nep-ias New Economics Papers
on Insurance Economics
Issue of 2016‒07‒30
thirteen papers chosen by
Soumitra K. Mallick
Indian Institute of Social Welfare and Business Management

  1. Aging and Health Financing in the US:A General Equilibrium Analysis By Juergen Jung; Chung Tran; Matthew Chambers
  2. Do Disaster Experience and Knowledge Affect Insurance Take-up Decisions? By Jing Cai; Changcheng Song
  3. Optimal Unemployment Insurance and International Risk Sharing By Moyen, Stephane; Stähler, Nikolai; Winkler, Fabian
  4. Cross-subsidization in employer-based health insurance and the effects of tax subsidy reform By Pashchenko, Svetlana; Porapakkarm, Ponpoje
  5. The demand for index-based flood insurance in a high-income country By Achtnicht, Martin; Osberghaus, Daniel
  6. A Large-Scale Optimization Model for Replicating Portfolios in the Life Insurance Industry By Maximilian ADELMANN; Lucio FERNANDEZ ARJONA; Janos MAYER; Karl SCHMEDDERS
  7. Discontinuity in Relative Credit Losses: Evidence from Defaults on Government-Insured Residential Mortgages By Agata M. Lozinskaia; Evgeniy M. Ozhegov; Alexander M. Karminsky
  8. Blame the Parents? How Financial Incentives Affect Labor Supply and Job Quality for Young Adults By Ilan Tojerow; Frédéric Panier; Andrey Fradkin
  9. How to measure whether index insurance provides reliable protection By Morsink,Karlijn; Clarke,Daniel Jonathan; Mapfumo,Shadreck
  10. Stochastic Claims Reserving Manual: Advances in Dynamic Modeling By Mario V. Wuthrich; Michael Merz
  11. Are diverse ecosystems more valuable? A conceptual framework for economic valuation of biodiversity By Bartkowski, Bartosz
  12. The effects of reform scenarios for unemployment benefits and social assistance on financial incentives to work and poverty in Lithuania By Jekaterina Navicke; Silvia Avram; Lilas Demmou
  13. When the Going Gets Tough... Financial Incentives, Duration of Unemployment and Job-Match Quality By Rebollo-Sanz, Yolanda Fatima; Rodríguez-Planas, Núria

  1. By: Juergen Jung; Chung Tran; Matthew Chambers
    Abstract: We quantify the effects of population aging on the US healthcare system. Our analysis is based on a stochastic general equilibrium overlapping generations model of endogenous health accumulation calibrated to match pre-2010 U.S. data. We find that population aging not only leads to large increases in medical spending but also a large shift in the relative size of public vs. private insurance. Without the Affordable Care Act (ACA), aging itself leads to a 36:6 percent increase in health expenditures by 2060 and a 5 percent increase in GDP which is driven by the expansion of the healthcare sector. The group-based health insurance (GHI) market shrinks, while the individual-based health insurance (IHI) market and Medicaid expand significantly. Additional funds equivalent to roughly 4 percent of GDP are required to finance Medicare in 2060 as the elderly dependency ratio increases. The introduction of the ACA increases the fraction of insured workers to 99 percent by 2060, compared to 81 percent without the ACA. This additional increase is mainly driven by the further expansion of Medicaid and the IHI market and the stabilization of the GHI market. Interestingly, the ACA reduces aggregate health care spending by enrolling uninsured workers into Medicaid which pays lower prices for medical services. Overall, the ACA adds to the fiscal cost of population aging mainly via the Medicare and Medicaid expansion.
    Keywords: Population aging, calibrated general equilibrium OLG model, health expenditures, Medicare & Medicaid, Affordable Care Act 2010, Grossman model of health capital, endogenous health spending and financing.
    JEL: H51 I13 J11 E21 E62
    Date: 2016–07
  2. By: Jing Cai; Changcheng Song
    Abstract: This study examines the effect of experience and knowledge on weather insurance adoption. First, we conduct insurance games with farmers, and find that the treatment improves real insurance take-up by 46%. The effect is not driven by changes in risk attitudes and perceived probability of disasters, or by learning of insurance benefits, but is driven by the experience acquired in the game. Second, we find that providing information about the payout probability has a strong positive effect on insurance take-up. Finally, when subjects receive both treatments, the probability information has a greater impact on take-up than does the disaster experience.
