nep-ias New Economics Papers
on Insurance Economics
Issue of 2017‒10‒15
twelve papers chosen by
Soumitra K. Mallick
Indian Institute of Social Welfare and Business Management

  1. Selection in Health Insurance Markets and Its Policy Remedies By Michael Geruso; Timothy Layton
  2. How Much Does Out-of-Pocket Medical Spending Eat Away at Retirement Income? By Melissa McInerney; Matthew S. Rutledge; Sara Ellen King
  3. Transparency aversion and insurance market equilibria By Gemmo, Irina; Browne, Mark J.; Gründl, Helmut
  4. The effect of private health insurance on self-assessed health status and health satisfaction in Germany By Petilliot, René
  5. Consumption Insurance, Welfare, and Optimal Progressive Taxation By Rostam-Afschar, Davud; Yao, Jiaxiong
  6. Cui bono? - Die Bürgerversicherung und die Beihilfe By Christian Bührer; Steffen Fetzer; Christian Hagist
  7. Das Hamburger Beihilfemodell - Ein Vergleich der internen Renditen von GKV und PKV By Christian Bührer; Steffen Fetzer; Christian Hagist
  8. Market Discipline, Deposit Insurance, and Competitive Advantages: Evidence from the Financial Crisis By Kaposty, Florian; Pfingsten, Andreas; Domikowsky, Christian
  9. Risk-based Selection in Unemployment Insurance: Evidence and Implications By Camille Landais; Arash Nekoei; Peter Nilsson; David Seim; Johannes Spinnewijn
  10. Local Shocks, Discrete Choice and Optimal Policy By Christopher Sleet
  11. The Interaction of Pension System and Unemployment Insurance - Evidence from two Reforms By Endler, Johannes; Geyer, Johannes
  12. Homeownership, Social Insurance, and Old-Age Security in the United States and Europe By Stipica Mudrazija; Barbara A. Butrica

  1. By: Michael Geruso; Timothy Layton
    Abstract: In this essay, we review the theory and evidence concerning selection in competitive health insurance markets and discuss the common policy tools used to address the problems it creates. We begin by outlining some important but often misunderstood differences between two types of conceptual frameworks related to selection. The first, which we call the fixed contracts approach, takes insurance contract provisions as given and views selection as influencing only insurance prices in equilibrium. The second, the endogenous contracts approach, treats selection as also influencing the design of the contract itself, including the overall level of coverage and coverage for services that are differentially demanded by sicker consumers. After outlining the selection problems, we discuss four commonly employed policy instruments that affect the extent and impact of selection: 1) premium rating regulation, including community rating; 2) consumer subsidies or penalties to influence the take-up of insurance; 3) risk adjustment; and 4) contract regulation. We discuss these policies with reference to two markets that seem especially likely to be targets of reform in the short and medium term: Medicare Advantage and the individual insurance markets reformed by the Affordable Care Act of 2010.
    JEL: H22 H4 I1 I13 I18
    Date: 2017–09
  2. By: Melissa McInerney; Matthew S. Rutledge; Sara Ellen King
    Abstract: The adequacy of retirement income – from Social Security benefits and other sources – is substantially reduced by Medicare’s high out-of-pocket (OOP) costs. This project uses the 2002-2014 Health and Retirement Study to calculate post-OOP benefit ratios, defined as the share of either Social Security benefits or total income available for non-medical spending. The project decomposes the share of income that is going toward premium payments and services delivered and examines how these post-OOP benefit ratios differ by age, gender, income, supplemental insurance coverage, and health status. The project also updates previous studies’ estimates to document how OOP spending and the post-OOP income ratios changed following the introduction of Medicare Part D prescription drug coverage in 2006 and the closing of the “donut hole” coverage gap in 2010, which decreased OOP costs under Part D for those spending moderate amounts on prescriptions.
    Date: 2017–10
  3. By: Gemmo, Irina; Browne, Mark J.; Gründl, Helmut
    Abstract: Telemonitoring devices can be used to screen consumers' characteristics and mitigate information asymmetries that lead to adverse selection in insurance markets. However, some consumers value their privacy and dislike sharing private information with insurers. In the second-best efficient Wilson-Miyazaki-Spence framework, we allow for consumers to reveal their risk type for an individual subjective cost and show analytically how this affects insurance market equilibria as well as utilitarian social welfare. Our analysis shows that the choice of information disclosure with respect to revelation of their risk type can substitute deductibles for consumers whose transparency aversion is sufficiently low. This can lead to a Pareto improvement of social welfare and a Pareto efficient market allocation. However, if all consumers are offered cross-subsidizing contracts, the introduction of a transparency contract decreases or even eliminates cross-subsidies. Given the prior existence of a WMS equilibrium, utility is shifted from individuals who do not reveal their private information to those who choose to reveal. Our analysis provides a theoretical foundation for the discussion on consumer protection in the context of digitalization. It shows that new technologies bring new ways to challenge crosssubsidization in insurance markets and stresses the negative externalities that digitalization has on consumers who are not willing to take part in this development.
