nep-ias New Economics Papers
on Insurance Economics
Issue of 2017‒04‒16
seven papers chosen by
Soumitra K. Mallick
Indian Institute of Social Welfare and Business Management

  1. Splitting Risks in Insurance Markets In Adverse Selection By Pierre Picard
  2. The Employment Service-Unemployment Insurance Partnership: Origin, Evolution, and Revitalization By David E. Balducchi Author-Workplace-Consultant; Christopher J. O'Leary
  3. Deposit Insurance and Reinsurance: A General Equilibrium Perspective By Gersbach, Hans; Haller, Hans; Volker, Britz
  4. On Path–dependency of Constant Proportion Portfolio Insurance strategies By Raquel M. Gaspar
  6. Hiring subsidies for people with disabilities: Do they work? By Sergi Jiménez-Martín; Arnau Juanmarti Mestres; Judit Vall Castelló
  7. Students in Distress: Labor Market Shocks, Student Loan Default, and Federal Insurance Programs By Mueller, Holger M; Yannelis, Constantine

  1. By: Pierre Picard (Ecole Polytechnique [Palaiseau])
    Abstract: We characterize the design of insurance schemes when policyhold- ers face several insurable risks in a context of adverse selection. Split- ting risks emerges as a feature of second-best Pareto-optimal alloca- tions. This may take the form of risk-speci c contracts, or of con- tracts where risks are bundled, but subject to di⁄erential coverage rules such as risk speci c copayments, combined with a deductible, an out-of-pocket maximum or a cap on coverage.
    Keywords: Insurance, adverse selection, contract, health insurance, copayment, deductible
    Date: 2017–01–22
  2. By: David E. Balducchi Author-Workplace-Consultant; Christopher J. O'Leary (W.E. Upjohn Institute for Employment Research)
    Abstract: This study traces the origin and evolution of the partnership between the employment service and unemployment insurance programs in the United States. We examine objectives of the framers of the Wagner-Peyser and Social Security Acts that established these programs. Using primary sources, we then analyze early actions of the architects of social insurance to facilitate cooperation between the two programs to meet economic exigencies, grapple with political cronyism, and surmount legal barriers. We also discuss factors that caused changes in the employment service–unemployment insurance partnership over time. We identify reasons for the erosion in cooperation starting in the 1980s, and explain why ever since there has been a continuous decline in service availability. Reviewing evidence on the effectiveness of in-person employment services for unemployment insurance beneficiaries, we suggest ways to revitalize the employment service–unemployment insurance partnership. We explore the source of Wagner-Peyser Act funding, how it was formalized, then eroded, and how it can be renewed.
    Keywords: employment service, unemployment insurance, Wagner-PeyserAct, Social Security Act, social insurance, public policy, Federal Unemployment Tax Act(FUTA), taxable wage base, intergovernmental relations
    JEL: J65 J68 H83
  3. By: Gersbach, Hans; Haller, Hans; Volker, Britz
    Abstract: We study the consequences and optimal design of bank deposit insurance and reinsurance in a general equilibrium setting. The model involves two production sectors. One sector is financed by issuing bonds to risk-averse households. Firms in the other sector are monitored and financed by banks. Households fund banks through deposits and equity. Deposits are explicitly insured by a deposit insurance fund. Any remaining shortfall is implicitly guaranteed by the government. The deposit insurance fund charges banks a premium per unit of deposits whereas the government finances any necessary bail-outs by lump-sum taxation of households. When the deposit insurance premium is actuarially fair or higher than actuarially fair, two types of equilibria emerge: One type of equilibria supports the Pareto optimal allocation, and the other type does not. In the latter case, bank lending is too large relative to equity and the probability that the banking system collapses is positive. Next, we show that a judicious combination of deposit insurance and reinsurance eliminates all non-optimal equilibrium allocations. Our paper provides a benchmark result for policy proposals that advocate deposit insurance cum reinsurance.
    Keywords: Capital Structure; deposit insurance; Financial Intermediation; General Equilibrium; reinsurance
    JEL: D53 E44 G2
    Date: 2017–03
  4. By: Raquel M. Gaspar
    Abstract: This paper evaluates the path-dependency/independency of the most widespread Portfolio Insurance strategies. In particular, we look into various Constant Proportion Portfolio Insurance (CPPI) structures and compare them to the classical Option Based Portfolio Insurance (OBPI) and with naive strategies such as Stop-loss Portfolio Insurance (SLPI).The paper is based upon conditional Monte Carlo simulations and we show that CPPI strategies with a multiplier higher than 1 are extremely path-dependent and that they can easily get cash-locked, even in scenarios when the underlying at maturity can be worth much more than initially. This likelihood of being cash-locked increases with maturity of the CPPI as well as with properties of the underlying's dynamics and is a major drawback to investors.To emphasise path dependency of CPPIs, we show that even in scenarios where the investor correctly "guesses" a higher future value for the underlying, CPPIs can get cash-locked and lead to losses. This path-dependency problem is specific of CPPIs, it goes against theEuropean-style nature of most traded CPPIs, and it does not occur in the classical case of OBPI strategies.We expect that this study will contribute to reinforce the idea that CPPI strategies suffer from a serious design problem. To clearly show the path dependency and the problems of CPPI strategies, the