nep-ias New Economics Papers
on Insurance Economics
Issue of 2018‒08‒20
eighteen papers chosen by
Soumitra K. Mallick
Indian Institute of Social Welfare and Business Management

  1. The Value of Health Insurance: A Household Job Search Approach By Gabriella Conti; Rita Ginja; Renata Narita
  2. Estimating Asymmetric Information Effects in Health Care Accounting for the Transactions Costs By Zheng, Yan; Vukina, Tomislav; Zheng, Xiaoyong
  3. Farmers’ Crop Insurance Choices in Iowa and Michigan: Survey Summary By Mary Doidge; Hongli Feng; David A. Hennessy; J. Roy Black; William M. Edwards
  4. Asset-Liability Management for Long-Term Insurance Business By Hansjoerg Albrecher; Daniel Bauer; Paul Embrechts; Damir Filipović; Pablo Koch-Medina; Ralf Korn; Stéphane Loisel; Antoon Pelsser; Frank Schiller; Hato Schmeiser; Joël Wagner
  5. Risk Aversion, Moral Hazard and Gender Differences in Health Care Utilization By Zheng, Yan; Vukina, Tomislav; Zheng, Xiaoyong
  6. Do Older SSDI Applicants Denied Benefits on the Basis of their Work Capacity Return to Work After Denial? By Jody Schimmel Hyde; April Yanuyan Wu
  7. The Welfare Implications of Health Insurance By Anup Malani; Sonia P. Jaffe
  8. Moral Hazard and the Energy Efficiency Gap: Theory and Evidence By Louis-Gaëtan Giraudet; Sébastien Houde; Joseph Maher
  9. Financial Incentives and Earnings of Disability Insurance Recipients: Evidence from a Notch Design By Philippe Ruh; Stefan Staubli
  10. Eyes Wide Shut? The Moral Hazard of Mortgage Insurers during the Housing Boom By Neil Bhutta; Benjamin J. Keys
  11. Effects of Access to Legal Same-Sex Marriage on Marriage and Health: Evidence from BRFSS By Christopher Carpenter; Samuel T. Eppink; Gilbert Gonzales Jr.; Tara McKay
  12. Quantifying the Work-Related Overpayments of Social Security Disability Insurance Beneficiaries By Denise Hoffman; Benjamin Fischer; John Jones
  13. Optimal forbearance of bank resolution By Linda Schilling
  14. Early Identification of Potential SSDI Entrants in California: The Predictive Value of State Disability Insurance and Workers’ Compensation Claims By Frank Neuhauser; Yonatan Ben-Shalom; David Stapleton
  15. Optimal Unemployment Insurance over the Business Cycle By Marcelo Veracierto
  16. Community-level flood mitigation effects on household-level flood insurance and damage claims payments By Frimpong, Eugene; Petrolia, Daniel; Harri, Ardian
  17. Modelling net carrying amount of shares for market consistent valuation of life insurance liabilities By Diana Dorobantu; Yahia Salhi; Pierre-Emmanuel Thérond
  18. Enrolling the Eligible: Lessons for the Funders By Beth Stevens; Sheila Hoag; Judith Wooldridge

  1. By: Gabriella Conti (University College London); Rita Ginja (University of Bergen); Renata Narita (University of São Paulo)
    Abstract: Do households value access to free health insurance when making labor supply decisions? We answer this question using the introduction of universal health insurance in Mexico, the Seguro Popular (SP), in 2002. The SP targeted individuals not covered by Social Security and broke the link between access to health care and job contract. We start by using the rollout of SP across municipalities in a differences-in-differences approach, and find an increase in informality of 4% among low-educated families with children. We then develop and estimate a household search model that incorporates the pre-reform valuation of formal sector amenities relative to the alternatives (informal sector and non-employment) and the value of SP. The estimated value of the health insurance coverage provided by SP is below the government’s cost of the program, and the corresponding utility gain is, at most, 0.56 per each peso spent.
    Keywords: search, household behavior, health insurance, informality, unemployment
    JEL: J64 D10 I13
    Date: 2018–08
  2. By: Zheng, Yan; Vukina, Tomislav; Zheng, Xiaoyong
    Abstract: We use a structural approach to separately estimate moral hazard and adverse selection effects in health care utilization using hospital invoices data. Our model explicitly accounts for the heterogeneity in the transactions costs associated with hospital visits which increase the individuals' total cost of health care and dampen the moral hazard effect. A measure of moral hazard is derived as the difference between the observed and the counterfactual health care consumption. In the population of patients with non life-threatening diagnoses, our results indicate statistically significant and economically meaningful moral hazard. We also test for the presence of adverse selection by investigating whether patients with different health status sort themselves into different health insurance plans. Adverse selection is confirmed in the data because patients with estimated worse health tend to buy the insurance coverage and patients with estimated better health choose not to buy the insurance coverage.
