nep-ias New Economics Papers
on Insurance Economics
Issue of 2016‒11‒27
fourteen papers chosen by
Soumitra K. Mallick
Indian Institute of Social Welfare and Business Management

  1. Can Insurance Mitigate Household Businesses’ Vulnerability to Health Shocks? By Axel Demenet
  2. The Affordable Care Act as Retiree Health Insurance: Implications for Retirement and Social Security Claiming By Alan L. Gustman; Thomas L. Steinmeier; Nahid Tabatabai
  3. Screening in Contract Design: Evidence from the ACA Health Insurance Exchanges By Michael Geruso; Timothy J. Layton; Daniel Prinz
  4. Multiple Contracting in Insurance Markets By Attar, Andrea; Mariotti, Thomas; Salanié, François
  5. The Price of Growth: Consumption Insurance in China 1989-2009 By Santaeulàlia-Llopis, Raül ; Zheng, Yu
  6. A note on health insurance under ex post moral hazard By Pierre Picard
  7. Free-rider behavior under voluntary amalgamation: The case of setting the long-term care insurance premium in Japan By Nakazawa, Katsuyoshi
  8. Life Insurance Development and Economic Growth: Evidence from Developing Countries By Idrissa Ouedraogo; Samuel Guerineau; Relwende Sawadogo
  9. Age-Specific Adjustment of Graduated Mortality By Yahia Salhi; Pierre-Emmanuel Thérond
  10. Seasonal Scarcity and Sharing Norms By Vojtech Bartos
  11. National Insurance Scheme Reforms in the Caribbean By Koffie Ben Nassar; Joel Chiedu Okwuokei; Mike Li; Timothy Robinson; Saji Thomas
  12. What was fair in actuarial fairness? By Antonio Heras Martínez; David Teira; Pierre-Charles Pradier
  13. Health Shocks and Permanent Income Loss: the Household Business Channel By Axel Demenet
  14. Scared to be poor: Vulnerability and poverty in Great Britain at the beginning of the 20th century By Federica Di Battista

  1. By: Axel Demenet (DIAL, UMR 225, IRD, Paris, France, PSL Research University, Université Paris-Dauphine, LEDa, Paris, France)
    Abstract: Household Businesses (HB) are vulnerable to health shocks affecting all members of the household to which they belong. The monetary costs of these shocks affect HB revenue and investment. Health insurance, by offering financial protection against catastrophic health expenditures and increasing health care utilisation, should mitigate this specific vulnerability. A 2005 reform giving free health insurance to children under 6 in Vietnam introduced a discontinuity in the coverage of children, and lets evaluating the influence of insurance in this regard. The change allows comparing otherwise similar household businesses that differ only by the proportion of insured children in the household. The results show that health insurance did not decrease health expenditures, and neither increased the number of days during which the HB operated. The potential of health insurance to mitigate the effect of health shocks on informal microenterprises is conditional on the actual level of financial protection offered –which was low in this context. I nevertheless evidence a potential peace of mind effect: health insurance can stimulate investment, at least temporarily, even while no actual mitigating effect exists.
    Keywords: informal sector, microenterprises, household business, health insurance
    JEL: O17 I13 I15
    Date: 2016–10
  2. By: Alan L. Gustman; Thomas L. Steinmeier; Nahid Tabatabai
    Abstract: Using data from the Health and Retirement Study, we examine the effects of the Affordable Care Act (ACA) on retirement. We first calculate retirements (and in related analyses changes in expected ages of retirement and/or Social Security claiming) between 2010, before ACA, and 2014, after ACA, for those with health insurance at work but not in retirement. This group experienced the sharpest change in retirement incentives from ACA. We then compare retirement measures for those with health insurance at work but not in retirement with retirement measures for two other groups, those who, before ACA, had employer provided health insurance both at work and in retirement, and those who had no health insurance either at work or in retirement. To complete a difference-in-difference analysis, we make the same calculations for members of an older cohort over the same age span. We find no evidence that ACA increases the propensity to retire or changes the retirement expectations of those who, before ACA, had coverage when working but not when retired. An analysis based on a structural retirement model suggests that eventually ACA will increase the probability of retirement by those who initially had health insurance on the job but did not have employer provided retiree health insurance. But the retirement increase is quite small, only about half a percentage point at each year of age. The model also suggests that much of the effect of ACA on retirement will be realized within a few years of the change in the law.
