nep-ias New Economics Papers
on Insurance Economics
Issue of 2018‒01‒22
eighteen papers chosen by
Soumitra K. Mallick
Indian Institute of Social Welfare and Business Management

  1. Open Enrollment Periods and Plan Choices By Francesco Decarolis; Andrea Guglielmo; Calvin Luscombe
  2. New Evidence on an Old Unanswered Question : Why Some Borrowers Purchase Credit Insurance and Other Debt Protection and Some Do Not By Thomas A. Durkin; Gregory E. Elliehausen
  3. The Fragility of Market Risk Insurance By Ralph Koijen; Motohiro Yogo
  4. Who benefits from free health insurance: evidence from Mexico By Gabriella Conti; Rita Ginja
  5. Service-level Selection: Strategic Risk Selection in Medicare Advantage in Response to Risk Adjustment By Sungchul Park; Anirban Basu; Norma Coe; Fahad Khalil
  6. Risk-based selection and unemployment insurance: evidence and implications By Camille Landais; Arash Nekoei; Peter Nilsson; David Seim; Johannes Spinnewijn
  7. Moral Hazard in Health Insurance: What We Know and How We Know It By Liran Einav; Amy Finkelstein
  8. Price Optimisation for New Business By Maissa Tamraz; Yaming Yang
  9. Asymmetries in Earnings, Employment and Wage Risk in Great Britain By Spyridon Lazarakis; James Malley; Konstantinos Angelopoulos
  10. Fiscal unions redux By Kehoe, Patrick J.
  11. The Affordability Goal and Prices in the National Flood Insurance Program By Matthew E. Kahn; V. Kerry Smith
  12. Unemployment Insurance Union By Marius Clemens; Guillaume Claveres
  13. Does Federally-Funded Job Training Work? Nonexperimental Estimates of WIA Training Impacts Using Longitudinal Data on Workers and Firms By Fredrik Andersson; Harry J. Holzer; Julia I. Lane; David Rosenblum; Jeffrey Smith
  14. Can Regional Decentralisation Shift Health Care Preferences? By Costa-Font, Joan; Ferrer-i-Carbonell, Ada
  15. The optimal timing of unemployment benefits: theory and evidence from Sweden By Kolsrud, Jonas; Landais, Camille; Nilsson, J. Peter; Spinnewijn, Johannes
  16. Proprietary Data, Competition, and Consumer Effort: An Application to Telematics in Auto Insurance By Imke Reimers; Benjamin R. Shiller
  17. A time change strategy to model reporting delay dynamics in claims reserving By Jonas Crevecoeur; Katrien Antonio; Roel Verbelen
  18. Cost-Sharing Design Matters: A Comparison of the Rebate and Deductible in Healthcare By Bijlsma, Michiel; Boone, Jan; Douven, Rudy; Remmerswaal, Minke

  1. By: Francesco Decarolis; Andrea Guglielmo; Calvin Luscombe
    Abstract: Open enrollment periods are pervasively used in insurance markets to limit adverse selection risks resulting when enrollees can switch plans at will. We exploit a change in the open enrollment rules of Medicare Part C and Part D to analyze how Medicare beneficiaries responded to the option of switching to 5-star rated plans at anytime, in a setting where insurers adjusted premiums and benefit design to counterbalance the increased selection risk. We find that within-year switches to 5-star plans increased by 7-16% and that those who switch are advantageously selected. Furthermore, demand for 5-star plans across the years did not change
    JEL: I11 I18 L22
    Date: 2017–12
  2. By: Thomas A. Durkin; Gregory E. Elliehausen
    Abstract: Credit related insurance and other debt protection are products sold in conjunction with credit that extinguish a consumer’s debt or suspends its periodic payments if events like death, disability, or involuntary unemployment occur. High penetration rates observed in the 1950s and 1960s raised concerns about coercion in the sale of credit insurance. This study presents evidence on credit insurance purchase and debt protection decisions from a new survey. The findings provide little evidence of widespread or systematic coercion in purchases. Instead, findings suggest that risk aversion and health or financial concerns motivate consumers to purchase credit insurance and debt protection, just as these concerns also motivate purchases of other types of insurance.
