nep-ias New Economics Papers
on Insurance Economics
Issue of 2017‒11‒12
ten papers chosen by
Soumitra K. Mallick
Indian Institute of Social Welfare and Business Management

  1. The perverse incentive for insurance instruments that are derivatives: solving the jackpot problem with a clawback lien for default insurance notes By Brian P. Hanley
  2. Structural Convergence vs. Systems Competition: Limits to the Diversity of Labour Market Policies in the EMU By Frank Vandenbroucke
  3. Does Medicaid Generosity Affect Household Income? By Kumar, Anil
  4. Voluntary Employer-Provided Severance Pay By Parsons, Donald O.
  5. Investor behaviour and reaching for yield: evidence from the sterling corporate bond market By Czech, Robert; Roberts-Sklar, Matt
  6. Informality and Productivity: The Role of Unemployment Insurance Schemes By Cirelli, Fernando; Espino, Emilio; Sanchez, Juan M.
  7. Employer-Provided Severance Pay: The Emergence of Job Displacement Insurance, 1930–1954 By Parsons, Donald O.
  8. Online Appendix to "Tough Love for Lazy Kids: Dynamic Insurance and Equal Bequests" By Ctirad Slavik; Kevin Wiseman
  9. Cultivating Optimism: How to Frame Your Future During a Health Challenge By Briley, Donnel A.; Rudd, Melanie; Aaker, Jennifer
  10. Long-Term Care Insurance: Knowledge Barriers, Risk Perception and Adverse Selection By M. Martin Boyer; Philippe De Donder; Claude Fluet; Marie-Louise Leroux; Pierre-Carl Michaud

  1. By: Brian P. Hanley
    Abstract: When an insurance note is also a derivative a serious problem arises because a derivative must be fulfilled immediately. This feature of derivatives prevents claims processing procedures that screen out ineligible claims. This, in turn, creates a perverse incentive for insured holders of notes to commit acts that result in payment. This problem first surfaced with CDS contracts, which are part of a class of loan insurance I term a default insurance note. Without an address to this problem, within the average range of returns for a large venture capital portfolio, a venture-bank makes less money the better their investments do, in a continuous function. The highest rate of return is a total loss, 64% more than a top portfolio. Here, a strategy for removing this perverse incentive is defined, consisting of a clawback lien that returns part of the payment value as a lien on the firm that is the beneficiary of the insurance. This is presented as the final major component for implementing a default insurance note system so that venture-banking can operate to maximum benefit. Removing the perverse incentive also minimizes disincentive for underwriters to deny DIN coverage to new venture capital firms, or to those firms that have historical earnings which are below average.
    Date: 2017–10
  2. By: Frank Vandenbroucke
    Abstract: Does a monetary union, for it to be successful, impose limits on the diversity of labour market policies and institutions in its member states? I argue that one should not overstretch functionalist arguments in this matter; the problem at hand is political and the challenge is to identify common standards and policy rules that are functionally relevant (taking on board a combination of arguments on what a wellfunctioning monetary union requires) and legitimate in view of shared aspirations across the member states. What is ‘needed’ and what is ‘imposed’ by monetary unification in Europe, depends on the fundamental aspirations that drive the European project at large. Already in the 1990s, reform in labour markets was justified by the advent of the monetary union. The European Employment Strategy emphasised supply-side flexibility: an agenda for flexible labour markets was interwoven with an agenda of investment in individual labour market opportunities and the development of ‘enabling’ policies. This essay develops a broader argument: to sustain a wellfunctioning monetary union that serves the EU’s aspirations, we need a consensus on labour market institutions that support symmetry and stability. Therefore, collective action and ‘protective’ policies are in order. Enabling and protective policies can be mutually reinforcing, in creating resilient social systems. With regard to symmetry, the member states need labour market institutions that can deliver on wage coordination; this limits the diversity of social systems cohabiting in a monetary union, since it excludes totally decentralised and uncoordinated bargaining. Institutions that monitor competitiveness should be embedded in social dialogue, and distributive concerns should be mainstreamed in the monitoring of competitiveness. Mainstreaming distributive concerns into competitiveness makes the ‘assignment’ for national social partners complex and challenging, but such an encompassing approach may stand a better chance to achieve legitimacy. Simultaneously, EU institutions should avoid interfering in the details of wage bargaining systems. This argument raises an existential question for unions and employers’ organisations in Europe: can they commit themselves to the coordination of wage bargaining, with this dual perspective of competitiveness and fair distribution? The concern with stability entails a cluster of policy principles to sustain an effective stabilisation