    JEL: D91 E21 H55 I13 J14 J18 J26 J32
    Date: 2016–11
  3. By: Michael Geruso; Timothy J. Layton; Daniel Prinz
    Abstract: By steering patients to cost-effective substitutes, the tiered design of prescription drug formularies can improve the efficiency of healthcare consumption in the presence of moral hazard. However, a long theoretical literature describes how contract design can also be used to screen consumers by profitability. In this paper, we study this type of screening in the ACA Health Insurance Exchanges. We first show that despite large regulatory transfers that neutralize selection incentives for most consumer types, some consumers are unprofitable in a way that is predictable by their prescription drug demand. Then, using a difference-in-differences strategy that compares Exchange formularies where these selection incentives exist to employer plan formularies where they do not, we show that Exchange insurers design formularies as screening devices that are differentially unattractive to unprofitable consumer types. This results in inefficiently low levels of coverage for the corresponding drugs in equilibrium. Although this type of contract distortion has been highlighted in the prior theoretical literature, until now empirical evidence has been rare. The impact on out-of-pocket costs for consumers affected by the distortion is substantial—potentially thousands of dollars per year—and the distortion creates an equilibrium in which contracts that efficiently trade off moral hazard and risk protection cannot exist.
    JEL: I11 I13 I18
    Date: 2016–11
  4. By: Attar, Andrea; Mariotti, Thomas; Salanié, François
    Abstract: We study insurance markets in which privately informed consumers can purchase coverage from several insurers. Under adverse selection, multiple contracting severely restricts feasible trades. Indeed, only one budget-balanced allocation is implementable by an entry-proof tariff, and each layer of coverage must be fairly priced given the consumer types who purchase it. This allocation is the unique equilibrium outcome of a game in which cross-subsidies between contracts are prohibited. Equilibrium contracts exhibit quantity discounts and negative correlation between risk and coverage. Public intervention should target insurers' strategic behavior, while consumers can be left free to choose their preferred amount of coverage.
    Keywords: Adverse Selection; Insurance Markets; Multiple Contracting
    JEL: D43 D82 D86
    Date: 2016–11
  5. By: Santaeulàlia-Llopis, Raül ; Zheng, Yu
    Abstract: The welfare gains of economic growth hinge on the ability of households to insure consumption against the risks associated with growth. We exploit a novel and unique opportunity to study this question using China, an economy that has witnessed enormous and sustained growth and for which we build a long panel of household-level consumption and income. We find that consumption insurance deteriorates along the growth process with a transmission of permanent income shocks to consumption that triples from 1989 to 2009. The loss of consumption insurance has implications for the welfare assessment of economic growth across time and across space.
    Keywords: Income Risk, Consumption Insurance, Growth, Welfare, China
    JEL: O4 D1
    Date: 2016
  6. By: Pierre Picard (Ecole Polytechnique [Palaiseau])
    Abstract: In the linear coinsurance problem, examined first by Mossin (1968), a higher risk aversion with respect to wealth in the sense of Arrow-Pratt implies a higher optimal coinsurance rate. We show that this property does not hold for health insurance under ex post moral hazard, i.e., when illness severity cannot be observed by insurers and policyholders decide on their health expenditures. The optimal coinsurance rate trades off a risk sharing effect and an incentive effect, both related to risk aversion.
    Keywords: coinsurance, ex post moral hazard,Health Insurance
    Date: 2016–10–10
  7. By: Nakazawa, Katsuyoshi
    Abstract: Amalgamation offers municipalities an incentive to free ride when they can subrogate the load onto the newly created municipality after amalgamation. However, the doubt about whether the merged municipalities were really selected at random remains, especially in the case of voluntary amalgamation. Moreover, the pre-merger municipality’s debt accumulation or public spending expansion before amalgamation cannot be confirmed as free-rider behavior because these municipalities might have only developed the infrastructure in preparation for the amalgamation. Based on the foregoing, this study divides pre-merger municipalities into two groups: those that had the chance to free ride when setting the long-term care insurance premium and those that did not. Moreover, it focuses on the revision of the long-term care insurance premium as the target of free-rider behavior. The regression results confirm that only pre-merger municipalities that formed amalgamation committees before FY2003 and approved amalgamation after FY2003 showed free-rider behavior. These municipalities revised the long-term care insurance premium lower than never-merged and pre-merger municipalities that formed amalgamation committees and approved amalgamation after FY2003.