    Keywords: Credit insurance ; Personal finance ; Consumer protection ; Insurance
    JEL: D14 D18 G22
    Date: 2017–12–18
  3. By: Ralph Koijen; Motohiro Yogo
    Abstract: Insurers sell retail financial products called variable annuities that package mutual funds with minimum return guarantees over long horizons. Variable annuities accounted for $1.5 trillion or 34 percent of U.S. life insurer liabilities in 2015. Sales fell and fees increased after the 2008 financial crisis as the higher valuation of existing liabilities stressed risk-based capital. Insurers also made guarantees less generous or stopped offering guarantees entirely to reduce risk exposure. We develop an equilibrium model of insurance markets in which financial frictions and market power are important determinants of pricing, contract characteristics, and the degree of market incompleteness.
    JEL: G22 G32
    Date: 2018–01
  4. By: Gabriella Conti (Institute for Fiscal Studies and University College London); Rita Ginja (Institute for Fiscal Studies and University of Bergen)
    Abstract: We present the first comprehensive evidence on the health impacts of the introduction and expansion of a large non-contributory health insurance program in Mexico, the Seguro Popular (SP). SP provided access to health services without co-pays to individuals with no Social Security protection. To identify the impacts of the program we use its staggered rollout across municipalities between 2002 and 2010. Our intent-to-treat estimates show that SP reduced infant mortality by 10% in poor municipalities. We are unable to detect program impacts on mortality for children ages 1-4, adults or elderly. The decline in infant mortality is driven by reductions in deaths due to perinatal conditions, congenital malformations, diarrhea and respiratory infections. Also in poor municipalities, the introduction of SP is associated with an immediate 7% increase in obstetric-related hospital admissions and with a 6% increase in hospital admissions due to diarrhea and respiratory infections among infants. The decline in infant mortality attributed to SP closes 84% of the gap in infant mortality rates between poor and rich Mexican municipalities.
    Keywords: Health Insurance, Child Mortality, Health Care Utilization, Mexico
    Date: 2017–11–02
  5. By: Sungchul Park; Anirban Basu; Norma Coe; Fahad Khalil
    Abstract: The Centers for Medicare and Medicaid Services (CMS) has phased in the Hierarchical Condition Categories (HCC) risk adjustment model during 2004-2006 to more accurately estimate capitated payments to Medicare Advantage (MA) plans to reflect each beneficiary’s health status. However, it is debatable whether the CMS-HCC model has led to strategic evolutions of risk selection. We examine the competing claims and analyze the risk selection behavior of MA plans in response to the CMS-HCC model. We find that the CMS-HCC model reduced the phenomenon that MA plans avoid high-cost beneficiaries in traditional Medicare plans, whereas it led to increased disenrollment of high-cost beneficiaries, conditional on illness severity, from MA plans. We explain this phenomenon in relation to service-level selection. First, we show that MA plans have incentives to effectuate risk selection via service-level selection, by lowering coverage levels for services that are more likely to be used by beneficiaries who could be unprofitable under the CMS-HCC model. Then, we empirically test our theoretical prediction that compared to the pre-implementation period (2001-2003), MA plans have raised copayments disproportionately more for services needed by unprofitable beneficiaries than for other services in the post-implementation period (2007-2009). This induced unprofitable beneficiaries to voluntarily dis-enroll from their MA plans. Further evidence supporting this selection mechanism is that those dissatisfied with out-of-pocket costs were more likely to dis-enroll from MA plans. We estimate that such strategic behavior led MA plans to save $5.2 billion by transferring the costs to the federal government.
