nep-ias New Economics Papers
on Insurance Economics
Issue of 2016‒12‒04
twelve papers chosen by
Soumitra K. Mallick
Indian Institute of Social Welfare and Business Management

  1. Federal Crop Insurance Options for Upland Cotton Farmers and Their Revenue Effects By Hungerford, Ashley; O'Donoghue, Erik
  2. Ireland: Financial Sector Assessment Program; Technical Note-Insurance Sector and Update on the Assessment of Observance of the Insurance Core Principles By International Monetary Fund. Monetary and Capital Markets Department
  3. Collusion in Vertical Relationships: The Case of Insurance Fraud in Taiwan By Pierre Picard; Kili Wang
  4. Gatekeeping in German Primary Health Care – Impacts on Coordination of Care, Quality Indicators and Ambulatory Costs By Sarah M. Hofmann; Andrea M. Mühlenweg
  5. Asymmetric Business Cycle Risk and Government Policy By Rocio Madera; Fatih Guvenen; David Domeij; Christopher Busch
  6. Adverse Selection and Moral Hazard in the Dynamic Model of Auto Insurance By Elena Krasnokutskaya; Przemyslaw Jeziorski
  7. Unemployment Insurance and the Duration of Employment: Theory and Evidence from a Regression Kink Design. By Diogo Britto
  8. Asset Pricing with Endogenously Uninsurable Tail Risks By anmol bhandari; Hengjie Ai
  9. What was fair in acturial fairness? By Antonio José Heras Martínez; David Teira; Pierre-Charles Pradier
  10. eHealth: Grundlagen der Digitalen Gesundheitswirtschaft und Leitmarktperspektiven By Paul J.J. Welfens
  11. Bounds on Treatment Effects in Regression Discontinuity Designs under Manipulation of the Running Variable, with an Application to Unemployment Insurance in Brazil By Gerard, Francois; Rokkanen, Miikka; Rothe, Christoph
  12. New modalities for managing drought risk in rainfed agriculture: Evidence from a discrete choice experiment in Odisha, India: By Ward, Patrick S.; Makhija, Simrin

  1. By: Hungerford, Ashley; O'Donoghue, Erik
    Abstract: The Agricultural Act of 2014 introduced two new crop insurance programs for upland cotton: the Supplemental Coverage Option (SCO) and the Stacked Income Protection Plan (STAX). SCO and STAX are known as “shallow loss” programs because they typically have lower deductibles and do not compensate for the bigger losses that other Federal crop insurance programs cover. This report examines the structures of SCO and STAX and how these programs interact with Revenue Protection, a preexisting crop insurance policy. It provides estimates of the contribution of SCO and STAX to revenue and downside risk reduction for upland cotton producers in various counties, revealing how risk reduction differs across counties with different inherent revenue risk caused by regional variations in yield. The report describes 2015 enrollment in STAX and SCO and finds that STAX enrollment is tied to the market share of cotton in a given county.
    Keywords: Cotton, crop insurance, Stacked Income Protection Plan, Supplemental Coverage, 2014 Farm Act, Agribusiness, Agricultural and Food Policy, Agricultural Finance, Crop Production/Industries, Financial Economics, Risk and Uncertainty,
    Date: 2016–10
  2. By: International Monetary Fund. Monetary and Capital Markets Department
    Abstract: This Technical Note discusses the findings and recommendations made in the Financial Sector Assessment Program for Ireland’s insurance sector. Insurance in Ireland is well developed, diverse, and has a large international business presence. Insurance penetration in Ireland is almost three times the EU average. Many recommendations have been implemented by the central bank, with Solvency II now the solvency regime in Ireland. In total, 51 Supervisory Review Process guidance papers have been prepared setting out the central bank’s internal supervisory processes and procedures under Solvency II with reference to the technical standards and guidelines and the central bank’s prioritization framework. Forty-seven of these were complete as of the end of 2015.
    Keywords: Financial Sector Assessment Program;Insurance;Insurance supervision;Insurance regulations;Reports on the Observance of Standards and Codes;Ireland;
    Date: 2016–09–29
  3. By: Pierre Picard (Ecole Polytechnique [Palaiseau]); Kili Wang (Tamkang University)
    Abstract: The delegation of services from producers to retailers is frequently at the origin of transaction costs, associated with the discretion in the way retailers do their job. This is particularly the case when retailers and customers collude to exploit loopholes in the contracts between producers and customers. In this paper, we analyze how insurance distribution channels may affect such misbehaviors, when car repairers are joining policy holders to defraud insurers. We focus attention on the Taiwan automobile insurance market by using a database provided by the largest Taiwanese automobile insurer. The theoretical underpinning of our analysisis provided by a model of claims fraud with collusion and audit. Our econometric analysis con firms that fraud occurs through the postponing of claims to the end of the policy year, possibly by filing on single claim for several events. It highlights the role of car dealer owned insurance agents in the collusive fraud mechanism.