    Keywords: Health Economics and Policy
    Date: 2016–09–01
  3. By: Mary Doidge; Hongli Feng; David A. Hennessy; J. Roy Black; William M. Edwards
    Abstract: Crop insurance is an important tool that allows farmers to manage risks in agricultural production. This report is a summary of a survey of farmers’ crop insurance choices in Iowa, a state typical of the central US Corn Belt, and Michigan, a state with a more diversified crop portfolio. Survey data indicate that Michigan farmers were less likely to purchase insurance than Iowa farmers. A smaller share of Michigan farmers received an indemnity payment from 2011 to 2015 than those in Iowa. Michigan farmers were more likely to report that they felt they have paid more for crop insurance policies than they have received in indemnity payments. For farmers in Iowa, downside yield and price risk was rated most important by the largest number of respondents, followed closely by out-of-pocket premium price. The ranking of these two factors was reversed for farmers in Michigan. The cross-state differences reported by the survey respondents imply that the federal crop insurance program has different regional impacts. In order to assist in informed policy debate, it would be useful to understand how different regions can achieve all the potential benefits afforded by the program. Specifically, it will be useful to know whether Michigan farmers are not taking best advantage of existing crop insurance opportunities or whether simple adjustments could result in program uptake as high as in some other states.
    Keywords: Agricultural and Food Policy, Agricultural Finance, Farm Management, Risk and Uncertainty
    Date: 2017–08–24
  4. By: Hansjoerg Albrecher (University of Lausanne and Swiss Finance Institute); Daniel Bauer (University of Alabama); Paul Embrechts (Swiss Federal Institute of Technology Zurich and Swiss Finance Institute); Damir Filipović (Ecole Polytechnique Fédérale de Lausanne and Swiss Finance Institute); Pablo Koch-Medina (University of Zurich and Swiss Finance Institute); Ralf Korn (University of Kaiserslautern); Stéphane Loisel (University of Lyon 1); Antoon Pelsser (Maastricht University); Frank Schiller (MunichRe); Hato Schmeiser (University of Muenster and University of St. Gallen); Joël Wagner (University of Lausanne and Swiss Finance Institute)
    Abstract: This is a summary of the main topics and findings from the Swiss Risk and Insurance Forum 2017. That event gathered experts from academia, insurance industry, regulatory bodies, and consulting companies to discuss past and current developments as well as future perspectives in dealing with asset-liability management for long-term insurance business. Topics include valuation, innovations in insurance products, investment, and modelling aspects.
    Keywords: asset-liability management, long-term insurance, valuation, insurance products, investments, models
    JEL: G22 G11
    Date: 2017–12
  5. By: Zheng, Yan; Vukina, Tomislav; Zheng, Xiaoyong
    Abstract: This paper uses truncated count model with endogeneity and simulated maximum likelihood estimation technique to estimate gender differences in moral hazard in health care insurance. We use the dataset which consists of invoices for all outpatient services from a regional hospital in Croatia. Our theoretical model predicts that higher risk aversion is associated with smaller moral hazard effect. If women are more risk-averse than men, then the moral hazard effect due to health insurance should be lower in women than in men. Whereas the overall results show a statistically significant evidence of moral hazard for the general population, we found economically small but statistically significant larger moral hazard in women than in men.
    Keywords: Risk and Uncertainty
    Date: 2017–07–03
  6. By: Jody Schimmel Hyde; April Yanuyan Wu
    Abstract: In this brief, we document the post-denial employment and benefit experiences of older applicants who are initially denied Social Security Disability Insurance (SSDI) for “work capacity†reasons.
    Keywords: SSDI, disability, applicants, work, employment, application
    JEL: I J
  7. By: Anup Malani; Sonia P. Jaffe
    Abstract: We analyze the financial value of insurance when individuals have access to credit markets. Loans allow consumers to smooth shocks across time, decreasing the value of the smoothing (across states of the world) provided by insurance. We derive a simple formula for the incremental value of insurance and show how it depends on individual age, health, and income and on the features of available loans. Our central contribution is to derive formulas for aggregate welfare that can be taken to data from typical studies of health insurance. We provide both exact formulas that can be taken to data on the distribution of medical expenditures and income and an approximate formula for aggregate data on medical expenditure. Using the Medical Expenditure Panel Survey we illustrate how the incremental value of insurance is decreasing with access to loans. For consumers in the sickest decile, access to a five-year loan decreases the incremental value of insurance by $338 (6%) on average and $3,433 (36%) for the poorest consumers. We also find that our approximate formula is a reasonable proxy for the exact one in our data.