    JEL: G22 H51 I13 I18
    Date: 2017–11
  6. By: Camille Landais (Institute for Fiscal Studies and London School of Economics and Political Science); Arash Nekoei (Institute for Fiscal Studies and Institute for International Economic Studies); Peter Nilsson (Institute for Fiscal Studies and Institute for International Economic Studies); David Seim (Institute for Fiscal Studies and Stockholm University); Johannes Spinnewijn (Institute for Fiscal Studies and London School of Economics)
    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 fi rst direct evidence for adverse selection in UI and derive its implications for UI design. We fi nd 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 fi ndings 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
    Date: 2017–10–10
  7. By: Liran Einav; Amy Finkelstein
    Abstract: We describe research on the impact of health insurance on healthcare spending ("moral hazard"), and use this context to illustrate the value of and important complementarities between different empirical approaches. One common approach is to emphasize a credible research design; we review results from two randomized experiments, as well as some quasi-experimental studies. This work has produced compelling evidence that moral hazard in health insurance exists – that is, individuals, on average, consume less healthcare when they are required to pay more for it out of pocket – as well as qualitative evidence about its nature. These studies alone, however, provide little guidance for forecasting healthcare spending under contracts not directly observed in the data. Therefore, a second and complementary approach is to develop an economic model that can be used out of sample. We note that modeling choices can be consequential: different economic models may fit the reduced form but deliver different counterfactual predictions. An additional role of the more descriptive analyses is therefore to provide guidance regarding model choice.
    JEL: D12 G22
    Date: 2017–11
  8. By: Maissa Tamraz; Yaming Yang
    Abstract: This contribution is concerned with price optimisation of the new business for a non-life product. Due to high competition in the insurance market, non-life insurers are interested in increasing their conversion rates on new business based on some profit level. In this respect, we consider the competition in the market to model the probability of accepting an offer for a specific customer. We study two optimisation problems relevant for the insurer and present some algorithmic solutions for both continuous and discrete case. Finally, we provide some applications to a motor insurance dataset.
    Date: 2017–11
  9. By: Spyridon Lazarakis (University of Glasgow); James Malley (University of Glasgow and CESifo); Konstantinos Angelopoulos (University of Glasgow)
    Abstract: This paper examines the relationship between idiosyncratic earnings, employment and wage risk and fluctuations in aggregate labour market quantities for Great Britain. We use data from the British Household Panel Survey(BHPS) for 1991-2008 and from the BHPS sub-sample of Understanding Society for 2010-2014. We measure idiosyncratic risk by the relevant moments of the distribution of earnings, employment and wage shocks across individuals. Our main finding is that each of these measures of idiosyncratic labour income risk responds symmetrically to fluctuations in the labour market aggregates. Furthermore, we find evidence of insurance, both within the household and in the form of public insurance. However, household disposable income risk still increases with negative changes in mean earnings, implying that private and public of insurance do not eliminate the increase in risk.
    Date: 2017
  10. By: Kehoe, Patrick J.
    Abstract: Before the advent of sophisticated international Önancial markets, a widely accepted belief was that within a monetary union, a union-wide authority orchestrating Öscal transfers between countries is necessary to provide adequate insurance against country-speciÖc economic áuctuations. A natural question is then: Do sophisticated international Önancial markets obviate the need for such an active union-wide authority? We argue that they do. SpeciÖcally, we show that in a benchmark economy with no international Önancial markets, an activist union-wide authority is necessary to achieve desirable outcomes. With sophisticated Önancial markets, however, such an authority is unnecessary if its only goal is to provide cross-country insurance. Since restricting the set of policy instruments available to member countries does not create a Öscal externality across them, this result holds in a wide variety of settings. Finally, we establish that an activist union-wide authority concerned just with providing insurance across member countries is optimal only when individual countries are either unable or unwilling to pursue desirable policies.