    Keywords: Insurance, Fraud, Audit, Insurance distribution
    Date: 2016–10–04
  4. By: Sarah M. Hofmann (WifOR Darmstadt); Andrea M. Mühlenweg (WifOR Darmstadt)
    Abstract: Evaluation studies on gatekeeping in primary care exist for a variety of countries but provide mixed evidence on utilization and quality of care as well as costs. Our study evaluates the German gatekeeping program, based on claims data of a major statutory health insurance company. The panel structure of the data allows controlling for patients’ characteristics in the year before opting (or not opting) for a GP contract. In contrast to previous studies we are able to draw on multiple identification strategies. We exploit variation in the regional provision of gatekeeping in an instrumental variable (IV) framework. We also analyze GP fixed effects based on the observation of patients opting for one of two different contracts within the same GP office. We find that the gatekeeping contract yields a somewhat higher coordination of care, improved quality (regarding prevention and avoidance of hospitalization) but also higher ambulatory costs. The effects are largely robust between our identification strategies.
    Keywords: primary health care, gatekeeping, health care quality
    JEL: I10 I11 I13
    Date: 2016–09
  5. By: Rocio Madera (University of Minnesota); Fatih Guvenen (University of Minnesota); David Domeij (Stockholm School of Economics); Christopher Busch (University of Cologne)
    Abstract: This paper studies the business-cycle variation in higher-order income risk—risks that are captured by moments higher than the variance. A key focus is the extent to which such risks can be smoothed within households or with government policies. To provide a broad perspective on these questions, we study panel data on individuals and households from the United States, Germany, and Sweden, covering more than three decades of data for each country. We find that the underlying variation in higher-order risk is remarkably similar across these countries that differ in many details of their labor markets. In particular, in all three countries, the variance of earnings changes is almost entirely constant over the business cycle, whereas the skewness of these shocks becomes much more negative in recessions. Government provided insurance, in the form of unemployment insurance, welfare benefits, aid to low income households, and the like, plays a more important role reducing downside risk in all three countries; the effectiveness is weakest in the United States, and most pronounced in Germany. The welfare benefits of social insurance policies for stabilizing skewness risk over the business cycle range from 1% of annual consumption for the US to 4.5% for Sweden.
    Date: 2016
  6. By: Elena Krasnokutskaya (Johns Hopkins University); Przemyslaw Jeziorski (UC Berkeley)
    Abstract: We use the data on multiple years of contract choices and claims by customers of a major Portuguese car insurance company to investigate a possibility that agent’s risk is modifiable through costly (unobserved) effort. Using a model of contract choice and endogenous risk production we demonstrate the economic importance of moral hazard, measure the relative importance of agents’ private information on cost of reducing risk and risk aversion, and evaluate the relative effectiveness of dynamic versus static contract features in incentivizing effort and inducing sorting on unobserved risk.
    Date: 2016
  7. By: Diogo Britto (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore)
    Abstract: Can unemployment insurance (UI) affect the behavior of employed workers and the duration of their employment spells? I apply a regression kink design to address this question using data from the Brazilian labor market. Exploiting the UI schedule, I find that a 1% higher potential benefit level increases job duration by around 0.35%. This result is driven by the fact that a higher potential benefit level reduces the probability of job quits, which are not covered by UI. I develop a simple model showing that the positive effect on employment duration implies that the optimal benefit is higher than otherwise and delivers a simple welfare formula based on sufficient statistics. A simple calibration exercise shows that this elasticity affects welfare with a similar magnitude as the well-known elasticity of unemployment duration to the benefit level.
    Keywords: Unemployment Insurance, Employment Duration, Regression Kink Design, Sufficient Statistics Welfare Analysis.
    JEL: I38 J65
    Date: 2016–09
  8. By: anmol bhandari (university of minnesota); Hengjie Ai (University of Minnesota)
    Abstract: This paper studies asset pricing implications of idiosyncratic risk in labor productivities in a model where markets are endogenously incomplete. Well-diversified owners of firms provide insurance to workers using long-term wage contracts but cannot commit to ventures that yield a net present value of dividends. We show that under the optimal contract subject to limited commitment, workers are uninsured against tail risks in idiosyncratic productivities. Risk compensations are higher when we calibrate the model to replicate the feature that tail risk in labor income is more pervasive in recessions relative to expansions. Besides salient features of equity and bond markets, the model is consistent with other empirical facts such as the cyclicality of factor shares and limited stock market participation.
    Date: 2016
  9. By: Antonio José Heras Martínez (Departamento de Economía Financiera y Contabilidad 1 - Universidad Complutense de Madrid [Madrid]); David Teira (Departamento de Lógica, Historia y Filosofía de la ciencia - UNED - Universidad Nacional de Educación a Distancia); Pierre-Charles Pradier (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, Labex ReFi - Université Paris1 - Panthéon-Sorbonne)
    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.
