nep-ias New Economics Papers
on Insurance Economics
Issue of 2018‒07‒09
nineteen papers chosen by
Soumitra K. Mallick
Indian Institute of Social Welfare and Business Management

  1. Uncertain altruism and non-linear long-term care policies By Canta, Chiara; Cremer, Helmuth
  2. Optimal investment of participating contracts under VaR-Regulation By Thai Nguyen; Mitja Stadje
  3. Financial Incentives and Earnings of Disability Insurance Recipients: Evidence from a Notch Design By Ruh, Philippe; Staubli, Stefan
  4. Guaranteed Renewable Life Insurance Under Demand Uncertainty By Michael Hoy; Afrasiab Mirza; Asha Sadanand
  5. Are subsidies to weather-index insurance the best use of public funds? A bio-economic farm model applied to the Senegalese groundnut basin By Aymeric Ricome; François Affholder; Françoise Gérard; Bertrand Muller; Charlotte Poeydebat; Philippe Quirion; Moussa Sall
  6. Universal Health Insurance in the Republic of Macedonia and Effects from the Implementation of the Project "Health Insurance for All" By Maja Parnardzieva-Zmejkova; Vladimir Dimkovski
  7. Reclassification Risk in the Small Group Health Insurance Market By Sebastián Fleitas; Gautam Gowrisankaran; Anthony Lo Sasso
  8. Financial Inclusion, Regulation, Financial Literacy, and Financial Education in Armenia By Nurbekyan, Armen; Hovanessian, Naneh
  9. Nonlinear household earnings dynamics, self-insurance, and welfare By Mariacristina De Nardi; Giulio Fella
  10. Long Term Care Risk Misperceptions By Martin Boyer; Philippe De Donder; Claude Fluet; Marie-Louise Leroux; Pierre-Carl Michaud
  11. Optimal proportional reinsurance and investment for stochastic factor models By Matteo Brachetta; Claudia Ceci
  12. Does personalized information improve health plan choices when individuals are distracted? By Cornel Kaufmann, Tobias Mueller, Andreas Hefti, Stefan Boes
  13. Why Leave Benefits on the Table? Evidence from SNAP By Colin Gray
  14. How do banks and households manage interest rate risk? Evidence from mortgage applications and banks’ responses By Basten, Christoph; Guin, Benjamin; Koch, Catherine
  15. Comparing the Productive Effects of Cash and Food Transfers in a Crisis Setting: Evidence from a randomized experiment in Yemen By Benjamin Schwab; UNICEF Office of Research - Innocenti
  16. Tackling non-performing loans in the Euro area: What are the costs of getting banks fit for a European Deposit Insurance Scheme? By Demary, Markus
  17. The Intergenerational Transmission of Welfare Dependency By Monique De Haan; Ragnhild C. Schreiner
  18. Financial Institutions’ Business Models and the Global Transmission of Monetary Policy By Isabel Argimon; Clemens Bonner; Ricardo Correa; Patty Duijm; Jon Frost; Jakob de Haan; Leo de Haan; Viktors Stebunovs
  19. The Effects of the Minimum Wage on Employment and Wages By Nicolás Grau; Jorge Miranda; Esteban Puentes

  1. By: Canta, Chiara; Cremer, Helmuth
    Abstract: We study the design of public long-term care (LTC) insurance when the altruism of informal caregivers is uncertain. We consider non-linear policies where the LTC benefit depends on the level of informal care, which is assumed to be observable while children's altruism is not. The traditional topping up and opting out policies are special cases of ours. Both total and informal care should increase with the children's level of altruism. This obtains under full and asymmetric information. Social LTC, on the other hand, may be non-monotonic. Under asymmetric information, social LTC is lower than its full information level for the lowest level of altruism, while it is distorted upward for the higher level of altruism. This is explained by the need to provide incentives to highaltruism children. The implementing contract is always such that social care increases with formal care.