    JEL: D14 D60 I13
    Date: 2018–07
  8. By: Louis-Gaëtan Giraudet (ENPC - École des Ponts ParisTech, CIRED - Centre International de Recherche sur l'Environnement et le Développement - CNRS - Centre National de la Recherche Scientifique - ENPC - École des Ponts ParisTech - AgroParisTech - EHESS - École des hautes études en sciences sociales - CIRAD - Centre de Coopération Internationale en Recherche Agronomique pour le Développement); Sébastien Houde (University of Maryland [College Park]); Joseph Maher (University of Maryland [College Park])
    Abstract: We investigate how moral hazard problems can cause sub-optimal investment in energy efficiency, a phenomenon known as the energy efficiency gap. We focus on contexts where both the quality offered by the energy efficiency provider and the behavior of the energy user are imperfectly observable. We first formalize under-provision of quality and compare two policy instruments: energy-savings insurance and minimum quality standards. Both instruments are second-best, for different reasons. Insurance induce over-use of energy, thereby requiring incomplete coverage in equilibrium. Standards incur enforcement costs. We then provide empirical evidence of moral hazard in the U.S. home retrofit market. We find that for those measures, the quality of which is deemed hard to observe, realized energy savings are subject to day-of-the-week effects. Specifically, energy savings are significantly lower when those measures were installed on a Friday—a day particularly prone to negative shocks on workers' productivity—than on any other weekday. The Friday effect explains 65% of the discrepancy between predicted and realized energy savings, an increasingly documented manifestation of the energy efficiency gap. We finally parameterize a model of the U.S. market for attic insulation and find that the deadweight loss from moral hazard is important over a range of specifications. Minimum quality standards appear more desirable than energy-savings insurance if energy-use externalities remain unpriced.
    Keywords: minimum quality standard, energy-savings insurance, credence good, day-of-the-week effect,Energy efficiency gap, moral hazard
    Date: 2016–12–10
  9. By: Philippe Ruh; Stefan Staubli
    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.
    JEL: H53 H55 J14 J21
    Date: 2018–07
  10. By: Neil Bhutta; Benjamin J. Keys
    Abstract: In the U.S. mortgage market, private mortgage insurance (PMI) is mandated for high-leverage mortgages purchased by Fannie Mae and Freddie Mac to serve as a private market check on GSE risk-taking. However, we document that PMI firms dramatically expanded insurance on high-risk mortgages at the tail-end of the housing boom, contradicting the industry's own research regarding house price risk. Using three detailed sources of mortgage and insurance data, we examine PMI application denial rates, default rates on PMI-backed loans, and growth rates of high-leverage lending around the GSE conforming loan limit, along with information extracted from company, industry and regulatory filings and reports. We conclude that PMI behavior during the housing boom in part reflects a "moral hazard" incentive inherent to insurance companies in general to underprice risk and be undercapitalized. Our results suggest that rather than providing discipline, private mortgage insurers facilitated GSE risk-taking.
    JEL: G21 G22 L10 L14
    Date: 2018–07
  11. By: Christopher Carpenter; Samuel T. Eppink; Gilbert Gonzales Jr.; Tara McKay
    Abstract: We exploit variation in access to legal same-sex marriage (SSM) across states and time to provide novel evidence of its effects on marriage and health using data from the CDC BRFSS from 2000-2016, a period spanning the entire rollout of legal SSM across the United States. Our main approach is to relate changes in outcomes for individuals in same-sex households (SSH) [i.e., households with exactly two same-sex adults], which we show includes a substantial share of gay and lesbian couples, coincident with adoption of legal SSM in two-way fixed effects models. We find robust evidence that access to legal SSM significantly increased marriage take-up among men and women in SSH. We also find that legal SSM was associated with significant increases in health insurance, access to care, and utilization for men in SSH. Our results provide the first evidence that legal access to SSM improved health for adult gay men.
    JEL: I1 K0
    Date: 2018–06
  12. By: Denise Hoffman; Benjamin Fischer; John Jones
    Abstract: This brief summarizes research quantifying the beneficiary-level prevalence, duration, and size of work-related overpayments. Among other notable findings, the results establish the high prevalence of overpayments among beneficiaries who engage in substantial gainful activity: more than 7 in 10 were overpaid.