    JEL: D03 D14 G22 M31 O16 O33 Q12
    Date: 2016–07
  3. By: Moyen, Stephane; Stähler, Nikolai; Winkler, Fabian
    Abstract: We discuss how cross-country unemployment insurance can be used to improve international risk sharing. We use a two-country business cycle model with incomplete financial markets and frictional labor markets where the unemployment insurance scheme operates across both countries. Cross-country insurance through the unemployment insurance system can be achieved without affecting unemployment outcomes. The Ramsey-optimal policy however prescribes a more countercyclical replacement rate when international risk sharing concerns enter the unemployment insurance trade-off. We calibrate our model to Eurozone data and find that optimal stabilizing transfers through the unemployment insurance system are sizable and mainly stabilize consumption in the periphery countries, while optimal replacement rates are countercyclical overall. Moreover, we find that debt-financed national policies are a poor substitute for fiscal transfers.
    Keywords: Fiscal Union ; International Business Cycles ; International Risk Sharing ; Unemployment Insurance
    JEL: E32 E62 H21 J64
    Date: 2016–07
  4. By: Pashchenko, Svetlana; Porapakkarm, Ponpoje
    Abstract: A major source of insurance coverage for non-elderly adults in the US is the employer-based health insurance market. Every participant in this market receives a tax subsidy because premiums are excluded from taxable income. However, people have different incentives to participate in the employer-based pool - since premiums are independent of individual risk, high-risk individuals receive implicit cross-subsidies from low-risk individuals. In this paper, we explore several ways to reform the tax subsidy by taking this implicit cross- subsidization into account. Using a general equilibrium heterogeneous agents model, we find that even though the complete elimination of the tax subsidy leads to the unraveling of the employer-based pool, there is still room for substantial savings by targeting the tax subsidy. More specifically, the same level of risk-sharing in the employer-based market can be achieved at one- third of the current costs if i) the tax subsidy is targeted only towards low- risk individuals who have weak incentives to participate in the pool, and ii) employer-based insurance premiums become age-adjusted. To improve the welfare outcome of this reform, the modified tax subsidy should also be targeted to low-income individuals.
    Keywords: health insurance, tax subsidies, tax deductions, general equilibrium, life-cycle, health reform
    JEL: D52 D91 E2 E21 E65 H20 I10
    Date: 2013–05–08
  5. By: Achtnicht, Martin; Osberghaus, Daniel
    Abstract: Flood insurance helps to cope with the risk of flooding, but take-up rates are relatively low. Insurance density could rise if index-based insurance (IBI) were provided as an alternative to traditional damage-based insurance (DBI). We analyze whether there is potential for private demand for IBI in Germany. We use data from a discrete choice experiment combined with damage data for a major flood in 2013. We find IBI to attract similar customers as DBI, while DBI is preferred on average. Our results suggest that not many new customers would enter the market, once IBI were available.
    Keywords: Climate Change,Discrete Choice Experiment,Floods,Insurance,Index-based
    JEL: Q54 G22 D14
    Date: 2016
  6. By: Maximilian ADELMANN (University of Zurich); Lucio FERNANDEZ ARJONA (Zurich Insurance Group Ltd.); Janos MAYER (University of Zurich); Karl SCHMEDDERS (University of Zurich and Swiss Finance Institute)
    Abstract: Replicating portfolios have recently emerged as an important tool in the life insurance industry, used for the valuation of companies' liabilities. This paper presents a replicating portfolio (RP) model for approximating life insurance liabilities as closely as possible. We minimize the L1 error between the discounted life insurance liability cash flows and the discounted RP cash flows over a multi-period time horizon for a broad range of different future economic scenarios. We apply two different linear reformulations of the L1 problem to solve large-scale RP optimization problems and also present several out-of-sample tests for assessing the quality of RPs. A numerical application of our RP model to empirical data sets demonstrates that the model delivers RPs that match the liabilities rather closely. The numerical analysis demonstrates that our model delivers RPs with excellent practical properties in a reasonable amount of time. We complete the paper with a description of an implementation of the RP model at a global insurance company.
    Keywords: Insurance regulation; liability cash flows; linear programming; out-of-sample tests; replicating portfolios; Solvency II
    JEL: C61 C65
  7. By: Agata M. Lozinskaia (National Research University Higher School); Evgeniy M. Ozhegov (National Research University Higher School); Alexander M. Karminsky (National Research University Higher School)
    Abstract: This paper investigates the distribution of relative credit losses given mortgage default for loans provided by a major government-sponsored creditor in a local area. We use borrower’s individual and loan-level data on residential mortgages originated in the period 2008–2012. Our numerical analysis indicates that mortgages bunching at certain Loan-to-Value ratios (LTV) led to a discontinuity in relative credit loss given mortgage default. Through regression analysis, we demonstrate discrete jumps in the approximated historical credit losses generated by loans with a high LTV ratios and find thresholds allowing the segmentation of loans according their credit risk. In addition, our results suggest that mortgage insurance is a potentially valuable instrument for compensation for expected loss in certain risk segments.