    Abstract: Le concept de justice actuarielle dérive de la tradition aristotélicienne d'après lequel la justice requiert l'égalité entre les biens échangés. Dans le cas de contrats aléatoires, ce principe a évolué, chez les scolastiques médiévaux, vers l'égalité en termes de risque : les gains et les pertes doivent être proportionnels aux risques encourus. La formalisation de ce principe a donné naissance au concept d'espérance mathématique, qui est apparu dans le calcul des chances aux jeux de hasard sous la forme de juste prix. Le concept de prix actuariellement juste découle alors de la mise en œuvre du principe aristotélicien dans le domaine de l'assurance, et notamment de l'assurance-vie. pour l'estimation concrète des primes actuariellement justes, il fallait mettre au point des tables de mortalité et considérer que l'âge constituait le principal facteur de risque. Pourtant, pendant le siècle et demi qui s'achève vers 1830, les proto-actuaires ne s'accordent pas sur les méthodes de construction des tables. Parmi les obstacles à la formulation d'une méthode commune, nous avons voulu souligner l'attention portée très tôt aux problèmes d'antisélection : les acheteurs comme les vendeurs pouvaient manipuler la perception des risques de l'autre partie, de sorte que des compagnies pratiquant des prix justes puissent faire faillite, ou que des clients honnêtes puissent être volés. Le paradoxe du concept de justice actuarielle est donc que les marchés ont montré, dès qu'il a été formulé et calculé, qu'il ne constituerait jamais un prix viable.
    Keywords: actuarial fairness,mathematical expectation,life insurance,annuity,risk,justice actuarielle,espérance mathématique,assurance-vie,rente,risque
    Date: 2016–10
  10. By: Paul J.J. Welfens (Europäisches Institut für Internationale Wirtschaftsbeziehungen (EIIW))
    Abstract: The expansion of the digital health economy represents a strategic challenge for both the wider economy and society of the Federal Republic of Germany. In this context, economic policy actors need to set adequate framework conditions, such that competition in the health system, i.e. the interaction of statutory and private health insurance providers, will lead to optimal innovation dynamics and efficiency gains. Statutory and private health insurance funds each follow their own strategies. Amongst other strategies, private insurance providers make use of the possibility that firms are also involved in the area of occupational health management. There are, however, considerable obstacles to a digital modernization of the health sector, while Germany was also relatively late in introducing a digital health card. Among the significant benefits, for patients, insurers and care providers, are innovations in the area of digital check-ups and preventative care, telemedicine, digitalized after-care and an optimization of billing processes. Germany – in an EU context – ranks mid-table with regard to eHealth applications in the hospital industry, however, on the basis of a good positioning in terms of ICT and the large domestic market, Germany has the potential to become both a leading actor and a leading market in the medium term. From an economic perspective, eHealth progress can help to curb the rise of insurance contributions – digital advances have cost dampening effects, patient benefits and positive effects in the competitive process. Non-uniform health economy standards in EU countries largely prevent national software solutions and other eHealth concepts from easily being scaled-up, i.e. exported. Here, action by the EU is clearly required; including in the promotion and support of cooperation projects.
    Keywords: Health, Insurance, Innovation, Research
    JEL: I1 I18 O3
    Date: 2016–10
  11. By: Gerard, Francois; Rokkanen, Miikka; Rothe, Christoph
    Abstract: A key assumption in regression discontinuity analysis is that units cannot affect the value of their running variable through strategic behavior, or manipulation, in a way that leads to sorting on unobservable characteristics around the cutoff. Standard identification arguments break down if this condition is violated. This paper shows that treatment effects remain partially identified under weak assumptions on individuals' behavior in this case. We derive sharp bounds on causal parameters for both sharp and fuzzy designs, and show how additional structure can be used to further narrow the bounds. We use our methods to study the disincentive effect of unemployment insurance on (formal) reemployment in Brazil, where we find evidence of manipulation at an eligibility cutoff. Our bounds remain informative, despite the fact that manipulation has a sizable effect on our estimates of causal parameters.
    Keywords: manipulation; Regression Discontinuity; Unemployment insurance
    JEL: C14 C21 C31 J65
    Date: 2016–11
  12. By: Ward, Patrick S.; Makhija, Simrin
    Abstract: In this paper we explore the potential for a new approach to managing drought risk among rainfed rice producers in Odisha, India. Droughts have historically been a serious constraint to agricultural production in rainfed agricultural systems, with droughts resulting in significant reductions in both yields and cultivated area, in turn leading to significant impacts on rural livelihoods and food security. Scientists and policy makers have proposed various strategies for managing risks, with limited success. In this study we consider two such strategies, specifically drought-tolerant rice and weather index insurance. While neither drought-tolerant cultivars nor weather index insurance products are perfect solutions for adequately managing drought risk in and of themselves, there is scope to exploit the benefits of each and bundle them into a complementary risk management product, specifically through proper index calibration and an optimized insurance design. In this study, we explore preferences for such a complementary risk management product using discrete choice experiments in Odisha, India. We are able to estimate the added value that farmers perceive in the bundled product above and beyond the value associated with each of the independent products. We also show that valuations are sensitive to the basis risk implied by the insurance product, with farmers less enthusiastic about risk management products that leave significant risks uninsured.
    Keywords: droughts, risk, drought tolerance, rice, insurance, rainfed farming, agricultural policies,
    Date: 2016

This nep-ias issue is ©2016 by Soumitra K. Mallick. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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