    Keywords: Long term care; uncertain altruism; private insurance; public insurance; topping up; opting out
    JEL: H2 H5
    Date: 2018–05
  2. By: Thai Nguyen; Mitja Stadje
    Abstract: This paper studies a VaR-regulated optimal portfolio problem of the equity holder of a participating life insurance contract. In a complete market setting the optimal solution is given explicitly for contracts with mortality risk using a martingale approach for constrained non-concave optimizations. We show that regulatory VaR constraints for participating insurance contracts lead to more prudent investment than the unconstrained solution in loss states. This result is contrary to the situation where the insurer maximizes the utility of the total wealth of the company (without distinguishing between equity and policy holders), in which case a VaR constraint may induce the insurer to take excessive risk leading to higher losses than in the case of no regulation, see Basak and Shapiro (2001). Furthermore, importantly for regulator we observe that for participating insurance contracts both relatively small or relatively large policyholder contributions yield rather risky and volatile strategies. Finally, we also discuss the regulatory effect of a portfolio insurance (PI), and analyze different choices for the parameters of the participating contract numerically.
    Date: 2018–05
  3. By: Ruh, Philippe; Staubli, Stefan
    Abstract: Most countries reduce Disability Insurance (DI) benefits for beneficiaries earning above a specified threshold. Such an earnings threshold generates a discontinuous increase in tax liability-a notch- and creates an incentive to keep earnings below the threshold. Exploiting such a notch in Austria, we provide transparent and credible identification of the effect of financial incentives on DI beneficiaries' earnings. Using rich administrative data, we document large and sharp bunching at the earnings threshold. However, the elasticity driving these responses is small. Our estimate suggests that relaxing the earnings threshold reduces fiscal cost only if program entry is very inelastic.
    Keywords: benefit notch; bunching; Disability insurance; Labor Supply
    JEL: H53 H55 J14 J21
    Date: 2018–06
  4. By: Michael Hoy; Afrasiab Mirza; Asha Sadanand
    Abstract: Guaranteed renewability is a prominent feature in many health and life insurance markets. It is well established in the literature that, when there is (only) risk type uncertainty, the optimal GR contract with renewal price set at the actuarially fair price for low risk types provides full insurance against reclassification risk. We develop a model that includes unpredictable (and unobservable) fluctuations in demand for life insurance as well as changes in risk type (observable) over individuals' lifetimes. The presence of demand type heterogeneity leads to the possibility that optimal GR contracts may have a renewal price that is either above or below the actuarially fair price of the lowest risk type in the population. Individuals whose type turns out to be high risk but low demand renew more of their GR insurance than is efficient due to the attractive renewal price. This results in incomplete insurance against re-classification risk. Although a first best efficient contract is not possible in the presence of demand type heterogeneity, the presence of GR contracts nonetheless improves welfare relative to an environment with only spot markets. Our results also apply to a comparison of environments with short versus long term (front loaded) insurance contracts.
