government crop insurance programs and other provisions of the 2014 Farm Bill. By comparing current crop insurance protection types and the selected coverage levels against previous reports, the results will show the change caused by the introduction of the government programs. Using enrollment numbers from both the Farm Service Agency (FSA) and the Risk Management Agency (RMA) programs the influence that the 2014 Farm Bill commodity program choices had on producer’s crop insurance election choices will be determined. Other crop insurance decision factors examined include geographic location, and primary crops produced. The findings of the research provide further insight regarding what factors drive producer crop insurance decisions.
    Keywords: Farm Bill, Crop Insurance, Agricultural and Food Policy, Crop Production/Industries,
    Date: 2016
  5. By: Miao, Ruiqing; Khanna, Madhu
    Abstract: We develop a framework to examine the extent to which farmers’ risk and time preferences, availability of credit to cover establishment cost, and crop insurance for conventional crops may influence farmers’ decision to allocate land to a perennial energy crop and, therefore, the total costs of meeting a cellulosic biofuel mandate using this crop. We also investigate the cost-effectiveness of two supplementary policies to the mandate: an establishment cost subsidy and subsidized energy crop insurance, which may achieve the targeted level of biomass production more cost-effectively than the mandate alone. We apply this framework to examine the total costs and land requirements of providing biomass for meeting a one-billion-gallon cellulosic biofuel mandate by using miscanthus as a feedstock while accounting for temporal and spatial variability in miscanthus yields relative to those of conventional crops at a county level across the U.S. rainfed region.
    Keywords: Agricultural and Food Policy,
    Date: 2015
  6. By: Mane, Ranjitsinh; Watkins, Bradley
    Abstract: Rice is an irrigated crop, and irrigated crops are more insulated against yield risk than non-irrigated crops. However, rice is largely dependent on energy related inputs like fuel and fertilizer and suffers from systemic risks caused by increasing energy related input costs. The USDA Risk Management Agency (RMA) is making available a new insurance product to rice producers in 2016 called Margin Protection (MP). Margin Protection provides coverage against an unexpected decrease in operating margin resulting from increased input costs. Thls study used simulation to evaluate stochastic indemnities generated by MP at various coverage levels ranging from 70 to 90 percent for three major rice counties in Arkansas. Multivariate empirical distributions of county yields, margin rice prices and prices for allowed margin inputs were simulated. The likelihood of receiving indemnities under MP was small for 70 and 75 percent coverage levels based on our simulated results. Indemnity probabilities were 0.8, 5.2, and 18 percent for Arkansas County at MP coverage levels of 80, 85, and 95 percent, respectively. Indemnity probabilities for Poinsett and Desha Counties were higher at the 80, 85, and 90 percent MP coverage levels (6, 18.8, and 31.9 percent respectively for Poinsette; 6.6, 16.8, and 34.6 percent respectively for Desha). The higher probabilities of indemnities in Poinsett and Desha counties may be due to higher variability in yields for those counties.
    Keywords: Margin Protection, Indemnity, Price Risk, Risk Management, Price Volatility, Crop Production/Industries, Risk and Uncertainty, Q11, Q13, Q14, Q16,
    Date: 2016
  7. By: Siameh, Celestine; Tack, Jesse; Barnett, Barry J.; Harri, Ardian
    Abstract: Response to adverse weather conditions by cotton and other major crops are likely to be heterogeneous across varieties, but it is unclear whether this translates into yield risk heterogeneity across varieties. Crop insurance is the dominant agricultural policy instrument and will play an important role for any potential adaptation path to climate change. However, the impact of climate change on the performance of crop insurance programs is not well established and currently the Risk Management Agency does not offer alternative premium rates across varieties. This study utilizes Mississippi cotton variety trial data for the period 1998 to 2013 to identify whether there are heterogeneous crop insurance premium rates across varieties using a moment-based model. Warming impacts on these rates will then be measured. Our results identified heterogeneities for both the mean and variance of cotton yields across varieties. These differences extended to the coefficient of variation – a commonly used measure of yield risk – as well as actuarially fair premium rates, which capture a producer’s exposure to downside risk. Our findings provide evidence of yield risk heterogeneity across varieties. The finding of heterogeneous premium rates across varieties presents an interesting problem for the FCIP.
