nep-ias New Economics Papers
on Insurance Economics
Issue of 2016‒11‒20
ten papers chosen by
Soumitra K. Mallick
Indian Institute of Social Welfare and Business Management

  1. A Quantitative Theory of Time-Consistent Unemployment Insurance By Pei, Yun; Xie, Zoe
  2. Loading Pricing of Catastrophe Bonds and Other Long-Dated, Insurance-Type Contracts By Eckhard Platen; David Taylor
  3. Elderly Care, Child Care, and Labor Supply in an Aging Japan By Ryuta Ray Kato
  4. Cost-Sharing and Drug Pricing Strategies : Introducing Tiered Co-Payments in Reference Price Markets By Herr, Annika; Suppliet, Moritz
  5. Case Management for High-Cost Medicare Beneficiaries By Jennifer L. Schore; Randall S. Brown; Valerie A. Cheh
  6. optimal insurance for time-inconsistent agents By Frederic Cherbonnier
  7. Strengthening Enforcement in Unemployment Insurance: A Natural Experiment By Arni, Patrick; Schiprowski, Amelie
  8. Etiopathology of Europe's Sick Man: Worker Flows in Germany, 1959-2016 By Hartung, Benjamin; Jung, Philip; Kuhn, Moritz
  9. Under-Insurance in Human Capital Models with Limited Enforcement By Krebs, Tom; Kuhn, Moritz; Wright, Mark L.J.
  10. Ownership and exit behavior: evidence from the home health care market By Chiara Orsini