    Keywords: Cross-country externalities; Cross-country insurance; Cross-country transfers; Fiscal externalities; international Önancial markets; International transfers; Optimal currency area
    JEL: E60 E61 F33 F35 F42 G15 G28 G33
    Date: 2017–02
  11. By: Matthew E. Kahn; V. Kerry Smith
    Abstract: The United States Gulf Region features areas that face significant flood risk. Climate change may further elevate this risk. Home owners in such areas face potentially large asset losses and property maintenance costs. Anticipating these challenges, the Federal government has enacted a complex set of policies through its National Flood Insurance Program (NFIP). The NFIP offers reduced insurance rates for homes built before rate maps were drawn and grandfathers rates for homes when new maps increase their risk ratings. This paper asks if the goal of affordable NFIP insurance rates for the high risk Gulf Coast areas is warranted? We compare the income distribution of the set of people who live in the areas that face the highest risk of flooding relative to nearby areas. Our findings imply reduced rates for high risk areas cannot be justified based on the assumption that low income households live in these areas.
    JEL: D3 H23 Q5
    Date: 2017–12
  12. By: Marius Clemens (German Institute for Economic Research (DIW Berlin)); Guillaume Claveres (Universite Paris 1 Pantheon-Sorbonne)
    Abstract: A European unemployment insurance scheme has gained increased attention as a new and ambitious common fiscal instrument which could be used for temporary cross-country transfers. Part of the national stabilizers composing unemployment insurance schemes would be transferred to the central level. Unemployed are then insured by both layers. When a country is hit by an asymmetric shock, it would receive positive net transfers from the central fund in the form of reduced taxes and increased benefits, providing risk-sharing for the whole union. We build a two-country DSGE model with supply, demand and labor market shocks in order to capture the recent national insurance system and the unemployment insurance union (UIU) design. The model is calibrated to the euro area core and periphery data and matches the empirically observed cyclicality of the net replacement rate, the wage and unemployment dynamics. This baseline scenario is then compared to a optimal unemployment insurance union with passive and active benefit policies. For all underlying shocks, we find that the UIU reduces the fluctuation of consumption and unemployment while it increases the fluctuation of the trade balance. In case of a positive domestic government spending shock the UIU reduces the negative crowding out effect on private consumption and investment. The model will be used to analyze the effects of national and supranational benefit policies on labour market patterns and welfare.
    Date: 2017
  13. By: Fredrik Andersson; Harry J. Holzer; Julia I. Lane; David Rosenblum; Jeffrey Smith
    Abstract: We study the job training provided under the US Workforce Investment Act (WIA) to adults and dislocated workers in two states. Our substantive contributions center on impacts estimated non-experimentally using administrative data. These impacts compare WIA participants who do and do not receive training. In addition to the usual impacts on earnings and employment, we link our state data to the Longitudinal Employer-Household Dynamics (LEHD) data at the US Census Bureau, which allows us to estimate impacts on the characteristics of the firms at which participants find employment. We find moderate positive impacts on employment, earnings and desirable firm characteristics for adults, but not for dislocated workers. Our primary methodological contribution consists of assessing the value of the additional conditioning information provided by the LEHD relative to the data available in state Unemployment Insurance (UI) earnings records. We find that value to be zero.
    Keywords: job training, active labor market program, program evaluation, Workforce Investment Act, administrative data
    JEL: I38 J08 J24
    Date: 2018–01
  14. By: Costa-Font, Joan (London School of Economics); Ferrer-i-Carbonell, Ada (IAE Barcelona (CSIC))
    Abstract: Uniform health care delivered by a mainstream public insurer – such as the National Health Service (NHS), seldom satisfies heterogeneous demands for care, and some unsatisfied share of the population either use private health care, or purchase private insurance (PHI). One potential mechanism to partially satisfy heterogeneous preferences for health care, and discourage the use of private health care, is regional health care decentralisation. We find robust estimates suggesting that the development of regional health services shifted both perceptions of, and preferences for, using the NHS, making it more likely individuals would use public health care and, consequently, reducing the uptake of PHI. These results are heterogeneous by income, education, and age groups; and are robust to placebo and other robustness and falsification checks.