    Keywords: discontinuity; credit risk; mortgage default; government mortgage lending programs; loss evaluation.
    JEL: C21 G21 G32 R20 R58
    Date: 2016
  8. By: Ilan Tojerow (Université Libre de Bruxelles); Frédéric Panier (Stanford University); Andrey Fradkin (MIT Sloan School of Management and Airbn)
    Abstract: Young adults entering the labor force typically have little access to unemployment insurance or other formal insurance mechanisms. Instead, they rely on family insurance in the form of parental support to smooth consumption. We study the labor market response of Belgian young adults to decreases in parental support caused by parental job displacements. Our estimates correct for unobserved heterogeneity by using the timing of parental shocks before and after labor market entry. We find that a child whose parents lose a job prior to the child’s labor market entry is, on average, induced to work 6% more in the 3 years following labor market entry than a child whose parents lose a job after the child’s entry (where labor market entry is defined as the end of the child’s full-time education). This effect is concentrated on the extensive margin, meaning that the child finds a job faster, and disappears within four years of entry. We find no evidence that parental support affects the quality of the initial job that entrants find.
    Date: 2016
  9. By: Morsink,Karlijn; Clarke,Daniel Jonathan; Mapfumo,Shadreck
    Abstract: Agricultural index insurance offers the promise of an affordable and sustainable insurance product for farmers that can help reduce their vulnerability to aggregate agricultural shocks such as large-scale drought or flooding. However, index insurance provides claim payments based on a trigger that is only imperfectly correlated with losses. This implies that it carries basis risk: it may provide claim payments in years when there are no losses, and no claim payments in years when there are losses. The impact of index insurance on poverty outcomes is highly sensitive to the degree to which the product offers reliable protection. Offering unreliable index insurance may lead to high reputation risk for donors, governments, and the private sector. This study proposes to measure the reliability of index insurance in terms of two policy objectives that stakeholders may have when offering index insurance: the extent to which the insurance captures losses caused by the peril covered by the contract (insured peril basis risk) and the extent to which the insurance covers losses from agricultural production (production smoothing basis risk). For both types of basis risk two indicators are proposed: the probability of catastrophic basis risk and the catastrophic performance ratio. Donors, governments, and insurers can use the proposed monitoring indicators without much prior technical knowledge. Although the indicators specifically focus on agricultural index insurance for low-income farmers, they can be applied to any context where payments are provided based on indices that are correlated with losses.
    Date: 2016–07–18
  10. By: Mario V. Wuthrich (ETH Zurich and Swiss Finance Institute); Michael Merz (University of Hamburg)
    Abstract: These notes are strongly motivated by practitioners who have been seeking for advise in stochastic claims reserving modeling under Solvency 2 and under the Swiss Solvency Test. There have been tremendous developments since the publication of our first book Stochastic Claims Reserving Methods in Insurance in 2008. Particularly the new solvency guidelines have added a dynamic component to claims reserving which has not been present before. This new viewpoint has motivated numerous new developments, for instance, the claims development result and the risk margin were introduced. The present text considers these new aspects, not treated in our previous book, and it should be viewed as completion to our first book.
    Keywords: Claims reserving, non-life insurance run-off, chain-ladder method, Bornhuetter-Ferguson method, claims modeling, claims development result, risk margin, run-off uncertainty, conditional mean square error of prediciton
    JEL: G22 C11
  11. By: Bartkowski, Bartosz
    Abstract: Biodiversity is an important environmental public good. However, the literature suggests that it is not clear how its economic value should be estimated; there is no established framework for doing this. This paper summarises concepts of biodiversity value from the ecological and economic literatures and combines them to a comprehensive and consistent framework. It is argued that biodiversity is the main carrier of insurance value, option value and spill-over value, and also influences the aesthetic appreciation of ecosystems. On that basis, an extension of the TEV framework is proposed to incorporate biodiversity values better. Furthermore, a number of specific challenges of biodiversity as an economic good are identified and used as criteria to inform the choice of suitable valuation methods.