    Keywords: insurance, guaranteed renewability, re-classification risk, demand uncertainty
    JEL: D80 D86 G22
    Date: 2018
  5. By: Aymeric Ricome (JRC - European Commission - Joint Research Centre [Ispra]); François Affholder (Centre de Coopération Internationale en Recherche Agronomique pour le Développement - Université de Lille, Sciences Humaines et Sociales); Françoise Gérard (GREEN - Gestion des ressources renouvelables et environnement - CIRAD - Centre de Coopération Internationale en Recherche Agronomique pour le Développement); Bertrand Muller (LEPSE - Écophysiologie des Plantes sous Stress environnementaux - INRA - Institut National de la Recherche Agronomique - Montpellier SupAgro - Centre international d'études supérieures en sciences agronomiques - Montpellier SupAgro - Institut national d’études supérieures agronomiques de Montpellier); Charlotte Poeydebat; Philippe Quirion (CIRED - Centre International de Recherche sur l'Environnement et le Développement - CIRAD - Centre de Coopération Internationale en Recherche Agronomique pour le Développement - EHESS - École des hautes études en sciences sociales - AgroParisTech - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique); Moussa Sall (ISRA - Institut Sénégalais de Recherches Agricoles - ISRA)
    Abstract: While crop yields in Sub-Saharan Africa are low compared to most other parts of the world, weather-index insurance is often presented as a promising tool, which could help resource-poor farmers in developing countries to invest and adopt yield-enhancing technologies. Here, we test this hypothesis on two contrasting areas (in terms of rainfall scarcity) of the Senegalese groundnut basin through the use of a bio-economic farm model, coupling the crop growth model CELSIUS with the economic model ANDERS, both specifically designed for this purpose. We introduce a weather-index insurance whose index is currently being used for pilot projects in Senegal and West Africa. Results show that insurance leads to a welfare gain only for those farmers located in the driest area. These farmers respond to insurance mostly by increasing the amount of cow fattening, which leads to higher crop yields thanks to the larger production of manure. We also find that subsidizing insurance is not the best possible use of public funds: for a given level of public funding, reducing credit rates, subsidizing fertilizers, or just transferring cash as a lump-sum generally brings a higher expected utility to farmers and leads to a higher increase in grain production levels.
    Date: 2017–09
  6. By: Maja Parnardzieva-Zmejkova; Vladimir Dimkovski
    Date: 2017–10
  7. By: Sebastián Fleitas; Gautam Gowrisankaran; Anthony Lo Sasso
    Abstract: We evaluate reclassification risk and adverse selection in the small group insurance market from a period before ACA community rating regulations. Using detailed individual-level data from a large insurer, we find a pass through of 5-43% from expected health risk to premiums. This limited reclassification risk cannot be explained by market power or search frictions but may be due to implicit long-term contracts. We find no evidence of adverse selection generated by reclassification risk. The observed pricing policy adds $2,346 annually in consumer welfare over 10 years relative to experience rating. Community rating would not increase consumer welfare substantially.
    JEL: I13 L13
    Date: 2018–05
  8. By: Nurbekyan, Armen (Asian Development Bank Institute); Hovanessian, Naneh (Asian Development Bank Institute)
    Abstract: Financial inclusion has significantly advanced in Armenia during the last decade. Rural and urban areas, however, have benefited unevenly. The high cost of providing financial services, the lack of physical infrastructure, higher poverty rates, and the low level of financial literacy are the main barriers to financial inclusion in the rural areas. The availability of, and the high level of trust in, postal services in all villages, along with innovative technologies, should be exploited to address the inadequate physical infrastructure. Insurance services, in particular health and agriculture insurance, have a high growth potential. Mandatory health insurance along with an e-health infrastructure can boost high-quality financial inclusion. Targeted financial education policies addressing the most vulnerable groups, in particular the rural population and the unemployed, will significantly increase the quality of financial inclusion. Addressing data gaps, especially in the small and medium-sized enterprises sector, should be a priority for policy makers. Overall, a clear separation of strategies for financial inclusion from the National Strategy for Financial Education clarifying quantitative goals and policies will be beneficial.
    Keywords: financial inclusion; financial literacy; regulation; Armenia
    JEL: G21 G28 I22 O16
    Date: 2018–05–08
  9. By: Mariacristina De Nardi (UCL, Federal Reserve Bank of Chicago, IFS, CEPR, and NBER); Giulio Fella (Queen Mary University of London, CFM, and IFS)
    Abstract: Earnings dynamics are much richer than typically assumed in macro models with heterogeneous agents. This holds for individual-pre-tax and household-post-tax earnings and across administrative (Social Security Administration) and survey (Panel Study of Income Dynamics) data. We study the implications of two processes for household, post-tax earnings in a standard life-cycle model: a canonical earnings process (that includes a persistent and a transitory shock) and a rich earnings dynamics process (that allows for age-dependence of moments, non-normality, and nonlinearity in previous earnings and age). Allowing for richer earnings dynamics implies a substantially better t of the evolution of cross-sectional consumption inequality over the life cycle and of the individual-level degree of consumption insurance against persistent earnings shocks. Richer earnings dynamics also imply lower welfare costs of earnings risk, but, as the canonical earnings process, do not generate enough concentration at the upper tail of the wealth distribution.
