nep-ias New Economics Papers
on Insurance Economics
Issue of 2018‒01‒15
fourteen papers chosen by
Soumitra K. Mallick
Indian Institute of Social Welfare and Business Management

  1. Optimal Risk Allocation in Reinsurance Networks By Nicole B\"auerle; Alexander Glauner
  2. Contests with Insurance By Sela, Aner
  3. The Dynamics of Disability and Benefit Receipt in Britain By Jones, Melanie K.; McVicar, Duncan
  4. New approaches to regulating insurance markets in the European Union in the aftermath of the financial crisis By Eliska Hrabalova; Eva Vavrova; David Hampel
  5. Do you want some cash-back? Assessing the demand for a no-claim rebate life-insurance product By Francisco Galarza; Ingo Outes Leonb
  6. Cost Sharing in Insurance Coverage for Precision Medicine By Mark V. Pauly
  7. Intergenerational Risk Sharing in Life Insurance: Evidence from France By J. Hombert; V. Lyonnet
  8. Regulating consumer finance: Do disclosures matter? The case of life insurance. By Halan, Monika; Sane, Renuka
  9. Dynamic and granular loss reserving with copulae By Mat\'u\v{s} Maciak; Ostap Okhrin; Michal Pe\v{s}ta
  10. Reevaluation of the capital charge in insurance after a large shock: empirical and theoretical views By F. Borel-Mathurin; S. Loisel; J. Segers
  11. The parental home as labor market insurance for young Greeks during the crisis By Rebekka Christopoulou; Maria Pantalidou
  12. Long-Term Care Insurance: Knowledge Barriers, Risk Perception and Adverse Selection By Martin Boyer; Philippe De Donder; Claude-Denys Fluet; Marie-Louise Leroux; Pierre-Carl Michaud
  13. Misallocation Before, During and After the Great Recession By T. Libert
  14. Revalorisation 2016 des contrats d’assurance-vie et de capitalisation – engagements à dominante épargne et retraite individuelle By Capitaine, G.; Frey, L.

  1. By: Nicole B\"auerle; Alexander Glauner
    Abstract: In this paper we consider reinsurance or risk sharing from a macroeconomic point of view. Our aim is to find socially optimal reinsurance treaties. In our setting we assume that there are $n$ insurance companies each bearing a certain risk and one representative reinsurer. The optimization problem is to minimize the sum of all capital requirements of the insurers where we assume that all insurance companies use a form of Range-Value-at-Risk. We show that in case all insurers use Value-at-Risk and the reinsurer's premium principle satisfies monotonicity, then layer reinsurance treaties are socially optimal. For this result we do not need any dependence structure between the risks. In the general setting with Range-Value-at-Risk we obtain again the optimality of layer reinsurance treaties under further assumptions, in particular under the assumption that the individual risks are positively dependent through the stochastic ordering. At the end, we discuss the difference between socially optimal reinsurance treaties and individually optimal ones by looking at a number of special cases.
    Date: 2017–11
  2. By: Sela, Aner
    Abstract: We study all-pay auctions under incomplete information where contestants have non-linear effort functions. Before the contest begins, the designer offers the option of insurance for which a contestant pays a premium for the contest designer who reimburses this contestant's cost of effort if he does not win. We demonstrate that contests with insurance may be profitable for a designer who wishes to maximize his expected revenue as based on the contestants expected total effort, the premium of the insured contestants, and their reimbursement.
    Keywords: all-pay auctions; Contests; Insurance; reimbursement
    JEL: D44
    Date: 2017–11
  3. By: Jones, Melanie K. (Cardiff University); McVicar, Duncan (Queen's University Belfast)
    Abstract: This paper exploits rarely-used longitudinal data to examine the impacts of disability onset on benefit receipt in Britain over the period 2004–2012. Differences in the timing of onset are exploited for identification in a framework that combines propensity score matching with difference-in-differences estimation. Disability onset increases receipt of disability insurance, a wider measure of sickness and disability benefits, and receipt of non-sickness benefits by six, eight and six percentage points respectively in the first year. These effects do not vary significantly by individual characteristics, but are larger for more severe disability onset, for those who did not previously report a long-term health condition, and for those who experienced disability onset under the less restrictive pre-2009 disability benefit regime. Contrary to the perception of disability benefits being an absorbing state, disability exit has an almost symmetrical impact on receipt of disability insurance and on wider sickness benefits in the first year.