    Keywords: Cotton, yield risk, Heterogeneities, premium rates, climate change, Agricultural and Food Policy, Environmental Economics and Policy,
    Date: 2016
  8. By: Frimpong, Eugene; Petrolia, Daniel
    Abstract: The Community Rating System (CRS) was introduced to encourage flood mitigation and increase participation in the National Flood Insurance Program (NFIP). In exchange for undertaking community-level mitigation activities, community residents earn discounts on their flood insurance policies. Little is known, however, about the relative role of specific mitigation activities on NFIP participation (i.e., policies-in-force) and damage claims. Using community-level panel data on policies-in-force, flood insured damage claims and CRS mitigation activities for the period (1998-2013) for the states of Alabama and Mississippi, we examine the effect of individual mitigation activities on both NFIP policies-in-force and damage claims across communities. We also estimate the average effect of community’s participation in the CRS program on NFIP policies-in-force and insured damage claims. We do so while controlling for key geospatial and demographic characteristics. Results are expected to provide guidance in terms of which CRS mitigation activities have the greatest impact on improving NFIP participation and damage reduction.
    Keywords: flood insurance, CRS mitigation activities, geospatial characteristics, propensity score matching, difference-in-differences, Environmental Economics and Policy, Risk and Uncertainty,
    Date: 2016
  9. By: Schmieder, Johannes F. (Boston University); Trenkle, Simon (Institute for Employment Research (IAB), Nuremberg)
    Abstract: A large literature has documented that the unemployment duration of unemployed individuals increases with the generosity of the unemployment insurance (UI) system, which has been interpreted as the disincentive effect of UI benefits. However, unemployed workers typically also have caseworkers assigned who are monitoring and assisting the job search efforts. These caseworkers may respond to differences in UI eligibility by shifting resources (financial or time) between unemployed individuals in order to counteract the moral hazard effect of UI benefits or to focus resources to where they have the largest effect. Depending on the motivations of the caseworker, the effectiveness of caseworker resources and the complementarity between these resources and UI benefits, the typical estimates of the disincentive effects of UI may be biased upwards or downwards in studies that compare workers within the same UI agency. We estimate whether caseworkers respond to the generosity of UI eligibility using a sharp regression discontinuity (RD) design in Germany, where potential UI durations vary with age. We show that across a wide variety of measures, including training programs, wage subsidies, personal meetings and sanctions, UI caseworkers do not treat unemployed with different eligibility differently. At best we find a very small effect that workers with shorter eligibility close to the exhaustion point are more likely to be assigned to training programs that prolong their UI eligibility. The typical RD estimates of the UI disincentive effects thus seem to be valid estimates.
    Keywords: unemployment benefits, unemployment insurance, caseworkers, active labor market programs
    JEL: J65
    Date: 2016–04
  10. By: Ahmed, Osama; Serra, Teresa
    Abstract: This article aims at determining how the introduction of agricultural revenue insurance contracts in Spain will affect the cost of purchasing insurance, relative to yield insurance schemes. We focus our empirical analysis on the apple and orange sectors in Spain. Statistical copulas are used to jointly model price and yield perils. Premium rates under revenue and yield insurance are simulated through Monte Carlo methods. Results indicate that revenue insurance is likely to reduce the price of agricultural insurance in Spain, which may result in higher acceptance and demand for agricultural insurance programs.
    Keywords: agricultural revenue insurance, dependency analysis, premium rate, expected loss, statistical copula, Agricultural and Food Policy, Agricultural Finance, C5, C15, G22, Q18,
    Date: 2015
  11. By: Yeboah, Augustine Kwadwo; Obeng, Camara Kwasi
    Abstract: This study investigated the effect of financial literacy on willingness to pay for micro-insurance among informal commercial market business operators in Ghana. Heckman’s Two-Step Estimation Technique is used to examine data on 612 informal commercial market business operators from selected major urban market centres in Ghana. The results indicate that financial literacy increases the amount willing to pay for micro-insurance. Other determinants of willingness to pay for micro-insurance include marital status, dependents, savings, trust, premium payment mode and income. The study recommends that microfinance institutions should strengthen financial education to increase the uptake of micro-insurance.