simulation exercise preformed in this paper takes a point of view that is not the one of the previous literature. Although we use a standard geometric Brownian motion to model the underlying, our Monte Carlo simulated paths are all conditioned to fixed final value, using the methodology proposed by Sousa, Esquível and Gaspar (2015). The financial intuition is to consider the point of view of an investor who has some expectation about the future value of an underlying asset at maturity, but uses portfolio insurance hedge against the possibility of being wrong. In our simulations we consider the investor is right, and show that, despite this, CPPI strategies with multipliers higher than one, can still lead to losses. This occurs due to the ``cash-lock'' property of CPPI strategies, which makes the risk of the strategy to become unrelated to the evolution of the underlying. Term sheets of most real life CPPIs simply ignore this important path-dependency risk. The existence of this path dependency make it hard to understand which investor risk profile is this product meant to satisfy. In fact, the traditional alternatives always stochastically dominate CPPIs with multipliers higher than 1 are. We expect this study contributes to the debate on design risk of structured products and reinforce the idea that CPPI products are ill conceived.
    Keywords: n.a., Finance, Finance
    Date: 2016–07–04
  5. By: Priyanka Singh
    Abstract: Mental health is an essential part of public health because good health includes physical, mental and social well-being. Mental illnesses are among the most important contribution to the global burden of disease and disability. Despite the huge burden of mental illness, huge numbers of patients do not take treatment because of some social factors. The objectives comprised to understand the social barriers in accessing mental health care from one of the mental hospital of Uttar Pradesh from the perspective of the health personnel and the patients and patient’s family members. This research is very sensitive in nature, because this research conducted on people with mental health problems, therefore respondents and mental hospital name is not revealed in this paper. Thirty respondents (10 patients and 20 providers) were selected purposively from one of the mental hospital of Uttar Pradesh. Primary data were collected after providers and patients and their family members consent. Qualitative method used for data analysis. Result shows many social barriers in accessing to mental health care such as: stigma, gender discrimination, beliefs about causality of mental illness, negative behavior with people with mental health problem, negative attitude about mental hospital and negative attitude about providers. Government should be implementing educational program for mental health and mental health services as well so that awareness is generated and more people opt for treatment. Key Words: Social barriers, mental health care Policy
    Date: 2017–03
  6. By: Sergi Jiménez-Martín; Arnau Juanmarti Mestres; Judit Vall Castelló
    Abstract: This article evaluates the effectiveness of hiring subsidies targeted to people with disabilities. By exploiting the timing of implementation among the different Spanish regions of a subsidy scheme implemented in Spain during the period 1990-2014, we employ a differencesin- differences approach to estimate the impact of the scheme on the probability of DI beneficiaries of transiting to employment and on the propensity of individuals of entering the DI program. Our results show that the introduction of the subsidy scheme is in general ineffective at incentivizing transitions to employment, and in some cases it is associated with an increased propensity of transiting to DI. Furthermore, we show that an employment protection component incorporated to the subsidy scheme, consisting in the obligation for the employer to maintain the subsidized worker in employment, is associated with less transitions to permanent employment, more transitions to temporary employment and more transitions to DI, suggesting that these type of employment protection measures can have undesired effects for people with disabilities.
    Keywords: Disability, employment subsidies, labor market transitions, disability insurance, differences-in-differences.
    JEL: H24 H55 J08 J14
    Date: 2017–04
  7. By: Mueller, Holger M; Yannelis, Constantine
    Abstract: The collapse in home prices during the Great Recession triggered a sharp drop in consumer demand by households, leading to massive employment losses. This paper examines the implications of these labor market shocks for the dramatic rise in student loan defaults, which originated during this time period. Linking administrative student loan data at the individual borrower level to de-identified tax records and exploiting Zip code level variation in home price changes, we show that the drop in home prices during the Great Recession accounts for approximately 24 to 32 percent of the increase in student loan defaults. Consistent with a labor market channel, we find a strong relationship between home prices, employment losses, and student loan defaults at the individual borrower level, which is concentrated among low income jobs. Comparing the default responses of home owners and renters, we find no evidence of a direct liquidity effect of home prices on student loan defaults. Lastly, we show that the Income Based Repayment (IBR) program introduced by the federal government in the wake of the Great Recession reduced both student loan defaults and their sensitivity to home price fluctuations, thus providing student loan borrowers with valuable insurance against adverse income shocks.
    Keywords: great recession; Labor Market Shocks; Student Loan Default
    Date: 2017–03

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