    Keywords: disability, disability onset, disability exit, welfare benefits, disability insurance, propensity score matching
    JEL: H51 H53 I38 J14
    Date: 2017–11
  4. By: Eliska Hrabalova (Department of Finance, Faculty of Business and Economics, Mendel University in Brno); Eva Vavrova (Department of Finance, Faculty of Business and Economics, Mendel University in Brno); David Hampel (Department of Statistics and Operation Analysis, Faculty of Business and Economics, Mendel University in Brno)
    Abstract: The main objective of this paper is to analyze the impact of the financial crisis on insurance markets in the European Union and to evaluate changes in the approaches to insurance regulation depending on the effects of the financial crisis. The financial crisis has triggered an identified banking crisis and has shifted through the contagion channels from the US mortgage market to other financial sectors and regions of the world. With regard to the integration of financial institutions in the EU and the globalization of financial markets, a number of regulatory proposals has emerged in recent years to address the impact of the crisis, to eliminate the trigger of the crisis and to prevent recurrence of the causes of the crisis. The authors assess the development of financial health of insurers in the European insurance markets in the period of lingering financial crisis and draw conclusions based on the analysis of the insurance sector. The methods of panel regression and resulting models were used to achieve the aim of the paper.
    Keywords: financial crisis, insurance market, regulation, supervisory authority, Directive Solvency II
    JEL: G01 G15 G22 G28
    Date: 2017–12
  5. By: Francisco Galarza (Universidad del Pacífico); Ingo Outes Leonb (University of Oxford)
    Abstract: We designed and implemented a field experiment in rural Peru, in order to examine the sensitivity of the demand for micro life-insurance products to the introduction of rebates (cash-backs), which are partial refunds of the insurance premium when no insured event occurs. We find that cash-backs do appear to create higher levels of trust between the insurer and the insurance policy holder, thus offering the promise to increase the demand for insurance. This result suggests that cash-backs can be an attractive product innovation in developing countries.
    Keywords: Cash-back, life micro-insurance, experimental economics
    Date: 2016–06
  6. By: Mark V. Pauly
    Abstract: This paper describes current pattern of insurance coverage for precision medicines and, especially, companion diagnostics and explores what coverage would improve efficiency. We find that currently coverage is common for tests and treatments with clinical acceptance used at high volumes but is haphazard across both private insurers and Medicare for precision medicines in general. Analysis of the case of homogenous patient preferences finds that discovery and use of the test that converts an ordinary drug into a precision drug can either increase or decrease total spending, and might call for full or no coverage of test and treatments. Heterogeneity in marginal benefits from testing and treatment can call for partial coverage. Finally, varying threshold levels for diagnostic test results can lead to a demand curve to test and treatment that calls for partial cost sharing. Numerical examples and case studies of several test-treatment combinations illustrate these points.
    JEL: I11 I13 O32
    Date: 2017–12
  7. By: J. Hombert; V. Lyonnet
    Abstract: We study intergenerational risk sharing in Euro-denominated life insurance contracts. These savings products represent 80% of the life insurance market in Europe. Using regulatory and survey data for the French market, which is €1.3 trillion large, we analyze the patterns of intergenerational redistribution implemented by these products. We show that contract returns are an order of magnitude less volatile than the return of assets underlying these contracts. Contract return smoothing is achieved using reserves that absorb fluctuations in asset returns and that generate intertemporal transfers across generations of investors. We estimate the average annual amount of intergenerational transfer at 1.4% of contract value, i.e., €17 billion or 0.8% of GDP. Finally, we provide evidence that smoothing makes contract returns predictable, but inflows react only weakly to these predictable returns.
    Keywords: Life insurance, intergenerational risk-sharing, euro contracts.
    JEL: G20 G22
    Date: 2017
  8. By: Halan, Monika (Editor, Mint, Delhi); Sane, Renuka (National Institute of Public Finance and Policy)
    Abstract: We use a sample-survey based experiment to estimate the effect of simplified life insurance disclosures. We randomise survey respondents into one of four product advertisements: 1) a baseline product with no additional disclosure, 2) disclosure of the actual rate of return on the product, 3) disclosure of the rate of return and a benchmark return of a similar product, and 4) the rate of return, benchmark return and product features of a more cost-effective competing product. We test if these incremental disclosures affect customer views of the product, and the intention to purchase. We find that relative to the baseline treatment, only Treatment 2, had an effect on product perceptions. Treatments which show additional data did not have a differential effect relative to the baseline treatment. None of the treatments had any impact on the intention to purchase.
    Date: 2017–11
  9. By: Mat\'u\v{s} Maciak; Ostap Okhrin; Michal Pe\v{s}ta
    Abstract: An intensive research sprang up for stochastic methods in insurance during the past years. To meet all future claims rising from policies, it is requisite to quantify the outstanding loss liabilities. Loss reserving methods based on aggregated data from run-off triangles are predominantly used to calculate the claims reserves. Conventional reserving techniques have some disadvantages: loss of information from the policy and the claim's development due to the aggregation, zero or negative cells in the triangle; usually small number of observations in the triangle; only few observations for recent accident years; and sensitivity to the most recent paid claims. To overcome these dilemmas, granular loss reserving methods for individual claim-by-claim data will be derived. Reserves' estimation is a crucial part of the risk valuation process, which is now a front burner in economics. Since there is a growing demand for prediction of total reserves for different types of claims or even multiple lines of business, a time-varying copula framework for granular reserving will be established.