    Keywords: Adverse Selection,Digitalization,Privacy,Screening,Transparency Aversion
    JEL: D41 D52 D60 D82 G22
    Date: 2017
  4. By: Petilliot, René
    Abstract: In Germany, private health insurance covers more innovative and costly treatments than public insurance. Moreover, privately insured individuals are treated preferentially by doctors. In this article, I use subjective health data to examine whether these superior features of private insurance actually transfer into better health. I focus on German adolescents who are still in education to control for selection and account for differences in health-conscious behavior between publicly and privately insured individuals. I find that privately and publicly insured individuals do not differ in health, which contrasts with previous research. Hence, doctors appear to be the sole profiteers of the private insurance system and billions of euros could be saved by aligning private and public health insurance.
    Keywords: Health satisfaction,Self-assessed health status,Private health insurance,Public health insurance,Selection
    JEL: I11 I12 I13 I18 I31
    Date: 2017
  5. By: Rostam-Afschar, Davud; Yao, Jiaxiong
    Abstract: Partial insurance of consumption against wage shocks is achieved through progressive taxation, labor supply adjustment, and precautionary wealth accumulation. The optimal degree of progressivity depends on preference and initial wealth conditions. More patient, more willing to work, and less wealthy households prefer more progressivity. The optimal progressivity is similar in Germany in comparison to the United States, though wealth has a greater impact on consumption insurance in Germany.
    JEL: D31 E21 H21 J22
    Date: 2017
  6. By: Christian Bührer; Steffen Fetzer; Christian Hagist
    Abstract: In der deutschen Gesundheitspolitik wird seit langem unter dem Stichwort Bürgerversicherung über die Einbeziehung aller Bürger in das System der Gesetzlichen Krankenversicherung diskutiert. Dabei wird meistens die Perspektive der GKV-Versicherten eingenommen, seltener diejenige der Versicherten der PKV. Es stellt sich jedoch insbesondere für die Gruppe der Beihilfeberechtigten die Frage, welche monetären Konsequenzen durch eine Bürgerversicherung für sie entstehen und in welcher Höhe daraus Kompensationszahlungen abgeleitet werden können. Unsere Ergebnisse zeigen: Selbst, wenn diese Kompensationen weniger als die Hälfte der Differenz der Versicherungsleistungen zwischen PKV/Beihilfe und einer Bürgerversicherung abdecken, hat der Business Case Bürgerversicherung für die Gebietskörperschaften zumindest kurzfristig negative fiskalischen Folgen. The health policy debate in Germany rotates around the question wheather Germany’s two pillar insurance system should be dissolved and replaced by universal coverage under the roof of the public system (so called „citizen insurance“/Bürgerversicherung). Most of the time, such a reform is argued from the perspective of the 90 percent of the German population which are already insured by a sickness funds. Rarely, the consequences of currently privately insurant are analysed. However, especially German civil servants are of great interest in this regard, as they are most times partly insured in the private scheme while the other part of their benefits are directly paid by the taxpayer. As the scheme for civil servants is more generous than the public scheme, the question of compensation arises when talking about the Bürgerversicherung reform. We show that if civil servants are only partly compensated by their employers (federal and state governments), the reform has a short-run negative fiscal impact.
    Keywords: Health insurance, civil servants’ benefits, compensation
    JEL: H55 H75 I13
    Date: 2017–09–15
  7. By: Christian Bührer; Steffen Fetzer; Christian Hagist
    Abstract: Zu Beginn ihrer Karriere verfügen Beamte über das Privileg zwischen einer Absicherung im System der gesetzlichen Krankenversicherungen (GKV) und den privaten Krankenversicherungen (PKV) wählen zu dürfen. Bislang entscheiden sich die meisten Beamten für letztere, auch weil sie in der GKV sowohl Arbeitnehmer- als auch Arbeitgeberbeitrag zahlen müssten, in der PKV dagegen eine Kostenbeteiligung im Rahmen der Beihilfe vorgesehen ist. Die Stadt Hamburg hat nun jedoch beschlossen, zukünftig Arbeitgeberzuschüsse zur GKV zu leisten, um damit eine „echte Wahlfreiheit“ herzustellen. Wir zeigen anhand eines Vergleichs der internen Renditen in beiden Systemen, dass sich das Kalkül für den Durchschnittsbeamten trotz dieser gefeierten Reform kaum verändern wird. Vielmehr wird es wahrscheinlich zu einer verstärkten adversen Selektion von hohen Gesundheitsrisiken zu Lasten der GKV kommen. At the beginning of their career civil servants in Germany can choose between the social health insurance system and a private plan combined with a direct reimbursement of the government up to 80 percent. Most civil servants chose the latter, also because they have to cover all contribution payments to the social system themselves, while normal employees get nearly 50 percent from their employers. The state of Hamburg decided to change the system by paying a share of the contributions if civil servants choose the social plan. Using a comparison of internal rates of return in both schemes, we show that this celebrated reform will not change the decision calculus for the average civil servant household and will probably thereby increase the adverse selection of high risk cases towards the social health insurance.