    Keywords: Financial literacy; Willingness to pay; Microfinance; Micro-insurance; commercial market business operators, Ghana
    JEL: G0
    Date: 2016
  12. By: Melanie Morten
    Abstract: When people can self-insure via migration, they may have less need for informal risk sharing. At the same time, informal insurance may reduce the need to migrate. To understand the joint determination of migration and risk sharing I study a dynamic model of risk sharing with limited commitment frictions and endogenous temporary migration. First, I characterize the model. I demonstrate theoretically how migration may decrease risk sharing. I decompose the welfare effect of migration into the change in income and the change in the endogenous structure of insurance. I then show how risk sharing alters the returns to migration. Second, I structurally estimate the model using the new (2001-2004) ICRISAT panel from rural India. The estimation yields: (1) improving access to risk sharing reduces migration by 21 percentage points; (2) reducing the cost of migration reduces risk sharing by 8 percentage points; (3) contrasting endogenous to exogenous risk sharing, the consumption-equivalent gain from reducing migration costs is 18.9 percentage points lower. Third, I introduce a rural employment scheme. The policy reduces migration and decreases risk sharing. The welfare gain of the policy is 55-70% lower after household risk sharing and migration responses are considered
    JEL: D12 D52 D91 O12 R23
    Date: 2016–04
  13. By: Ouyang, Yaofu
    Abstract: We analyze a credence goods market with risk averse consumers when the assumptions of both liability and verifiability hold. In the basic model, we show that the consumer's risk-aversion would induce expert's overtreatment behavior and thus cause social inefficiency. But the probability of overtreating deceases with the degree of consumer's risk-aversion or the coefficient of absolute risk aversion(CRRA). Furthermore, we extend the basic model with insurance option. We assume there exists a perfectly competitive insurance market where the consumer could purchase insurance. Two sets of equilibria indexed by expert's pricing strategy could be specified. The equilibrium outcome shows that social efficiency could always be achieved and the expert could obtain all the social surplus in the equilibrium.
    Keywords: Credence Goods, Risk Averse, Insurance
    JEL: D81 D82 I11
    Date: 2016–03
  14. By: Madrigal, Lucia (Inter-American Development Bank); Pagés, Carmen (Inter-American Development Bank); Suaya, Agustina (Inter-American Development Bank)
    Abstract: As the population ages, low and unequal social security coverage are among the most pressing challenges in the Latin American region. On average, only 45% of workers contribute to social security, and this figure is much lower for low-income and low-skilled individuals. There are many hypotheses for this limited and uneven coverage. This paper studies two of them: First, we test whether individuals do not contribute to social insurance because, due to myopia or limited information, they place little value in social insurance. Second, we test whether low-income, low-skilled individuals have a lower value of social insurance than higher-income or higher-skilled individuals. Using an indirect method to estimate individual social security valuation based on self-reported job satisfaction, we find that workers attain higher job satisfaction in formal than in informal jobs in Peru but not in the case of Mexico. In addition, we find little evidence that the value of social insurance increases with income or education. If anything, the opposite is the case, with lower-income or lower-education individuals deriving higher utility from having access to social insurance.
    Keywords: job satisfaction, informality, social insurance, Latin America
    JEL: J21 J28 O17
    Date: 2016–04
  15. By: Romero-Aguilar, Randall; Miranda, Mario J.; Glauber, Joseph W.
    Abstract: We model a regional grain reserve as a game of two countries that agree to pool together a fraction of their grain to cope with production risk, but that can also repudiate their obligations at any moment. The reserve can be operated as a “credit union” or an “insurance union”. We find that although risk sharing is more effective when production shocks are negatively correlated, the regional reserve is more sustainable when the correlation is positive. We also find that an “insurance” game can be more sustainable than a “credit” game.
    Keywords: multilateral reserve, grain, food crisis, default, game theory, Agricultural Finance, Food Consumption/Nutrition/Food Safety,
    Date: 2015
  16. By: Olila, Dennis; Nyikal, Rose; Otieno, David
    Abstract: Climate change and weather variability are perhaps some of the major challenges facing the world today. In the phase of these challenges, various climate mitigation strategies including financial, production, as well as marketing aspects have played a significant role in cushioning farmers against adverse effects. In Kenya, agricultural insurance is still at a pilot stage after the unsustainable effort in the 1970’s. Despite the noble intention to revive the crop insurance industry, limited empirical information exists on farmers’ preferences for crop insurance. The study employed Choice Experiment (CE) to elicit farmers’ preferences for crop insurance design features among 300 farmers. The analysis employed a random parameter logit (RPL) model. The results show that farmers are willing to pay for various features of crop insurance. These findings are important in informing ex-ante design and improvement of crop insurance programmes in Kenya and the rest of the world.
    Keywords: Crop insurance, Choice experiment, Random parameter logit, Kenya, Crop Production/Industries, Farm Management, C90,
    Date: 2015

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