    Date: 2018–01
  10. By: F. Borel-Mathurin; S. Loisel; J. Segers
    Abstract: Motivated by the recent introduction of regulatory stress tests in the Solvency II framework, we study the impact of the re-estimation of the tail risk and of loss absorbing capacities on post-stress solvency ratios. Our contribution is threefold. First, we build the first stylized model for re-estimated solvency ratio in insurance. Second, we solve a new theoretical problem in statistical theory: what is the asymptotic impact of a record on the re-estimation of tail quantiles and tail probabilities for classical extreme value estimators? Third, we quantify the impact of the re-estimation of tail quantiles and of loss absorbing capacities on real-world solvency ratios thanks to regulatory data from EIOPA. Our analysis sheds a first light on the role of the loss absorbing capacity and its paramount importance in the Solvency II capital charge computations. We conclude with a number of policy recommendations for insurance regulators.
    Keywords: Insurance, Extreme Value Theory, Financial Regulation, Solvency II, Solvency Capital Requirement, Loss Absorbing Capacities, Stress Tests, Enterprise Risk Management.
    JEL: G22 G18 C13 C15
    Date: 2017
  11. By: Rebekka Christopoulou (Department of Economics, University of Macedonia); Maria Pantalidou (Athens University of Economics and Business)
    Abstract: Labor market conditions in Greece have severely deteriorated during the crisis, af- fecting youths the most. Using the Greek crisis as a case-study, this paper examines the role of the family as a social safety net for its young members. Specically, we test the relationship between youth labor outcomes and parental co-residence, whether this rela- tionship has become stronger during the crisis, and the degree to which the relationship is causal. Our results conrm that the parental home is a refuge both for jobless youth and for those in poorly paid, insecure jobs, and this role has intensied during the crisis. We nd no reverse causality between co-residence and employment status for young men, and signicant reverse causality for women. This nding implies that all youths live in the parental home when they are in need themselves, but it is young women not men who live with parents when parents are in need or for cultural reasons.
    Keywords: Living arrangements, parental coresidence, youth employment, great recession, Greece.
    JEL: J12 J21
    Date: 2017–10
  12. By: Martin Boyer; Philippe De Donder; Claude-Denys 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 Einav et al. (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 offered this type of insurance while overall 31% report no knowledge of the product. Although we finnd evidence of adverse selection, results suggest it plays a minimal role in limiting take-up. On the demand side, once respondents have been made aware of the risks, we finnd that demand remains low, in part because of misperceptions of risk, lack of bequest motive and home ownership which may act as a substitute.
    Keywords: Long-term care insurance, adverse selection, stated-preference, Health, Insurance
    Date: 2017
  13. By: T. Libert
    Abstract: This paper assesses resource misallocation dynamics and its impact on aggregate TFP in the French manufacturing sector between 1990 and 2015. I provide an exact decomposition of allocational inefficiency into three components: labor misallocation, capital misallocation, and a third term representing the interplay between both. Misallocation increased substantially between 1997 and 2007, generating a loss in annual TFP growth of roughly 0.8 percentage points. This increase is mainly related to labor misallocation, except at the beginning of the 2000s, when capital misallocation played the leading role. The impact of allocational efficiency during the Great Recession is sizeable: misallocation accounts for roughly 25% of the 2007-2009 decline in TFP and 20% of the improvement observed in the immediate aftermath of the crisis. The main feature behind the rise in misallocation during the crisis is the predominance of the interplay component, which is stable the rest of the time. It suggests that one should pay special attention to mechanisms disrupting both labor and capital markets in the wake of financial crises. Finally, allocational efficiency remains rather constant after 2010: the post-crisis slowdown in productivity growth is therefore even more pronounced for efficient TFP than for observed TFP.
    Keywords: Misallocation; Aggregate Productivity; Great Recession.
    JEL: D24 O11 O47
    Date: 2017
  14. By: Capitaine, G.; Frey, L.
    Abstract: Dans un contexte de taux bas, le niveau des taux de revalorisation servis aux assurés appelle une vigilance particulière du superviseur, au regard de ses objectifs de contrôle prudentiel et de suivi des pratiques commerciales en assurance-vie. Le taux de revalorisation moyen des fonds euros des contrats individuels, net de frais de chargement (mais avant prélèvements sociaux), pondéré par les provisions mathématiques correspondantes, s’élève à 1,93 % au titre de 2016 après 2,27% au titre de 2015 et 2,54% au titre de 2014..
    Keywords: assurance-vie, revalorisation, rachats.
    JEL: G22 G28 D14 D18
    Date: 2017

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