    Keywords: National Health Service (NHS), political decentralization, use of private health care, private health insurance, health system satisfaction, demand for private health care
    JEL: H7 I18
    Date: 2017–11
  15. By: Kolsrud, Jonas; Landais, Camille; Nilsson, J. Peter; Spinnewijn, Johannes
    Abstract: This paper provides a simple, yet robust framework to evaluate the time profile of benefits paid during an unemployment spell. We derive sufficient-statistics formulae capturing the marginal insurance value and incentive costs of unemployment benefits paid at different times during a spell. Our approach allows us to revisit separate arguments for inclining or declining profiles put forward in the theoretical literature and to identify welfare-improving changes in the benefit profile that account for all relevant arguments jointly. For the empirical implementation, we use administrative data on unemployment, linked to data on consumption, income, and wealth in Sweden. First, we exploit duration-dependent kinks in the replacement rate and find that, if anything, the moral hazard cost of benefits is larger when paid earlier in the spell. Second, we find that the drop in consumption affecting the insurance value of benefits is large from the start of the spell, but further increases throughout the spell. In trading off insurance and incentives, our analysis suggests that the at benefit profile in Sweden has been too generous overall. However, both from the insurance and the incentives side, we find no evidence to support the introduction of a declining tilt in the profile.
    Keywords: unemployment; dynamic policy; sufficient statistics; consumption soothing
    JEL: H20 J64
    Date: 2017–12–02
  16. By: Imke Reimers (Northeastern University); Benjamin R. Shiller (Brandeis University)
    Abstract: Firms are increasingly able to monitor and collect proprietary data on their customers' behaviors, raising concerns among antitrust autorities that incumbents may use such data to soften competition. Focusing on auto insurance monitoring programs which offer tailored discounts to consumers driving safely, we examine the impact of proprietary data collection on incumbent profits. We find that incumbents' profits initially increase but are eroded by competition from other firms offering similar programs. We further find that these monitoring programs reduce fatal accidents. Yet the benefits are short lived. Incumbents, who do not necessarily internalize the full costs of accidents, typically monitor their customers only temporarily. Thus, regulation incentivizing permanent monitoring may improve welfare by reducing moral hazard.
    Keywords: Proprietary data, competition, asymmetric information, switching costs, car insurance, privacy
    JEL: D43 D82 L13 L40
    Date: 2018–01
  17. By: Jonas Crevecoeur; Katrien Antonio; Roel Verbelen
    Abstract: This paper considers the problem of predicting the number of claims that have already incurred in past exposure years, but which have not yet been reported to the insurer. This is an important building block in the risk management strategy of an insurer since the company should be able to fulfill its liabilities with respect to such claims. Our approach puts emphasis on modeling the time between the occurrence and reporting of claims, the so-called reporting delay. Using data at a daily level we propose a micro-level model for the heterogeneity in reporting delay caused by calendar day effects in the reporting process, such as the weekday pattern and holidays. A simulation study identifies the strengths and weaknesses of our approach in several scenarios compared to traditional methods to predict the number of incurred but not reported claims from aggregated data (i.e. the chain ladder method). We also illustrate our model on a European general liability insurance data set and conclude that the granular approach compared to the chain ladder method is more robust with respect to volatility in the occurrence process. Our framework can be extended to other predictive problems where interest goes to events that incurred in the past but which are subject to an observation delay (e.g. the number of infections during an epidemic).
    Date: 2018–01
  18. By: Bijlsma, Michiel; Boone, Jan; Douven, Rudy; Remmerswaal, Minke
    Abstract: Since 2006, the Dutch population has faced two different cost-sharing schemes in health insurance for curative care: a mandatory rebate of 255 euros in 2006 and 2007, and since 2008 a mandatory deductible. Using administrative data for the entire Dutch population, we compare the effect of both cost-sharing schemes on healthcare consumption between 2006 and 2013. We use a regression discontinuity design which exploits the fact that persons younger than eighteen years old neither face a rebate nor a deductible. Our fixed effect estimate shows that for individuals around the age of eighteen, a one euro increase of the deductible reduces healthcare expenditures 18 eurocents more than a euro increase of the rebate. These results demonstrate that differences in the design of a cost-sharing scheme can lead to substantial different effects on total healthcare expenditure.
    Keywords: cost-sharing; deductible; healthcare consumption; panel data; rebate; regression discontinuity design
    Date: 2017–12

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