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on Insurance Economics |
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Issue of 2017‒03‒26
nine papers chosen by Soumitra K. Mallick Indian Institute of Social Welfare and Business Management |
| By: | Braun, R. Anton (Federal Reserve Bank of Atlanta); Kopecky, Karen A. (Federal Reserve Bank of Atlanta); Koreshkova, Tatyana (Concordia University) |
| Abstract: | Half of U.S. 50-year-olds will experience a nursing home (NH) stay before they die, and a sizeable fraction will incur out-of-pocket expenses in excess of $200,000. Given the extent of NH risk, it is surprising that only about 10 percent of individuals over age 62 have private long-term care insurance (LTCI). This market also has a number of other puzzling features. Many applicants are denied coverage by insurers. Coverage of those who have insurance is incomplete. Insurance premia are high relative to an actuarily fair benchmark. Using a model that features agents with private information about their NH entry risk and an insurer who optimally chooses menus of LTCI contracts subject to participation and incentive compatibility constraints, this paper shows that these puzzles can be attributed to adverse selection, overhead costs on the insurer, and Medicaid. The model also accounts for the lack of correlation between NH entry and LTCI ownership. This final property is novel because our setup has only one dimension of private information. |
| Keywords: | long-term care insurance; Medicaid; adverse selection; insurance rejections |
| JEL: | E62 H31 H52 H55 |
| Date: | 2017–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2017-03&r=ias |
| By: | Zvezdov, Ivelin |
| Abstract: | Examining the intersection of research on the effects of (re)insurance risk diversification and availability of big insurance data components for competitive underwriting and premium pricing is the purpose for this paper. We study the combination of physical diversification by geography and insured natural peril with the complexity of aggregate structured insurance products, and furthermore how big historical and modeled data components impact product underwriting decisions. Under such market conditions, the availability of big data components facilitates accurate measurement of inter-dependencies among risks, and the definition of optimal and competitive insurance premium at the level of the firm and the policy holders. We extend the discourse to a notional micro-economy and examine the impact of diversification and insurance big data components on the potential for developing strategies for sustainable and economical insurance policy underwriting. We review concepts of parallel and distributed algorithmic computing for big data clustering, mapping and resource reducing algorithms. |
| Keywords: | Effects of insurance risk diversification on premium definition; contribution of big data components to measuring inter-dependencies; rational for sustainable and economic underwriting practices and cost savings |
| JEL: | C81 D83 G22 |
| Date: | 2017–02–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:77502&r=ias |
| By: | GOTTARDI, Piero; MAURIN, Vincent; MONNET, Cyril |
| Abstract: | We show that repurchase agreements (repos) arise as the instrument of choice to borrow in a competitive model with limited commitment. The repo contract traded in equilibrium provides insurance against fluctuations in the asset price in states where collateral value is high and maximizes borrowing capacity when it is low. Haircuts increase both with counterparty risk and asset risk. In equilibrium, lenders choose to re-use collateral. This increases the circulation of the asset and generates a “collateral multiplier" effect. Finally, we show that intermediation by dealers may endogenously arise in equilibrium, with chains of repos among traders |
| Keywords: | Repos; Collateral re-use; Intermediation; Haircuts |
| JEL: | G10 G21 G23 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2017/03&r=ias |
| By: | SAWADA Yasuyuki; MASAKI Tatsujiro; NAKATA Hiroyuki; SEKIGUCHI Kunio |
| Abstract: | In this paper, we investigate the factors behind the low disaster insurance subscription rate in the Japanese corporate sector using unique firm level datasets on the corporate awareness of disasters, insurance subscriptions, and the determinants of risk financing methods. From the survey, we find that disaster insurance participation rates are 59.5% and 47.0% for large companies and small and small-sized enterprises, respectively. The data outline how Japanese companies specify highly probable natural disasters, formulate business continuity planning/business continuity management (BCP/BCM), subscribe to disaster insurance, and select a risk financing method. Descriptive statistics indicate that the majority of companies identify disasters that would cause the worst damages, but fewer companies have an estimation of the scale of asset damages caused by such disasters. Furthermore, it shows that only about half of the respondent companies observe management's commitment toward disaster risk management and establish specific BCP/BCM, and that disaster insurance in the corporate sector is characterized disproportionately by property insurance for coverage, while the subscription rate for disaster insurance is subject to various restrictions. Regarding the risk finance behavior, irrespective of the firm size, the combinations of either equity capital (self-financing) and bank loans or disaster insurance and equity capital are the most popular financial instruments to cope with damages caused by a natural disaster and the resulting shortage of cash flow. This suggests a problem of "over-reliance" on self-financing against potential disaster damages. On the other hand, lack of knowledge and high insurance premiums are the two major reasons for not subscribing to disaster insurance. Since high exposure to natural disasters is likely to undermine corporate activities and the overall economy, expansion of formal insurance mechanisms will be indispensable. This paper also analyzes companies in the area damaged by the Kumamoto earthquake in 2016. The above mentioned results clearly shows the importance of policy interventions to improve corporate management's awareness of and commitment to disaster risk management and disaster insurance. |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:eti:rpdpjp:17002&r=ias |
| By: | Louis-Gaëtan Giraudet (ENPC - École des Ponts ParisTech, CIRED - Centre International de Recherche sur l'Environnement et le Développement - CIRAD - Centre de Coopération Internationale en Recherche Agronomique pour le Développement - EHESS - École des hautes études en sciences sociales - AgroParisTech - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique); Sébastien Houde (University of Maryland [College Park]); Joseph Maher (University of Maryland [College Park]) |