    Keywords: Health insurance, internal rate of return, adverse selection, civil servants’ benefits
    JEL: H55 H75 I13
    Date: 2017–10–01
  8. By: Kaposty, Florian; Pfingsten, Andreas; Domikowsky, Christian
    Abstract: First, this study empirically explores whether it is possible to offer full insurance for non-financial depositors whilst maintaining market discipline. Second, we analyze whether a more credible deposit insurance scheme can be a competitive advantage for banks in a systemic crisis. We find (1) evidence for market discipline, and (2) banks ceteris paribus achieving higher growth rates of customer deposits in the financial crisis if they are part of a credible deposit insurance scheme.
    JEL: G01 G21 G28
    Date: 2017
  9. By: Camille Landais; Arash Nekoei; Peter Nilsson; David Seim; Johannes Spinnewijn
    Abstract: This paper studies whether adverse selection can rationalize a universal mandate for unemployment insurance (UI). Building on a unique feature of the unemployment policy in Sweden, where workers can opt for supplemental UI coverage above a minimum mandate, we provide the first direct evidence for adverse selection in UI and derive its implications for UI design. We find that the unemployment risk is more than twice as high for workers who buy supplemental coverage, even when controlling for a rich set of observables. Exploiting variation in risk and prices to control for moral hazard, we show how this correlation is driven by substantial risk-based selection. Despite the severe adverse selection, we find that mandating the supplemental coverage is dominated by a design leaving the choice to workers. In this design, a large subsidy for supplemental coverage is optimal and complementary to the use of a minimum mandate. Our findings raise questions about the desirability of the universal mandate of generous UI in other countries, which has not been tested before.
    Keywords: Adverse Selection, Unemployment Insurance, Mandate, Subsidy
    JEL: H40 J65
    Date: 2017–10
  10. By: Christopher Sleet (Carnegie Mellon University)
    Abstract: Economic opportunities and wages are unevenly dispersed across locations. The risk of being born in and having personal attachment to a low wage location creates a motive for social insurance. Policymakers must trade this motive off against its adverse impact on location choice and migration. Our paper develops the theory of optimal geographic social insurance. We provide new formulas that characterize optimal location-conditioned transfers and a quantitative analysis of such transfers for the US. We model workers as solving dynamic discrete choice location problems and embed these problems into an optimal policy framework. The policy maker is assumed to observe and condition transfers on the locational choices of workers, but not their private locational preferences. In the simplest environment, optimal policy is characterized by a generalized multidimensional version of formulas originally derived by Bailey (1978), Saez (2002) and Chetty (2006) in the context of unemployment insurance. This formula equates the marginal benefit of a transfer to the recipient with the marginal resource cost where the latter incorporates behavioral sufficient statistics describing the elasticities of migration with respect to transfers. The discrete choice framework allows us to connect these sufficient statistics to structural primitives and quantitatively evaluate optimal policy. We extend the model to a rich dynamic setting with endogenous wage determination. This complicates optimal policy formulas through the introduction of terms capturing the option value of future relocations and the impact of relocations on the wage distribution. We use the approach of Hotz and Miller (1993) to estimate the migration costs and other structural parameters. We then quantitatively evaluate optimal geographic policy at steady state and under various adjustment scenarios.
    Date: 2017
  11. By: Endler, Johannes; Geyer, Johannes
    Abstract: Unemployment benefits are one important option to bridge time between employment exit and claiming retirement benefits for older workers. We develop an option value model that explicitly accounts for the pension system and unemployment insurance in Germany. We use administrative panel data and implement the model for female birth cohorts of 1940 to 1949, exploiting exogenous variation in social security wealth by the pension reform 1992 and the reform of unemployment benefits in 2004.
    JEL: H55 J14 J22 J26 J65
    Date: 2017
  12. By: Stipica Mudrazija; Barbara A. Butrica
    Abstract: Relatively few Americans have accumulated substantial savings outside of their employer-sponsored retirement plans, yet most own their homes. The traditional view of the retirement income system as a three-legged stool supported by Social Security, private pensions, and savings may be better viewed as being supported by Social Security, pensions, and homeownership. Country-specific economic, social, and political developments throughout modern history mean that homeownership rates and the relative importance of homeownership for old-age security vary widely across developed countries. Many countries, however, are increasingly promoting homeownership as an effective way of building assets, a de facto self-insurance mechanism for old-age security, and a substitute for various social transfers. This paper uses data from the Health and Retirement Study (HRS) and the Survey of Health, Ageing, and Retirement in Europe (SHARE) to better understand the role of homeownership in retirement before and after the Great Recession for the United States and nine Western European countries: Austria, Belgium, Denmark, France, Germany, Italy, the Netherlands, Spain, and Sweden. It begins by comparing trends in homeownership rates among older adults and the key characteristics of housing-related policies and regulations that potentially impact home acquisition. It then examines home equity trends, the prevalence and burden of housing debt, and the relative importance of housing as a source of retirement wealth. Next it provides an overview of equity release options and estimates how much older households could increase their incomes by fully monetizing their housing equity. Finally, the paper discusses the prospects for and limits of home equity release and asset-based welfare policies.
    Date: 2017–10

This nep-ias issue is ©2017 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.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.