    Keywords: overpayment, Social Security disability, employment
    JEL: I J
  13. By: Linda Schilling (Ecole Polytechnique (CREST))
    Abstract: This paper analyzes optimal strategic delay of bank resolution (forbearance) in a setting where partially insured depositors can run on the bank after observing bad news on the bank's assets. A resolution authority (RA) observes withdrawals of deposits at the bank level and needs to decide when to intervene to protect a deposit insurance fund. Intervention means the authority seizes the bank's assets and impose a mandatory stay for depositors, liquidates assets at market terms and evenly distributes proceeds among all remaining depositors. We show, there exists a hidden trade-off when resolving banks, late intervention increases costs to insurance but early intervention increases depositors' propensity to run, by this making the run and subsequent resolution more likely. This trade-off crucially depends on the amount of deposit insurance provided. Under low insurance depositors are too sensitive to bad news and inefficient runs exist, under high insurance, depositors start ignoring bad news on the bank fundamental, roll over to often and there is inefficient investment. As main result of the paper, under low deposit insurance, the optimal policy is to never intervene during a run, even if the run is ex post inefficient; a stricter intervention policy would alter depositors' behavior in a way that inefficient runs become even more likely. Under high insurance it is optimal to intervene as soon as possible. Further, for every intervention policy the optimal amount of insurance coverage is strictly between zero and one. There exist infinitely many pairs of intervention threshold and insurance coverage which achieve the first best outcome. Thus, there is room for a policy parameter reduction: RA can fix the intervention threshold and achieve first best solely by choosing the amount of insurance coverage. But not the other way around suggesting that insurance coverage is the stronger parameter: Under too high insurance coverage inefficient investment exists, under too low coverage inefficient runs exist, both for every intervention threshold.
    Date: 2018
  14. By: Frank Neuhauser; Yonatan Ben-Shalom; David Stapleton
    Abstract: Characteristics of SDI and WC claims can help predict claims likely to last 12 months, but more information is needed to effectively target early intervention services.
    Keywords: Disability insurance , Workers’ compensation , Early intervention
    JEL: I J
  15. By: Marcelo Veracierto (Federal Reserve Bank of Chicago)
    Abstract: In this paper I study the optimal provision of unemployment insurance over the business cycle. A novel feature of the paper is that, instead of performing the analysis in an environment with exogenous restrictions to risk sharing such as borrowing constraints, the paper takes a more primitive mechanism design approach. In particular, the restrictions to risk sharing arise endogenously as a consequence of search intensities being private information of the individual agents. The economy is essentially a standard real business cycle model that incorporates unemployed agents similar to those in Hopenhayn and Nicolini (1997). Output, which can be consumed or invested, is produced with a Cobb-Douglas production function that uses capital and labor subject to an aggregate productivity shock that follows an AR(1) process. This production technology is located in a single "production island" and workers must be located in this island in order to provide their labor services. Workers get separated from the production island at the beginning of the following period with a constant separation probability. Once outside the production island agents must search in order to get back to it. The probability that a worker arrives to the production island at the beginning of the following period depends on her own search intensity level. A crucial assumption is that this search intensity level is private information of the agent. Only the location of the agent at the beginning of the period (inside or outside the production island) is observed. Agents value consumption and leisure (which is obtained outside the production island) and dislike to search. In order to guarantee stationarity I assume that agents have a constant probability of surviving between consecutive time periods. When an agent dies he is immediately replaced by an offspring from which the agent derives no utility. Newborns start their life as unemployed agents (i.e. outside the production island). In this framework the social planner offers dynamic insurance contracts to the agents under full commitment. The state of the contract is given by the location of the agent at the beginning of the period and by the value that the contract promises to the agent at the beginning of the period. Given this state, the contract determines the consumption level of the agent during the current period and the contingent promised values at the beginning of the following period. These contingent promised values depend both on the realized employment status of the agent at the beginning of the following period and on the realized aggregate productivity shock at the beginning of the following period. The contract must deliver an expected lifetime discounted utility equal to the value promised at the beginning of the period (promise keeping constraint). Although search intensities are not directly observed by the social planner he takes as given the optimal choice of individual search intensities of unemployed agents as a function of the difference that they face between the expected value of becoming employed at the beginning of the following period and the expected value of continuing unemployed (incentive compatibility constraint). The state of the economy for the social planner is the aggregate productivity level, the aggregate stock of capital, and the joint distribution of old agents (i.e. those that are not newborns at the beginning of the current period) across promised values and employment states. Given this aggregate state the social planner chooses investment and the dynamic insurance contracts to maximize the weighted expected lifetime utility of the current newborns and of all future newborns (with constant relative Pareto weights), subject to promise