    Keywords: Earnings risk, savings, consumption, inequality, life cycle
    JEL: D14 D31 E21 J31
    Date: 2018–06–15
  10. By: Martin Boyer; Philippe De Donder; Claude Fluet; Marie-Louise Leroux; Pierre-Carl Michaud
    Abstract: This paper reports survey evidence on long-term care (LTC) risk misperceptions and demand for long-term care insurance (LTCI) in Canada. LTC risk misperceptions is divided into three different risks: needing help for at least one activity of daily life, needing access to a nursing home, and living to be 85 years old. We contrast subjective (i.e. stated) probabilities with actual probabilities for these three dimensions. We first provide descriptive statistics of how objective and subjective probabilities differ and correlate to each other. Second, we study cross-correlations between different types of risks. We then study how risk misperceptions correlate with individual characteristics, and evaluate how misperceptions affect intentions and actual purchase of LTCI. Our conclusions are two-fold. First, we find that most subjects are not well informed about their individual LTC risks, making it difficult for them to take the correct LTCI decisions. Second, and even though misperceptions explain an individuals actual or his intentions to take-up LTCI, misperceptions are unlikely to explain the poor take-up rate of LTCI in our sample.
    Keywords: long-term care insurance puzzle, disability, misperceptions, subjective probability
    JEL: D91 I13
    Date: 2018
  11. By: Matteo Brachetta; Claudia Ceci
    Abstract: In this work we investigate the optimal proportional reinsurance-investment strategy of an insurance company which wishes to maximize the expected exponential utility of its terminal wealth in a finite time horizon. Our goal is to extend the classical Cramer-Lundberg model introducing a stochastic factor which affects the intensity of the claims arrival process, described by a Cox process, as well as the insurance and reinsurance premia. Using the classical stochastic control approach based on the Hamilton-Jacobi-Bellman equation we characterize the optimal strategy and provide a verification result for the value function via classical solutions of two backward partial differential equations. Existence and uniqueness of these solutions are discussed. Results under various premium calculation principles are illustrated and a new premium calculation rule is proposed in order to get more realistic strategies and to better fit our stochastic factor model. Finally, numerical simulations are performed to obtain sensitivity analyses.
    Date: 2018–06
  12. By: Cornel Kaufmann, Tobias Mueller, Andreas Hefti, Stefan Boes
    Abstract: Choice-based health insurance systems allow individuals to select a health plan that ts their needs. However, bounded rationality and limited attention may lead to sub-optimal insurance coverage and higher-than-expected out-of-pocket payments. In this paper, we study the impact of providing personalized information on health plan choices in a laboratory experiment. We seek to more closely mimic real-life choices by randomly providing an incentivized distraction to some individuals. We nd that providing personalized information signi cantly improves health plan choices. The positive e ect is even larger and longer-lasting if individuals are distracted from their original task. In addition to providing decision support, receiving personalized information restores the awareness of the choice setting to a level comparable to the case without distraction thus reducing inertia. Our results indicate that increasing transparency of the health insurance system and providing tailored information can help individuals to make better choices and reduce their out-of-pocket expenditures.
    Keywords: health insurance choice; decision under uncertainty; limited attention; information; laboratory experiment
    JEL: I13 D83 C91
    Date: 2018–03
  13. By: Colin Gray (Massachusetts Institute of Technology)
    Abstract: Studies of take up in social insurance programs rarely distinguish between initial enrollment and retention of beneficiaries. This paper shows that retention plays a meaningful role in incomplete take up: despite knowledge of and eligibility for a near-cash public benefit, many participants exit the program rather than complete administrative requirements. Using administrative data on the Supplemental Nutrition Assistance Program (SNAP) for multiple states, I show that over half of entering households exit SNAP within one year of entry. Exits are concentrated in key reporting and recertification months, when participants must submit substantial paperwork in order to remain on the program. Combining administrative SNAP and Unemployment Insurance (UI) records from the state of Michigan, I provide evidence that mechanical eligibility changes cannot explain the extent of program exit. Finally, I demonstrate a substantial effect of administrative requirements on retention by studying the staggered rollout of Michigan’s online case management tool, which reduced exits for likely eligible applicants by approximately 10 percent around these key dates.
