nep-ias New Economics Papers
on Insurance Economics
Issue of 2017‒08‒20
eight papers chosen by
Soumitra K. Mallick
Indian Institute of Social Welfare and Business Management

  1. Subsidizing Health Insurance for Low-Income Adults: Evidence from Massachusetts By Amy Finkelstein; Nathaniel Hendren; Mark Shepard
  2. Bundling and Insurance of Independent Risks By Benjamin Davies; Richard Watt
  3. Rising interest rates, lapse risk, and the stability of life insurers By Berdin, Elia; Gründl, Helmut; Kubitza, Christian
  4. Persistence of insurance activities and financial stability By Kubitza, Christian; Regele, Fabian
  5. Exploring the nexus between certainty in injury compensation and treatment selection By Bertoli,P.; Grembi,V.;
  6. Two-Sided Matching in Physician-Insurer Networks: Evidence from Medicare Advantage By Nosal, K.;
  7. The fair surrender value of a tontine By Weinert, Jan-Hendrik
  8. Targeting Disability Insurance Applications with Screening By Godard, M.; Koning, P.; Lindeboom, M.;

  1. By: Amy Finkelstein; Nathaniel Hendren; Mark Shepard
    Abstract: How much are low-income individuals willing to pay for health insurance, and what are the implications for insurance markets? Using administrative data from Massachusetts’ subsidized insurance exchange, we exploit discontinuities in the subsidy schedule to estimate willingness to pay and costs of insurance among low-income adults. As subsidies decline, insurance take-up falls rapidly, dropping about 25% for each $40 increase in monthly enrollee premiums. Marginal enrollees tend to be lower-cost, consistent with adverse selection into insurance. But across the entire distribution we can observe – approximately the bottom 70% of the willingness to pay distribution – enrollee willingness to pay is always less than half of own expected costs. As a result, we estimate that take-up will be highly incomplete even with generous subsidies: if enrollee premiums were 25% of insurers’ average costs, at most half of potential enrollees would buy insurance; even premiums subsidized to 10% of average costs would still leave at least 20% uninsured. We suggest an important role for uncompensated care for the uninsured in explaining these findings and explore normative implications.
    JEL: H51 I13
    Date: 2017–08
  2. By: Benjamin Davies; Richard Watt (University of Canterbury)
    Abstract: Risky prospects can often by disaggregated into several identifiable, smaller risks. In such cases, at least two modes of insurance are available: either (i) the disaggregated risks can be insured independently or (ii) the aggregate risk can be insured as one. We identify (ii) as risk bundling prior to insurance and (i) as separate, or unbundled, insurance. We investigate whether (i) or (ii) is preferable among consumers, insurers and the insurance market as a whole using numerical simulations. Our simulations reveal that separate contracts provide the socially optimal form of insurance when the insurer is able to charge the profit-maximising premia and has perfect information. Under asymmetric information with respect to consumers’ risk aversion, we find that separation is again the dominant method of insurance in terms of the market share it represents.
    Keywords: Optimal insurance, risk bundling, simulation
    JEL: D8
    Date: 2017–08–14
  3. By: Berdin, Elia; Gründl, Helmut; Kubitza, Christian
    Abstract: This paper investigates the effects of a rise in interest rate and lapse risk of endowment life insurance policies on the liquidity and solvency of life insurers. We model the book and market value balance sheet of an average German life insurer, subject to both GAAP and Solvency II regulation, featuring an existing back book of policies and an existing asset allocation calibrated by historical data. The balance sheet is then projected forward under stochastic financial markets. Lapse rates are modeled stochastically and depend on the granted guaranteed rate of return and prevailing level of interest rates. Our results suggest that in the case of a sharp increase in interest rates, policyholders sharply increase lapses and the solvency position of the insurer deteriorates in the short-run. This result is particularly driven by the interaction between a reduction in the market value of assets, large guarantees for existing policies, and a very slow adjustment of asset returns to interest rates. A sharp or gradual rise in interest rates is associated with substantial and persistent liquidity needs, that are particularly driven by lapse rates.
    Keywords: Interest Rate Risk,Lapse Risk,Life Insurance
    Date: 2017
  4. By: Kubitza, Christian; Regele, Fabian
    Abstract: Different insurance activities exhibit different levels of persistence of shocks and volatility. For example, life insurance is typically more persistent but less volatile than non-life insurance. We examine how diversification among life, non-life insurance, and active reinsurance business affects an insurer's contribution and exposure to the risk of other companies. Our model shows that a counterparty's credit risk exposure to an insurance group substantially depends on the relative proportion of the insurance group's life and non-life business. The empirical analysis confirms this finding with respect to several measures for spillover risk. The optimal proportion of life business that minimizes spillover risk decreases with leverage of the insurance group, and increases with active reinsurance business.
    Keywords: Insurance Companies,Financial Stability,Persistence
    JEL: G01 G22 G23 G28
    Date: 2017
  5. By: Bertoli,P.; Grembi,V.;