capacity in each member state: sufficiently generous unemployment benefits, notably in the shortterm; sufficient coverage rates of unemployment benefit schemes; no labour market segmentation that leaves part of the labour force poorly insured against unemployment; no proliferation of employment relations that are not integrated into systems of social insurance; effective activation of unemployed individuals; and the constitution of budgetary buffers in good times, so that the automatic stabilisers can do their work in bad times. These principles become a fortiori imperative, as quid pro quo, if the Eurozone would be equipped with reinsurance of national unemployment insurance systems; but even without that perspective, they should figure on the Eurozone’s agenda. I draw a comparison with the problem of vaccination to make that point. In addition, the monetary union calls for integrated competitive markets for goods and services and cross-border mobility of labour. This in turn entails a social corollary. Next to reform in the regulation of posting, national minimum wage regimes should be transparent, predictable and universal in coverage. This reinforces the case against total decentralisation of collective bargaining. Also, the legacy of the Viking judgment of the European Court of Justice should be clarified. An upshot of the argument is that one should carefully distinguish between (i) the ‘social corollary’ of the Economic and Monetary Union and (ii) the ‘social corollary’ of the Single Market; they partly overlap, but are also different. Moreover, the social policy debate is not exhausted by what we may consider as the logical corollaries of monetary unification and market integration. The Reflection Paper on the Social Dimension of Europe of April 2017 is insufficiently clear about this.
    JEL: E02 J38 J88 J65 O52
    Date: 2017–07
  3. By: Kumar, Anil (Federal Reserve Bank of Dallas)
    Abstract: Almost all recent literature on Medicaid and labor supply has used Affordable Care Act (ACA)- induced Medicaid eligibility expansions in various states as natural experiments. Estimated effects on employment and earnings differ widely due to differences in the scope of eligibility expansion across states. Using a Regression Kink Design (RKD) framework, this paper takes a uniquely different approach to the identification of the effect of Medicaid generosity on household income. Both state-level data and March CPS data from 1980–2013 suggest that generous federal funding of state-level Medicaid costs have a modest negative effect on household income. The negative impact of Medicaid generosity on household income is more pronounced at the lower end of the household income distribution and on the income and earnings of female heads.
    Keywords: Medicaid; household income; labor supply
    JEL: C31 I13 J08 J22
    Date: 2017–10–01
  4. By: Parsons, Donald O. (George Washington University)
    Abstract: Employer-provided severance pay in the U.S. emerged among salaried workers during the Great Depression as an alternative to modest advance notice and expanded in the late 1950s and 1960s, especially among union (hourly) workers. A variety of sources are employed to estimate variations in severance coverage and design over the remainder of the 20th Century. The Bureau of Labor Statistics provided coverage estimates from 1980 to 2000, but these offered little information on severance plan structures, forcing reliance on surveys by private, for-profit management consulting firms. Although the studies differ in sample and survey instrument design, they broadly reveal a standard benefit form –essentially scheduled wage insurance, similar to severance plans mandated internationally. Coverage is another matter, with voluntary coverage narrowly focused on firms/workers vulnerable to large job displacement wage losses, while mandated coverage is quite broad. Labor market events of the new century highlight the limits of standard benefit schedules as wage insurance, whether voluntary or mandated.
    Keywords: severance pay, wage insurance, unemployment insurance, layoff, job displacement
    JEL: J65 J32 J33
    Date: 2017–10
  5. By: Czech, Robert (Imperial College Business School); Roberts-Sklar, Matt (Bank of England)
    Abstract: We provide evidence on how corporate bond investors react to a change in yields, and how this behaviour differs in times of market-wide stress. We also investigate ‘reaching for yield’ across investor types, as well as providing insights into the structure of the corporate bond market. Using proprietary sterling corporate bond transaction data, we show that insurance companies, hedge funds and asset managers are typically net buyers when corporate bond yields rise. Dealer banks clear the market by being net sellers. However, we find evidence for this behaviour reversing in times of stress for some investors. During the 2013 ‘taper tantrum’, asset managers were net sellers of corporate bonds in response to a sharp rise in yields, potentially amplifying price changes. At the same time, dealer banks were net buyers. Finally, we provide evidence that insurers, hedge funds and asset managers tilt their portfolios towards higher risk bonds, consistent with ‘reaching for yield’ behaviour.
