nep-ias New Economics Papers
on Insurance Economics
Issue of 2019‒06‒10
eleven papers chosen by
Soumitra K. Mallick
Indian Institute of Social Welfare and Business Management

  1. Targeting Disability Insurance Applications with Screening By Godard, Mathilde; Koning, Pierre; Lindeboom, Maarten
  2. Family and Government Insurance: Wage, Earnings, and Income Risks in the Netherlands and the U.S. By Mariacristina De Nardi; Giulio Fella; Marike Knoef; Gonzalo Paz-Pardo; Raun Van Ooijen
  3. Improving the mechanisms for determining the volume and payment of medical care By Nazarov, Vladimir (Назаров, Владимир)
  4. Size and persistence matter: Wage and employment insurance at the micro level By Kerndler, Martin
  5. Weather Index Insurance in Sub-Saharan Africa By Ernst Juerg Weber
  6. Best Bets for Reducing Medicare Costs for Dual Eligible Beneficiaries: Assessing the Evidence By Randall Brown; David R. Mann
  7. Reclassification to Avoid Consumer Cost-Sharing in Group Health Plans By Olesya Fomenko; Jonathan Gruber
  8. Financial literacy and precautionary insurance By Kubitza, Christian; Hofmann, Annette; Steinorth, Petra
  9. Correcting for Transitory Effects in RCTs: Application to the RAND Health Insurance Experiment By Kevin Devereux; Mona Balesh Abadi; Farah Omran
  10. An Experimental Test of the Under-Annuitization Puzzle with Smooth Ambiguity and Charitable Giving By Hippolyte d'Albis; Giuseppe Attanasi; Emmanuel Thibault
  11. Making the square-root formula compatible with capital allocation By Paulusch, Joachim; Schlütter, Sebastian

  1. By: Godard, Mathilde (GATE, University of Lyon); Koning, Pierre (Leiden University); Lindeboom, Maarten (Vrije Universiteit Amsterdam)
    Abstract: We examine the targeting effects of increased scrutiny in the screening of Disability Insurance (DI) applications using exogenous variation in screening induced by a policy reform. The reform raised DI application costs and revealed more information about the true disability status of applicants at the point of the award decision. We use administrative data on DI claims and awards and merge these with other administrative data on hospitalization, mortality and labor market outcomes. Regression Discontinuity in Time (RDiT) regressions show substantial declines in DI application rates and changes in the composition of the pool of applicants. We find that the health of those who are not discouraged from applying is worse than those who are. This suggests that the pool of applicants becomes more deserving. At the same time, compared with those who did not apply under the old system of more lax screening, those who are discouraged from applying are in worse health, have substantially lower earnings and are more often unemployed. This indicates that there are spillovers of the DI reform to other social insurance programs. As we do not find additional screening effects on health at the point of the award decision, we conclude that changes in the health condition of the pool of awarded applicants are fully driven by self-screening of (potential) applicants.
    Keywords: disability insurance, screening, composition effects, targeting efficiency
    JEL: H2 I3
    Date: 2019–05
  2. By: Mariacristina De Nardi (University College London / Federal Reserve Bank of Chicago / IFS / NBER); Giulio Fella (Queen Mary University of London); Marike Knoef (Leiden University); Gonzalo Paz-Pardo (University College London); Raun Van Ooijen (University of Groningen)
    Abstract: We document new facts on the distributions of male wages, male earnings, and household earnings and income (before and after taxes) in the Netherlands and the United States. We find that, in both countries, wages display rich dynamics, including substantial asymmetries and nonlinearities by age and previous earnings levels. Individual-level male wage and earnings risk is relatively high for younger and older people, and for those in the lower and upper parts of the income distribution. In the Netherlands, the behavior of hours and family labor supply have noticeable effects on earnings persistence and on the skewness and kurtosis of wage changes, but government transfers are a major source of insurance. Instead, the role of family insurance is much larger in the U.S. and also affects the standard deviation of wage changes, in addition to its skewness and kurtosis, and wage persistence. Family and government insurance reduce, but do not eliminate these non-linearities in household disposable income by age and previous earnings in both countries.
    Keywords: wage risk, self-insurance, social insurance, progressive taxation, redistribution, life cycle
    JEL: D31 E24 J31 H31
    Date: 2019–05
  3. By: Nazarov, Vladimir (Назаров, Владимир) (The Russian Presidential Academy of National Economy and Public Administration)
    Abstract: The paper deals with basic prerequisites for the selection of purchaser of guaranteed health care. On the basis of international experiences advantages and disadvantages of delegation of purchasing authority to health insurance organizations are shown. The paper also presents recommendations for the development of health care purchasing under the Programme of state guarantees.
    Date: 2019–05
  4. By: Kerndler, Martin
    Abstract: Firms provide substantial insurance against wage fl uctuations and job loss. This paper studies how the interaction between shock size and persistence affects the firm's ability to insure workers against idiosyncratic firm-level shocks. Using linked employer-employee data from Germany, I find that wages respond largely symmetrically to positive and negative permanent shocks. Whereas transitory shocks lead to upward wage rigidity. Individual layoff probabilities only increase in response to negative permanent shocks. Interestingly, wage cuts and job loss after negative shocks are limited to blue-collar workers. Whereas white-collar workers are fully insured against negative shocks both in terms of wages and employment.