  1. By: Pei, Yun (State University of New York at Buffalo); Xie, Zoe (Federal Reserve Bank of Atlanta)
    Abstract: During recessions, the U.S. government substantially increases the duration of unemployment insurance (UI) benefits through multiple extensions. This paper seeks to understand the incentives driving these increases. Because of the trade-off between insurance and job search incentives, the classic time-inconsistency problem arises. This paper endogenizes a time-consistent UI policy in a stochastic equilibrium search model, where a government without commitment to future policies chooses the UI benefit level and expected duration each period. A longer benefit duration increases unemployed workers’ consumption but reduces job search, leading to higher future unemployment. Quantitatively, the model rationalizes most of the variations in benefit duration during the Great Recession. We use the framework to evaluate the effects of the 2009–13 benefit extensions on unemployment and welfare.
    Keywords: time-consistent policy; unemployment insurance; labor market; business cycle
    JEL: E61 H21 J64 J65
    Date: 2016–11–01
  2. By: Eckhard Platen (Finance Discipline Group, UTS Business School, University of Technology, Sydney); David Taylor (Department of Actuarial Science and the African Collaboration for Quantitative Finance and Risk Research, University of Cape Town)
    Abstract: Catastrophe risk is a major threat faced by individuals, companies, and entire economies. Catastrophe (CAT) bonds have emerged as a method to offset this risk and a corresponding literature has developed that attempts to provide a market-consistent pricing methodology for these and other long-dated, insurance-type contracts. This paper aims to unify and generalize several of the widely-used pricing approaches for long-dated contracts with a focus on stylized CAT bonds and market-consistent valuation. It proposes a loading pricing concept that combines the theoretically possible minimal price of a contract with its formally obtained risk neutral price, without creating economically meaningful arbitrage. A loading degree controls how much influence the formally obtained risk neutral price has on the market price. A key finding is that this loading degree has to be constant for a minimally fluctuating contract, and is an important, measurable characteristic for prices of long-dated contracts. Loading pricing allows long-dated, insurance-type contracts to be priced less expensively and with higher return on investment than under classical pricing approaches. Loading pricing enables insurance companies to accumulate systematically reserves needed to manage its risk of ruin in a market consistent manner.
    Keywords: long-dated contracts; CAT bonds; real world pricing; risk neutral pricing; loading pricing; benchmark approach; market-consistent valuation
    JEL: G10 G13
    Date: 2016–10–01
  3. By: Ryuta Ray Kato (International University of Japan)
    Abstract: This paper numerically examines the impact of the financial and time cost of child care as well as elderly care on economic growth and welfare in an aging Japan within a dynamic general equilibrium framework of multi-period overlapping generations with endogenized labor supply. Simulation results indicate that the replacement rate of the public pension scheme becomes below 50 percent from year 2039, even if the currently accumulated public pension funds are used up for paying pension benefits by year 2115. Financial burdens for the first group (age 65 and over) and for the second group (age 40 - 64) in the public long-term care insurance in year 2060 become more than double and more than five times as much as the level of year 2010 in an aging Japan, respectively. While increased child benefits stimulate savings and thus they improve welfare, the impact of elimination of the time cost of child care and elderly care is quite mixed, depending on the gender and job contract types of workers within the household. When the time cost of elderly care spent by all workers irrespective of gender and job contract types is eliminated, many generations enjoy welfare gain, but when the time cost of child care by all workers is eliminated, then almost all generations, except for relatively elder generations, reversely suffer from welfare loss. When a starting age to contribute to the long-term care insurance becomes earlier from the current age of 40 to age 35, welfare of all generations improves.
    Keywords: Child Care, Child Benefits, Elderly Care, Long-Term Care Insurance, Public Pension, Female Labor Supply, Aging, Economic Growth, Simulation, CGE Model
    JEL: C68 H51 E62 H55 J16
    Date: 2016–11
  4. By: Herr, Annika; Suppliet, Moritz
    Abstract: Health insurances curb price insensitive behavior and moral hazard of insureds through different types of cost-sharing, such as tiered co-payments or reference pricing. This paper evaluates the effect of newly introduced price limits below which drugs are exempt from co-payments on the pricing strategies of drug manufacturers in reference price markets. We exploit quarterly data on all prescription drugs under reference pricing available in Germany from 2007 to 2010. To identify causal effects, we use instruments that proxy regulation intensity. A difference-in-differences approach exploits the fact that the exemption policy was introduced successively during this period. Our main results first show that the new policy led generic firms to decrease prices by 5 percent on average, while brand-name firms increase prices by 7 percent after the introduction. Second, sales increased for exempt products. Third, we find evidence that differentiated health insurance coverage (public versus private) explains the identifed market segmentation.
    Keywords: pharmaceutical prices; cost-sharing; co-payments; reference pricing; regulation; firm behavior; health insurance
    JEL: I1 L11
    Date: 2016
  5. By: Jennifer L. Schore; Randall S. Brown; Valerie A. Cheh
    Abstract: Based on the findings presented in this article, HCFA is conducting another set of demonstrations on case management and care coordination, which Mathematica is helping to design.
    JEL: I
  6. By: Frederic Cherbonnier (Toulouse School of Economics)
    Abstract: We examine the provision of insurance against non-observable liquidity shocks for a time-inconsistent agent who can privately store resources. When the lack of self control is strong enough, hidden storage does not constrain the allocation of resources. The optimal contract is strictly concave and similar to a credit contract : It allows the agent to borrow at an increasing cost, and save at a decreasing rate of return. Extending the model to an infinite horizon, we then show that, in the presence of repeated shocks, the optimal contract leads consumers to impoverishment almost surely. By contrast, the optimal contract for a time-consistent agent only allows him to borrow at the economy’s interest rate, and induces him to almost surely accumulate wealth indefinitely. Those results bring out how lack of self-control changes the nature of optimal savings and borrowing instruments, and may lead individuals and states to impoverishment. We discuss applications to consumer over-indebtedness, social security design, sovereign debt crises and Pigovian regulation.
    Date: 2016
  7. By: Arni, Patrick (University of Bristol); Schiprowski, Amelie (IZA)
    Abstract: Enforcing the compliance with job search obligations is a core task of conditional benefit systems like unemployment insurance (UI) or welfare. For targeted policy design, it is key to understand how the enforcement regime affects job search outcomes. This paper provides first estimates that separately identify the effects of increasing enforcement strictness in UI. As a natural experiment, we exploit a reform which induced a sharp and unanticipated increase in the probability of being sanctioned after the failure to document job search effort. Using a difference-in-differences design, we find that the probability of job finding within six months increases by 6 percentage points in response to the policy change. This effect comes at the cost of lower job stability. As a consequence, early job finders experience losses in total earnings driven by fewer months in employment within the considered post-unemployment period. We use these estimates to quantify the elasticities to changes in enforcement strictness, trading off the short-run gains (job finding) against the mid-run costs (job quality).
    Keywords: unemployment insurance, job search, natural experiment, enforcement
    JEL: J64 J65 J68
    Date: 2016–11
  8. By: Hartung, Benjamin (University of Bonn); Jung, Philip (TU Dortmund); Kuhn, Moritz (University of Bonn)
    Abstract: We provide new estimates on worker flow rates in and out of unemployment for Germany covering the last six decades. In the 1980s, Germany emerged as the sick man of Europe with a labor market characterized by persistently high unemployment rates. We attribute a substantial fraction of the rise in unemployment to a dramatic increase in inflow rates compared to the 1960s. Germany's recovery started in the mid-2000s after the Hartz reforms, when inflow rates persistently decreased. Comparing the German and U.S. labor market during recessions uncovers a striking similarity between the recent financial crisis in the U.S. and the German recession in the 1980s. We relate these findings to existing theories on labor market differences between the U.S. and Germany.
    Keywords: labor market dynamics, worker flows, Germany
    JEL: J63 J64
    Date: 2016–11
  9. By: Krebs, Tom; Kuhn, Moritz; Wright, Mark L.J.
    Abstract: This paper uses a macroeconomic model calibrated to U.S. data to show that limited contract enforcement leads to substantial under-insurance against human capital risk. The model economy is populated by a large number of risk-averse households who can invest in risk-free physical capital and risky human capital. Expected human capital returns are age-dependent and calibrated to match the observed life-cycle profile of median labor income. Households have access to a complete set of credit and insurance contracts, but their ability to use the available financial instruments is limited by the possibility of default (limited contract enforcement). According to the baseline calibration, young households are severely under-insured against human capital (labor income) risk and the welfare losses due to the lack of insurance are substantial. These results are robust to realistic variations in parameter values.
    Keywords: Human Capital Risk; Insurance; Limited Enforcement
    JEL: D52 E21 E24 J24
    Date: 2016–11
  10. By: Chiara Orsini
    Abstract: In the US health care system a high fraction of suppliers are not-for-profit companies. Some argue that non-profits are “for-profits in disguise” and I test this proposition in a quasi-experimental way by examining the exit behavior of home health care firms after a legislative change considerably reduced reimbursed visits per patient. The change allows me to construct a cross provider measure of restriction in reimbursement and to use this measure and time-series variation due to the passage of the law in my estimates. I find that exits among for-profit firms are higher than those of not-for-profit firms, rejecting the null that these sectors responded to the legislation in similar ways. In addition, my results expand the view that “not-for-profit” firms are a form of “trapped capital.” There is little capital investment in the home health care market, so the higher exit rates of for-profit firms after the law change indicate the possible role of labor inputs in generating differences in exit behavior across sectors.
    Keywords: long-term care; government restriction in financing; not-for-profit
    JEL: H32 I11 L31
    Date: 2016–01

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