    Keywords: biodiversity,economic valuation,insurance value,option value,TEV
    Date: 2016
  12. By: Jekaterina Navicke; Silvia Avram; Lilas Demmou
    Abstract: In 2015 the Lithuanian government launched an ambitious Social Model reform agenda aimed at balancing flexibility of the labour market and security provided through the system of social protection. We simulate alternative scenarios for reforming the unemployment benefit and cash social assistance systems in Lithuania. We first analyse a reform of the social insurance unemployment benefit along the lines currently proposed by the Lithuanian authorities within the new “Social Model”. The social assistance reforms were left outside of the Social Model. However, social assistance, as currently designed, has strong negative effects on the work incentives of the recipients. We construct and consider several reform scenarios: extending the current system of in-work payments; establishing earnings disregards; and modifying the equivalence scale for family. We look at the effects of reforms on financial incentives to search and accept a vacancy as measured by the share of additional income that is taxed away through direct taxes, social insurance contributions or through benefit withdrawal when increasing labour supply (effective marginal tax rate). We also investigate the impact of reforms on poverty, income distribution as well as their first-order financial costs. We use microsimulation techniques applied to a representative sample of Lithuanian households. Our simulations are carried out using EUROMOD –a static tax-benefit microsimulation model developed for the European Union. The model uses micro-data from the 2012 Lithuanian component of the European Union-Survey of Income and Living Conditions (SILC). This Working Paper relates to the 2016 OECD Economic Survey of Lithuania ( Les effets de différents scénarios de réforme des assurances chômage et aides sociales sur les incitations financières au travail et la pauvreté en Lituanie En 2015, le gouvernement Lituanien a lancé un programme de réforme ambitieux du modèle social visant à trouver un équilibre entre flexibilité de la législation du marché du travail et sécurité fournie par le système de protection sociale. Nous simulons des scénarios alternatifs de réformes des allocations d’assurance chômage et du régime d’aide sociale (allocations payées sous forme d’aide en liquidités) en Lituanie. Nous analysons d'abord les effets d’une réforme de l'allocation d'assurance chômage selon les lignes actuellement proposées par les autorités lituaniennes dans le cadre du nouveau « Modèle Social ». Ce nouveau modèle social ne prévoit pas de reformes de l'aide sociale. Toutefois, le régime d’aide sociale, tel qu'il est actuellement conçu, a des effets fortement négatifs sur les incitations au travail des bénéficiaires. Nous construisons et considérons plusieurs scénarios de réforme du régime d’aide social: une extension du système de prestations liées à l’exercice d’un emploi; la mise en place de mesures d’exemptions de rémunération; et une réforme du facteur d‘équivalence tenant compte de la taille des familles lors de l’octroi des allocations. Nous examinons les effets des réformes sur les incitations financières à rechercher et accepter un poste tel que mesuré par la part du revenu supplémentaire qui est effectivement imposé via les impôts directs, les cotisations d'assurance sociale ou par le retrait des prestations (taux effectif marginal d'imposition). Nous étudions également l'impact des réformes sur la pauvreté, la répartition des revenus ainsi que leurs coûts financiers (de premier tour). Nous utilisons des techniques de microsimulation appliqués à un échantillon représentatif des ménages lituaniens. Nos simulations sont effectuées à l'aide du modèle statique de micro-simulation des taxes et prestations sociales EUROMOD développé pour l'Union européenne. Le modèle utilise des micro-données tirées de l’enquête de l’Union Européenne sur les conditions de revenu et de vie (SILC) 2012. Ce document de travail se rapporte à l’Étude économique de l’OCDE de la Lituanie 2016 ( ique-lituanie.htm).
    Keywords: in-work benefits, effective tax rate, simulations, social assistance benefits, unemployment benefits, taux de taxation effective, aide sociale, simulations, Allocation d’assurance chômage, prestations liées à l'exercice d'un emploi
    JEL: D04 D3 I3 J2 J6
    Date: 2016–07–26
  13. By: Rebollo-Sanz, Yolanda Fatima (Universidad Pablo de Olavide); Rodríguez-Planas, Núria (Queens College, CUNY)
    Abstract: In the aftermath of the Great Recession, the Spanish government reduced the replacement rate (RR) from 60% to 50% after 180 days of unemployment for all spells beginning on July 15, 2012. Using Social Security data and a Differences-in-Differences approach, we find that reducing the RR by 10 percentage points (or 17%) increases workers' odds of finding a job by at least 41% relative to similar workers not affected by the reform. To put it differently, the reform reduced the mean expected unemployment duration by 5.7 weeks (or 14%), implying an elasticity of 0.86. We find strong behavioral effects as the reform reduced the expected unemployment duration right from the beginning of the unemployment spell. While the reform had no effect on wages, it did not decrease other measures of post-displacement job-match quality. After 15 months, the reform decreased unemployment insurance expenditures by 16%, about half of which are explained by job seekers' behavioral changes.
    Keywords: labor supply, financial incentives, unemployment insurance replacement rate, hazard function models, wages and job-match quality, forward-looking non-employed workers, longitudinal social security data
    JEL: C41 J64
    Date: 2016–07

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