    Keywords: Corporate bonds; trading volume; investment decisions; banks; insurer; non-bank financial institutions; cyclicality; financial stability
    JEL: G11 G12 G15 G21 G22 G23
    Date: 2017–10–20
  6. By: Cirelli, Fernando; Espino, Emilio; Sanchez, Juan M.
    Abstract: We study the design of optimal unemployment protection schemes to evaluate its impact on labor markets, welfare and productivity. We consider a life-cycle economies with formal and informal labor markets, unobservable effort to find and keep formal jobs, and unobservable heterogeneities across worker to find better formal jobs. We analyze the first best allocation to compare with the allocations stemming from the implementation of two alternative schemes: (i) a simple unemployment insurance system with a defined profile of unemployment benefits; (ii) an unemployment insurance saving account scheme parameterized by a replacement rate, an initial contribution to the saving account, a minimum level of savings at which the payment is suspended, and a maximum level of savings at which the contributions are suspended. Our quantitative analysis makes clear that both schemes can have a significant impact on welfare and productivity. Two additional lessons can be learned. First, no scheme is necessarily better in both economies. Second, a reform that implements an scheme that it is welfare improving does not necessarily boost productivity and viceversa.
    Keywords: Economía, Investigación socioeconómica, Trabajo y protección social, Desempleo,
    Date: 2017
  7. By: Parsons, Donald O. (George Washington University)
    Abstract: Employer-provided severance pay plans became common during the Great Depression, a reaction to (i) large-scale layoffs of long-service workers, and (ii) the growing formalism of the employment relationship. Reasonably consistent series are constructed for severance plan coverage and structure by broad occupational group (office or factory workers) over the next two decades based on an ambitious series of surveys conducted by the National Industrial Conference Board. By 1953/54, approximately one-third of surveyed companies reported having a formal severance plan for nonexempt salary workers and one-sixth for hourly workers. Over much of the period, modal long-service plans offered benefits of a week's pay for each year of service, although many firms, especially those outside the manufacturing sector, offered flat-rate "notice" payments of only a week or two. Surprisingly, coverage levels were only modest higher in 1954 than in the late 1930s. The stability of plan coverage and design in the face of large changes in economic conditions and labor relations remains a puzzle.
    Keywords: severance pay, wage insurance, unemployment insurance, job displacement insurance, advance notice, layoff, Great Depression
    JEL: J65 J32 J33
    Date: 2017–10
  8. By: Ctirad Slavik (CERGE-EI); Kevin Wiseman (International Monetary Fund)
    Abstract: Online appendix for the Review of Economic Dynamics article
    Date: 2017
  9. By: Briley, Donnel A. (University of Sydney); Rudd, Melanie (University of Houston); Aaker, Jennifer (Stanford University)
    Abstract: Research shows that optimism can positively impact health, but when and why people feel optimistic when confronting health challenges is less clear. Findings from six studies show that the frames people adopt when thinking about health challenges influence their optimism about overcoming those challenges, and that their culture moderates this effect. In cultures where the independent self is highly accessible, individuals adopting an initiator frame (how will I act, regardless of the situations I encounter?) were more optimistic than those adopting a responder frame (how will I react to the situations I encounter?); the converse occurred for individuals from cultures where the interdependent self is highly accessible. Moreover, mediation and moderation evidence revealed that this interactive effect of culture and frame on optimism was driven by people's ability to easily imagine the recovery process. These effects held for distinct health challenges (cancer, diabetes, flood-related illness, traumatic injury) and across single-country and cross-country samples, as well as impacted positive health outcomes and decisions ranging from anticipated energy, physical endurance, and willingness to take on more challenging physical therapy to intentions to get vaccinated, stick to a doctor recommended diet, and undertake a physically strenuous vacation.
    Date: 2017–06
  10. By: M. Martin Boyer; Philippe De Donder; Claude Fluet; Marie-Louise Leroux; Pierre-Carl Michaud
    Abstract: We conduct a stated-choice experiment where respondents are asked to rate various insurance products aimed to protect against financial risks associated with long-term care needs. Using exogenous variation in prices from the survey design, and objective risks computed from a dynamic microsimulation model, these stated-choice probabilities are used to predict market equilibrium for long-term care insurance using the framework developped by Einavetal. (2010). We investigate in turn causes for the low observed take-up of long-term care insurance in Canada despite substantial residual out-of-pocket financial risk.We first find that awareness and knowledge of the product is low in the population: 44% of respondents who do not have long-term care insurance were never off ered this type of insurance while overall 31% report no knowledge of the product. Although we find evidence of adverse selection, results suggest it plays a minimal role in limiting take-up. On the demandside, oncer espondents have been made aware of the risks,we find that demand remains low,in part because of misperceptions of risk, lack of bequest motive and homeownership which may act as a substitute.
    Date: 2017–10–30

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