    Keywords: Voluntary amalgamation; Free-rider behavior; Long-term care insurance system; Premium setting; Difference-in-difference
    JEL: H73 H75 H77 I18 R51
    Date: 2016–11–19
  8. By: Idrissa Ouedraogo (CEDRES - Université de Ouaga II); Samuel Guerineau (CERDI - Centre d'études et de recherches sur le developpement international - Université d'Auvergne - Clermont-Ferrand I - CNRS - Centre National de la Recherche Scientifique); Relwende Sawadogo (CERDI - Centre d'études et de recherches sur le developpement international - Université d'Auvergne - Clermont-Ferrand I - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This article examines the relation between the development of life insurance sector and economic growth, for a sample of 86 developing countries over the period 1996-2011. We also examine the heterogeneous effect of life insurance on growth. The econometric results show on the one hand that the development of life insurance has a positive effect on economic growth per capita and, on the other hand, that this effect varies according to the structural characteristics of countries. Thus, the marginal positive impact of the development of life insurance decreases with the levels of deposit interest rate, bank credit and stock market value traded, while the effect is greater in countries with high-quality institutions. Finally, life insurance effect on growth is less for SSA and British legal system countries, compared to non-SSA and non-British legal system countries.
    Keywords: Life insurance market, Economic growth, Developing countries.
    Date: 2016–10–20
  9. By: Yahia Salhi (SAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1); Pierre-Emmanuel Thérond (Galea & Associés, SAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1)
    Abstract: Recently, there has been an increasing interest of life insurers to assess their portfolios own mortality risk. The new European prudential regulation, namely Solvency II, emphasized the need to use mortality and life tables that best capture and reflect the experienced mortality, and thus policyholders' proper risk profile, in order to adequately quantify the underlying risk. Therefore, building a mortality table based on the experience from the portfolio is highly recommended and, for this purpose, various approaches have been introduced in the literature. Although, such approaches succeed in capturing the main feature, it remains difficult to assess the mortality when the underlying portfolio lacks of sufficient exposure. In this paper, we propose to graduate the mortality curve using an adaptive procedure based on the local likelihood, which has the ability to model the mortality patterns even in presence of complex structures and avoid to rely on experts opinion. However, such a technique fails at proposing a consistent yet regular structure when for portfolios with limited deaths. Although the technique borrows the information from the adjacent ages, it is sometimes not sufficient to produce a robust life tables. In presence of such a bias, we propose to adjust the corresponding curve, at the age level, based on a credibility approach. This consists on reviewing, as new observations arrive, the assumption on the mortality curve. We derive the updating procedure and investigate the benefits of using the latter instead of a sole graduation based on real datasets. Moreover, we look at the divergences in the mortality forecasts generated by the classical credibility approaches including Hardy-Panjer, the Poisson-Gamma model and Makeham framework on portfolios originating from various French insurance companies.
    Keywords: Smoothing,Graduation,Life Insurance,Credibility,Mortality,Local Likelihood,Prediction
    Date: 2016–10–20
  10. By: Vojtech Bartos
    Abstract: Sharing provides one of few sources of insurance in poor communities. It gains prominence during adverse shocks, often largely aggregate, when it is also costliest for individuals to share. Yet it is little understood how scarcity affects individual willingness to share and willingness to enforce sharing from others, an important ingredient in sustaining prosocial behavior. This is what this paper examines. I conduct repeated within-subject lab-in-the-field experiments among Afghan subsistence farmers during a lean and a postharvest season of relative plenty. These farmers experience seasonal scarcities annually. Using dictator and third party punishment games I separate individual sharing behavior from enforcement of sharing norms. While sharing exhibits high degree of temporal stability at both the aggregate, and, to a large extent, at the individual level, the enforcement of sharing norms is substantially weaker during the lean season. The findings suggest that the farmers are capable of sustaining mutual sharing through transitory periods of scarcity. It remains an open question whether exposure to unexpected shocks or prolonged periods of scarcity might result in breakdown of prosociality due to loosened sharing norms enforcement on a community level.