| Abstract: | We investigate how moral hazard problems can cause sub-optimal investment in energy efficiency, a phenomenon known as the energy efficiency gap. We focus on contexts where both the quality offered by the energy efficiency provider and the behavior of the energy user are imperfectly observable. We first formalize under-provision of quality and compare two policy instruments: energy-savings insurance and minimum quality standards. Both instruments are second-best, for different reasons. Insurance induce over-use of energy, thereby requiring incomplete coverage in equilibrium. Standards incur enforcement costs. We then provide empirical evidence of moral hazard in the U.S. home retrofit market. We find that for those measures, the quality of which is deemed hard to observe, realized energy savings are subject to day-of-the-week effects. Specifically, energy savings are significantly lower when those measures were installed on a Friday—a day particularly prone to negative shocks on workers’ productivity—than on any other weekday. The Friday effect explains 65% of the discrepancy between predicted and realized energy savings, an increasingly documented manifestation of the energy efficiency gap. We finally parameterize a model of the U.S. market for attic insulation and find that the deadweight loss from moral hazard is important over a range of specifications. Minimum quality standards appear more desirable than energy-savings insurance if energy-use externalities remain unpriced. |
| Keywords: | minimum quality standard, energy-savings insurance, credence good, day-of-the-week effect,Energy efficiency gap, moral hazard |
| Date: | 2016–12–10 |
| URL: | http://d.repec.org/n?u=RePEc:hal:ciredw:hal-01420872&r=ias |
| By: | Tim Muir (OECD) |
| Abstract: | This report presents the first international quantification and comparison of levels of social protection for long-term care (LTC) in 14 OECD and EU countries. Focusing on five scenarios with different LTC needs and services, it quantifies the cost of care; the level of coverage provided by social protection systems; the out-of-pocket costs that people are left facing; and whether these costs are affordable. The cost of care varies widely between countries but it is always high relative to typical incomes, meaning that LTC is often unaffordable in the absence of social protection. All countries studied have some form of social protection for LTC, but even where coverage is comprehensive, people pay some of the cost out of pocket. Coverage for home care for moderate or severe needs is often insufficient, leaving people with large out-of-pocket costs. In contrast, all countries studied ensure that institutional care is affordable. Unless family and friends can provide informal care, many people will be unable to afford LTC in their own home, leaving them with unmet needs or at risk of early institutionalisation. Benefits are usually means-tested to provide more support to those less able to afford to contribute, but it is still those with lowest incomes that are most likely to face unaffordable costs. Some countries provide financial support to informal carers, but this rarely comes close to compensating them for the time they spend providing LTC. When designing social protection systems for LTC, countries need to look systematically at the level of protection provided to people in different scenarios. Many countries aim to support people with LTC needs to remain in their own home for longer, but the results presented here suggest that gaps in social protection make this unaffordable for people with low income. Addressing these gaps should be a priority for future reforms. |
| JEL: | I13 |
| Date: | 2017–03–27 |
| URL: | http://d.repec.org/n?u=RePEc:oec:elsaad:93-en&r=ias |
| By: | Dionne, Georges (HEC Montreal, Canada Research Chair in Risk Management); Liu, Ying (Shandong University) |
| Abstract: | We investigate the incentive effects of insurance experience rating on road safety by evaluating the claim frequency following a regulatory reform introduced in a pilot city of China. Our contribution to the growing literature on moral hazard is to offer a neat identification of a causal effect of experience rating on road safety by employing the differences-in-differences methodology in the framework of a natural experiment. The pre-treatment placebo test corroborates the assumption that the pilot city and the control city share the same pre-reform time trends in claims. We find that basing insurance pricing on traffic violations reduces claim frequency significantly. These results are robust to the inclusion of vehicle controls, alternative definitions of claim frequency, two placebo experiment tests, and several robustness checks. The effects of basing pricing on past claims are not significant. |
| Keywords: | Insurance incentives; experience rating; road safety; natural experiment; China; traffic violation; past claim; moral hazard. |
| JEL: | C33 C35 D81 D82 G22 R41 |
| Date: | 2017–03–15 |
| URL: | http://d.repec.org/n?u=RePEc:ris:crcrmw:2017_001&r=ias |
| By: | Stephanie Lluis (Department of Economics, University of Waterloo); Brian McCall (University of Michigan) |
| Abstract: | We apply a difference-in-differences estimation approach to analyze the effect of four Employment Insurance program initiatives which took place between 2004 and 2009 in a subset of Canadian Employment Insurance regions. The pilots increased the generosity of the EI system regarding EI eligibility, benefit amount, benefit duration and the allowable earning criteria. These pilots were run in about 50% of the EI regions until August 2008 providing a quasi-experimental setting to analyze the impact of increased generosity of EI on labour market outcomes. We use the Labour Force Survey data to study the aggregate impact of the four pilots on monthly labour force transitions into employment, unemployment and nonemployment as well as job search behaviour. |
| JEL: | J62 J65 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:wat:wpaper:1701&r=ias |
| By: | Robert L. Clark; Robert G. Hammond; Melinda S. Morrill; David Vanderweide |
| Abstract: | Social Security Leveling is an annuity option that allows participants to receive a level income before and after age 62. The retiree receives a larger pension benefit prior to age 62, but then the pension benefit is lowered at age 62 when the individual is expected to claim Social Security benefits. This option is not uncommon in public pension plans, yet little is known about how this option is used in practice and its impact on well-being in retirement. Our study uses a combination of administrative records and survey data from recent North Carolina public sector retirees. We find that one-third of all retirees selecting a single life annuity between 2009 and 2014 opted for Social Security Leveling. The evidence suggests that individuals are choosing this option in a way that is consistent with their stated preferences and a consumption smoothing motive. However, we also see higher rates of ex post “regret” in the annuity choice among those choosing the level income option. |
| JEL: | H55 J26 J38 |
| Date: | 2017–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23262&r=ias |