keeping, incentive compatibility and aggregate consumption feasibility constraints. Observe that the social planner does not seek to maximize the lifetime utilities of the current old agents since these are predetermined by their dynamic insurance contracts. Computing a solution to this mechanism design problem is a complex task given the high dimensionality of the state space. I use a method that I introduced in a previous paper (Veracierto 2017) which has the important advantage of not imposing an approximation to the law of motion for the distribution of agents across individual states. The method requires carrying as a state variable a long history of spline coefficients for the decision rules that have been chosen in the past. A (large) linear rational expectations model is then obtained by linearizing all first order conditions and aggregate feasibility constraints with respect to those spline coefficients. In that paper the method was shown to reproduce some key analytical properties that could be derived in the case of logarithmic preferences, even though the computational method did not exploit any particular feature of that case. While this provided considerable confidence about the accuracy of the computational method, the logarithmic preferences corresponded to a case in which the cross sectional heterogeneity did not play an important role in aggregate fluctuations. For other preferences, the computational method still delivered numerical solutions in which the cross sectional heterogeneity did not play a crucial role. Given those results the computational method had to wait to be applied to an environment in which the cross sectional heterogeneity plays an important role for aggregate fluctuations. I expect that the model in this paper will provide such environment. The reason is that when a positive aggregate productivity shock hits the economy and the planner wants to bring people quickly out of unemployment, the only way that he can induce individual agents to increase their search intensity is by increasing the difference between the expected value of becoming employed and the expected value of continuing unemployed. That is, the planner needs to worsen the insurance that it provides to unemployed agents in order to induce them to search more. This will introduce interesting interactions between social insurance (and, therefore, inequality) and properties of the aggregate business cycle since the social planner will consequently be induced to respond less to the aggregate shocks given the negative insurance effects that such response entails. I am currently in the process of computing a solution to the optimal business cycle fluctuations. I will provide a draft of the paper with the results as soon as I have them ready.
    Date: 2018
  16. By: Frimpong, Eugene; Petrolia, Daniel; Harri, Ardian
    Abstract: The Community Rating System (CRS) was introduced to encourage community-level flood mitigation and increase household-level National Flood Insurance Program (NFIP) participation. It is not clear, however, if and to what extent community participation in the CRS increases household participation in the NFIP and decreases damage claims payments. We employ genetic matching methods and estimate fixed-effects and Mundlak-style panel regression models that control for key geospatial, socioeconomic, and time effects to isolate the CRS treatment effect on these outcomes. Results show a positive and significant effect of CRS participation on NFIP participation, whereas significant effects on damage claims payments are limited.
    Keywords: Consumer/Household Economics, Environmental Economics and Policy, Land Economics/Use, Risk and Uncertainty
    Date: 2017–03
  17. By: Diana Dorobantu (SAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon); Yahia Salhi (SAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon); Pierre-Emmanuel Thérond (Galea & Associés, SAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon)
    Abstract: The attractiveness of insurance saving products is driven, among others, by dividends payments to policyholders and participation in profits. These are mainly constrained by regulatory measures on profit-sharing on the basis of statutory accounts. Moreover, since both prudential and financial reporting regulation require market consistent best estimate measurement of insurance liabilities, cash-flows projection models have to be used for such a purpose in order to derive the underlying financial incomes. Such models are based on Monte-Carlo techniques. The latter should simulate future accounting profit and losses needed for profit-sharing mechanisms. In this paper we deal with impairment losses on equity securities for financial portfolios which rely on instrument-by-instrument assessment (when projection models consider groups of shares). Our motivation is to describe the joint distribution of market value and impairment provision of a book of equity securities, with regard to the French accounting rules for depreciation. The results we obtain enable to improve the ability of projection models to represent such an asymmetric mechanism. Formally, an impairment loss is recognized for an equity instrument if there has been a significant and prolonged decline in its market value below the carrying cost (acquisition value). Such constraints are formalized using an assumption on the dynamics of the equity, and leads to a complex option-like pay-off. Using this formulation, we propose analytical formulas for some quantitative measurements related the impairments losses of a book of financial equities. These are derived on a general framework and some tractable example are illustrated. We also investigate the operational implementation of these formulas and compare their computational time to a basic simulation approach.
    Keywords: Insurance,Best Estimate Technical Provision,Impairment Losses,Correlated Brownian Motions,Joint Density *
    Date: 2018–07–16
  18. By: Beth Stevens; Sheila Hoag; Judith Wooldridge
    Abstract: This article describes lessons from Covering Kids & Families® (CKF) and covers topics such as how outreach, simplification, and coordination increase enrollment of low-income children and their families in Medicaid and SCHIP.
    Keywords: CHIP, Covering Kids and Families, Medicaid, Health
    JEL: I

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