    Abstract: We study the effect of reduced medical liability due to the implementation of scheduled damages on the overuse of cesarean sections. Using data from inpatient discharge records on deliveries in Italy, we exploit the fact that hospitals are distributed across court districts and that only some courts introduced schedules during the period of observation. This allows us to identify the effect of a decrease in liability using a difference-in-difference approach while minimizing the heterogeneities between treated and control hospitals. We show that decreased medical liability increases the incidence of unnecessary cesarean sections by 7 percentage points, which corresponds to a 20% increase at the mean of cesarean sections. The magnitude of the response is higher for hospitals with lower quality and that are far from consumer association headquarters. Lower schedules and higher levels of reimbursements per delivery also increase the overuse of cesarean section. The analysis of the response times, combining the difference-in-difference approach with a regression discontinuity design, shows that the response to decreased liability is already detectable in the short run. Our findings are robust to several sets of robustness checks and are not driven by anticipatory effects or a change in the composition of the treated patients.
    Keywords: Scheduled Damages; Cesarean Sections; Difference in Difference;
    JEL: K13 K32 I13
    Date: 2017–08
  6. By: Nosal, K.;
    Abstract: Many health insurance plans in the U.S. restrict enrollees to choose from a set of providers the insurer has contracted with. These provider networks are formed via bilateral bargaining between insurers and providers. Provider networks are an important tool for product differentiation and cost containment for insurers and also put real restrictions on consumers’ choice of providers. In this paper, I analyze matching between insurers offering Medicare Advantage Plans and physicians, using a unique data set consisting of all insurer-physician links in several counties. I estimate parameters of a two-sided, many-to-many matching model which describes formation of provider networks, using the Maximum Score estimator of Fox (2010). This method uses implications of a pairwise stability condition to estimate a joint surplus function which depends on insurer-physician links. The surplus function accounts for the role of physician and insurer characteristics in determining their match values, and also for interactions between physicians linked to the same insurer, whose services may be complements or substitutes. The results indicate that insurers prefer on the margin to link with physicians who increase the specialty concentration of their network and who are located near other physicians in the network. Physicians are negatively affected by having a broader referral network,as defined by having a larger set of physicians with whom they have insurer links in common. Finally, compared with regional insurers, nationally active insurers benefit more from matching with physicians with U.S. medical degree. Preliminary counterfactual analyses suggest that insurers and physicians would be collectively better off if all physicians were matched to all insurers– that is, if selective contracting were eliminated entirely.
    Date: 2017–08
  7. By: Weinert, Jan-Hendrik
    Abstract: A tontine provides a mortality driven, age-increasing payout structure through the pooling of mortality. Because a tontine does not entail any guarantees, the payout structure of a tontine is determined by the pooling of individual characteristics of tontinists. Therefore, the surrender decision of single tontinists directly affects the remaining members' payouts. Nevertheless, the opportunity to surrender is crucial to the success of a tontine from a regulatory as well as a policyholder perspective. Therefore, this paper derives the fair surrender value of a tontine, first on the basis of expected values, and then incorporates the increasing payout volatility to determine an equitable surrender value. Results show that the surrender decision requires a discount on the fair surrender value as security for the remaining members. The discount intensifies in decreasing tontine size and increasing risk aversion. However, tontinists are less willing to surrender for decreasing tontine size and increasing risk aversion, creating a natural protection against tontine runs stemming from short-term liquidity shocks. Furthermore we argue that a surrender decision based on private information requires a discount on the fair surrender value as well.
    Keywords: Life Insurance,Tontines,Annuities,Life Insurance Surrender
    JEL: D81 D82 D86 G22 G23 H55 H75 I13 J14 J32 N23
    Date: 2017
  8. By: Godard, M.; Koning, P.; Lindeboom, M.;
    Abstract: We estimate the impact of stricter screening of Disability Insurance (DI) applications on DI applications and DI awards, as well as on compositional changes in ex-ante health of DI applicants and long-term employment and health outcomes of DI applicants and non-applicants. We use exogeneous variation induced by a field experiment where we directly controlled the screening stringency of the caseworkers. In two out of 26 regions in the Netherlands, caseworkers at the local offices of the National Social Insurance Institute (NSII) were instructed to screen reintegration reports considerably more strictly than elsewhere. Using a difference-in-differences strategy, we examine the extent to which – and among whom – screening stringency influences DI application and award rates. Our results show that the decline in DI applications and DI (unconditional) awards primarily comes from able individuals, which suggests that targeting efficiency improves. In particular, we observe strong changes in the composition of DI applicants and recipients in response to changes in screening stringency. We infer from longer run (up to 7 years) mortality and labour-market outcomes of non-applicants whether increased stringency may induce truly disabled individuals not to apply, but find no evidence of such perverse self-screening.
    Keywords: Disability Insurance; Screening; Targeting Efficiency; The Netherlands;
    Date: 2017–08

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