    Keywords: social insurance, food assistance, program take up, public finance
    JEL: H42 I38
    Date: 2018–05
  14. By: Basten, Christoph (University of Zurich); Guin, Benjamin (Bank of England); Koch, Catherine (Bank for International Settlements)
    Abstract: We exploit a unique dataset that features both un-intermediated mortgage requests and independent responses from multiple banks to each request. We show that households typically are not prudent risk managers, but prioritize minimizing current mortgage payments over insurance against future rate increases. Contrary to assumptions in the previous literature, we find that banks do also influence contracted rate fixation periods. They trade off their own exposure to interest rate risk against household requests and against credit risk.
    Keywords: Interest rate risk; credit risk; maturity mismatch; duration; fixation period; repricing frequency; fixed-rate mortgage; adjustable rate mortgage
    JEL: D14 E43 G21
    Date: 2018–06–08
  15. By: Benjamin Schwab; UNICEF Office of Research - Innocenti
    Abstract: The productive impacts of transfer programmes have received increased attention. However, little is known about such effects in emergency and crisis settings. Even less is known about whether transfer type – a food basket or a cash grant – influences the productive potential of such transfers. Theory suggests that, while cash transfers can relieve liquidity constraints associated with investments, subsidized food provision, by acting as a form of insurance, may prevent households from retreating to conservative income-generating strategies during volatile periods. Using a randomized field experiment in Yemen, we contrast the effects of transfer modality. The results demonstrate a modest productive impact of both modalities and suggest a role for both liquidity and price risk channels. Cash transfer recipients invested relatively more in activities with higher liquidity requirements (livestock), while food recipients incorporated higher-return crops into their agricultural portfolios.
    Date: 2018
  16. By: Demary, Markus
    Abstract: The study of non-performing loans (NPLs) is highly relevant when looking for a solution to the ongoing structural weaknesses in the Euro area banking sectors, especially in light of the planned completion of the banking union and the introduction of a European Deposit Insurance System (EDIS). While the aggregate data on non-performing loans shows some improvements, it cannot be ruled out that problems within large and systemically important banks may persist. For the quantification of these risks, the analysis of NPLs must be based on individual bank data. In order to gain a greater insight, I therefore built a dataset of 76 large and systemically relevant banks in the Euro area, which cover 74.6 percent of the non-performing loans in the Euro area. Although data points had to be imputed with the help of other data sources, the dataset provides a helpful impression of the ongoing problems with NPLs. The analysis reveals that banks with an NPL ratio of 25 percent or higher represent 10.5 percent of the systemically important banks studied here. Moreover, close to 20 percent of the outstanding amounts of the NPLs concentrates on banks with an NPL ratio of 25 percent or higher. When it comes to the dynamics of the NPLs, the decline in the aggregate NPL ratio of the Euro area was mainly driven by banks with moderate NPL ratios that reduced their NPLs further, while banks with higher NPL ratios contributed negatively to the aggregate NPL ratio. In order to demonstrate the extent to which NPLs can be reduced, I ran several simulations with the dataset. A reduction of NPLs in the amount of the loan-loss provisions of the banks is simulated first. It can be seen that the share of banks with an NPL ratio of only up to three percent could increase from 31.6 percent to 53.9 percent. However, the divide in the banking sector also shows up when it comes to write-offs: banks with a low NPL ratio can easily reduce it even further, while banks with a high NPL ratio have a hard time in reducing it significantly. The problem becomes even more severe at the long end of the NPL distribution. Although the number of banks with an NPL ratio of more than 25 percent can be reduced from 10.5 percent to 3.9 percent, there still remains two large with an NPL ratio of more than 25 percent. I also simulated an additional write-off together with recapitalisation measures with the aim of finding banks with NPL ratios