    Keywords: Afghanistan; scarcity; seasonality; sharing; social norms;
    JEL: C93 D63 I32 Z13
    Date: 2016–01
  11. By: Koffie Ben Nassar; Joel Chiedu Okwuokei; Mike Li; Timothy Robinson; Saji Thomas
    Abstract: Weighed down by population aging, slow economic growth, and high unemployment, National Insurance Schemes in the Caribbean are projected to run substantial deficits and deplete their assets in the next decades, raising the prospects of government intervention. With the region highly indebted, this paper quantifies the impact of three parametric reforms—freezing pension benefits for two years, raising the retirement age and increasing the contribution rate by one percentage point—that, if implemented, would put the pension schemes on a stronger financial footing. While the appropriate combination of reforms necessary to eliminate the actuarial deficits varies depending on each country’s circumstances, most countries need to undertake reforms now or risk even higher taxes, lower growth and unsustainable debt dynamics.
    Keywords: Insurance;Caribbean;Old age pensions;Aging;Retirement;Social security;Pension reforms;Social Security, Old Age Pensions, Public Debt, Contingent Liabilities
    Date: 2016–10–17
  12. By: Antonio Heras Martínez (Departamento de Economía Financiera y Contabilidad 1 - Universidad Complutense de Madrid); David Teira (Departamento de Lógica, Historia y Filosofia de la Ciencia - Universidad Nacional de Educatión a Distancia (UNED)); Pierre-Charles Pradier (Centre d'Economie de la Sorbonne & LabEx RéFi)
    Abstract: The concept of acturial fairness stems from an Aristotelian tradition in which fairness requires equality between the goods exchanged. When dealing with aleatory contracts, this principle evolved, among medieval scholars, into equality in risk: benefits and losses should be proportional to the risks undertaken. The formalization of this principle gave rise to the concept of mathematical expectation, first implemented in the calculation of the fair price of gambles. The concept of an actuarial fair price was first theoretically articulated in the 17th century as an implementation of this same Aristotelian principle in the field of life insurance. For a practical estimation of fair actuarial prices it was necessary to build mortality tables, assuming that the major risk factor was age. Yet, in the 18th and 19th centuries, we find no agreement among proto-actuaries about the proper construction of these tables. Among the obstacles they found, we want to highlight their early awareness of the possibility of adverse selection: buyers and sellers could manipulate the risk assessment for their own private interests, in a way that would either make fair companies collapse or fair customers be cheated. The paradox in the concept of actuarial fairness is that as soon as it was formally articulated, markets made clear it could never be implemented in actual pricing
    Keywords: actuarial fairness; mathematical expectation; life insurance; annuity; risk
    JEL: G22 G28 G01
    Date: 2016–10
  13. By: Axel Demenet (DIAL, UMR 225, IRD, Paris, France, PSL Research University, Université Paris-Dauphine, LEDa, Paris, France)
    Abstract: This study uses an original Vietnamese panel data to provide strong evidence that microenterprises are vulnerable to health shocks affecting their operators and/or other household members. Although intra-household labour reallocation mitigates the direct labour supply decrease, large out-of- pocket health expenditures have the potential of crowding out business-related expenditure, and to significantly decrease investment. The costs associated with illness thus affect directly the household businesses that generate income for countless individuals around the developing world. These results have important implications, among which the underestimation of the positive externalities of health insurance schemes.
    JEL: I15 E26 O17
    Date: 2016–10
  14. By: Federica Di Battista
    Abstract: This work explores the determinants of poverty in Edwardian Britain. We use a new household budget sample collected between 1900 and 1914 to understand what role vulnerability played in determining poverty and undernutrition. First, using a probit model we find that due to perceived risk on one hand, and to social norms on the other, families purchased insurance schemes as a strategy to cope with uncertainty. Second, using recursive mixed process estimation, we find that the decision to insure caused a reallocation from food to precautionary expenditures, which led to a significant reduction in calorie availability.
    Keywords: 1900-1914, Great Britain, insurance, poverty, vulnerability
    JEL: C14 I31 I32 N33
    Date: 2016–07–22

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