of 3 percent or lower and equity capital ratios of at least 7 percent. The recapitalisation costs of the banks in Cyprus would then amount to 2.4 percent of the GDP for each year from 2019 to 2022, while the yearly recapitalisation of the Greek banks would amount to 2.0 percent of the Greek GDP. In Italy, yearly recapitalisation measures would amount to 0.8 percent of the Italian GDP. Less exposed would be Spain with yearly recapitalisation costs of 0.4 percent of the GDP. I conclude from these results, that there are still significant risks in the national banking sectors of the Eurozone, which implies the danger of rendering a common Euro area Deposit Insurance System into a transfer mechanism. If neither the governments nor the private sectors were willing to bear the costs of reducing NPLs and recapitalising their banks, it would be better to abandon the idea of a common deposit insurance or to postpone it far into the future in the hope that banks will grow out of their NPL problems.
    JEL: G21 G28
    Date: 2018
  17. By: Monique De Haan (University of Oslo); Ragnhild C. Schreiner (Department of Economics, University College London, CReAM and the Ragnar Frisch Centre for Economic Research)
    Abstract: There is a strong intergenerational correlation in welfare participation, but this does not imply that parental welfare receipt induces child receipt. While there are a few quasi-experimental studies that provide estimates of the causal effect of parental welfare participation for children from marginal welfare participants, we know very little about intergenerational spillovers of welfare participation onto the children of average welfare participants. By combining rich administrative data from Norway with weak mean-monotonicity assumptions, we estimate nonparametric bounds around the average causal effect of parental welfare participation on children’s welfare participation in the general population, as well as the average causal effect for children growing up in welfare-dependent families. We find that these average causal effects are considerably lower than the intergenerational correlation in welfare participation, and substantially below available local average treatment effect estimates in the literatu . We further find important differences between intergenerational spillovers of disability insurance and intergenerational spillovers of financial assistance, a traditional means-tested welfare program.
    Keywords: Welfare dependency, intergenerational spillovers, disability insurance, financial assistance,partial identification
    JEL: H55 I38 J62
    Date: 2018–06
  18. By: Isabel Argimon; Clemens Bonner; Ricardo Correa; Patty Duijm; Jon Frost; Jakob de Haan; Leo de Haan; Viktors Stebunovs
    Abstract: Global financial institutions play an important role in channeling funds across countries and, therefore, transmitting monetary policy from one country to another. In this paper, we study whether such international transmission depends on financial institutions' business models. In particular, we use Dutch, Spanish, and U.S. confidential supervisory data to test whether the transmission operates differently through banks, insurance companies, and pension funds. We find marked heterogeneity in the transmission of monetary policy across the three types of institutions, across the three banking systems, and across banks within each banking system. While insurance companies and pension funds do not transmit home-country monetary policy internationally, banks do, with the direction and strength of the transmission determined by their business models and balance sheet characteristics.
    Keywords: Monetary policy transmission ; Global financial institutions ; Bank lending channel ; Portfolio channel ; Business models
    JEL: E5 F3 F4 G2
    Date: 2018–05–29
  19. By: Nicolás Grau; Jorge Miranda; Esteban Puentes
    Abstract: The effect of the minimum wage on labor market outcomes is controversial. There are several studies for developed countries with mixed results, but there is a lack of evidence for developing countries. We have access to a panel of workers from the unemployment insurance system in Chile, which allow us to study the effect of four consecutive increases in minimum wages using administrative data. We use several definitions of treatment and control groups, finding consistently a small and positive effect of the minimum wage on formal wages, and non-significant effects on formal employment.
    Date: 2018–06

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