    Keywords: wage insurance,layoffs,linked employer-employee data,Kalman filter
    JEL: C33 D22 J33 J41
    Date: 2019
  5. By: Ernst Juerg Weber (Economics Discipline, Business School, The University of Western Australia)
    Abstract: Food insecurity is a leading cause of poverty in sub-Saharan Africa. Overcoming food insecurity would improve the health and education of rural populations, increase labour productivity and promote rural economic development. Governments and numerous aid agencies dispense food aid during famines. The recent emergence of weather index insurance offers a promising new risk management tool that enhances economic opportunities and welfare in rural sub-Saharan Africa. In 2004 MicroEnsure launched Africa’s first weather index-based insurance product.1 In 2008 the International Fund for Agricultural Development (IFAD) and the World Food Programme (WFP) established the Weather Risk Management Facility (WRMF), which supported pilot projects for weather index insurance. In 2009 Kenya Seed, the Syngenta Foundation, UAP Group, Swiss Re and the World Bank’s Global Index Insurance Facility (GIIF) joined forces to establish Kilimo Salama, which offered index-based microinsurance to Kenyan maize and wheat farmers, with more crops and livestock being added later. In 2011 WFP and Oxfam America founded the R4 Rural Resilience Initiative, building on the Horn of Africa Risk Transfer for Adaptation (HARITA). In 2013 the AXA Group launched index-based agricultural insurance; in 2014 AXA and the South African Sanlam participated in MicroEnsure; and in 2015 AXA entered into partnership with the World Bank’s GIIF. In 2014 Kilimo Salama was succeeded by the Agriculture and Climate Risk Enterprise (ACRE), which assists local insurers in Kenya, Tanzania and Rwanda. After a decade of keen experimentation, the focus has now shifted from pilot projects to scaling up index-based insurance as a risk management tool for smallholder farmers.
    Date: 2019
  6. By: Randall Brown; David R. Mann
    Abstract: This study reviews prior pilot projects and demonstrations for dual eligibles—those receiving both Medicare and Medicaid benefits—and finds support for modest Medicare savings through well-targeted interventions.
    Keywords: Medicare Costs , Dual Eligibles , Beneficiaries , Health
    JEL: I
  7. By: Olesya Fomenko; Jonathan Gruber
    Abstract: We examine how consumers respond to being effectively double insured under two systems: group health (GH) and workers’ compensation (WC). Many GH plans have substantial consumer cost-sharing burden, while WC coverage has no cost-sharing for medical services for work-related injuries. As a result, a consumer facing a large deductible under their group health plan will have a strong financial incentive to make a claim under WC instead. We use a unique data set of claims under both GH and WC to study how “case shifting” to WC responds to GH deductibles for the most common set of injuries that are covered under both types of insurance. We identify the impact of case shifting by using interactions of deductible levels and previous spending. We find that a typical claim is about 1.4 percentage points (5.3%) more likely to be filed as a WC claim when facing an average deductible (about $630) compared to a plan with no deductible, and that total WC costs in the U.S. are more than $1.2 billion higher as a result. At the same time, we find that consumers do not appear to be forward looking, focusing on the “spot price” rather than the full “end of year price” in deciding whether to claim under WC.
    JEL: H51 I18 I28
    Date: 2019–05
  8. By: Kubitza, Christian; Hofmann, Annette; Steinorth, Petra
    Abstract: This paper studies insurance demand for individuals with limited financial literacy. We propose uncertainty about insurance payouts, resulting from contract complexity, as a novel channel that affects decision-making of financially illiterate individuals. Then, a trade-off between second-order (risk aversion) and third-order (prudence) risk preferences drives insurance demand. Sufficiently prudent individuals raise insurance demand upon an increase in contract complexity, while the effect is reversed for less prudent individuals. We characterize competitive market equilibria that feature complex contracts since firms face costs to reduce complexity. Based on the equilibrium analysis, we propose a monetary measure for the welfare cost of financial illiteracy and show that it is mainly driven by individuals' risk aversion. Finally, we discuss implications for regulation and consumer protection.
    Keywords: financial literacy,insurance demand,prudence,precautionary insurance
    JEL: D11 D81 D91 G22
    Date: 2019
  9. By: Kevin Devereux; Mona Balesh Abadi; Farah Omran
    Abstract: The long run price elasticity of healthcare spending is critically important to estimating the cost of provision. However, temporary randomized controlled trials may be confounded by transitory effects. This paper shows evidence of a 'deadline effect' – a spike in spending in the final year of the program – among participants of the RAND Health Insurance Experiment, long considered the definitive RCT in the field. The deadline effect is economically and statistically significant, with power to identify coming from random allocation to three- or five-year enrolment terms. The deadline effect interacts with the price elasticity: participants who face lower coinsurance rates show larger spending spikes. Crucially, controlling for the price-deadline interaction yields significantly smaller estimates of the price elasticity in non-deadline years, which we argue is a better approximation for the long run elasticity. This has important implications for public finance and the design of private/temporary subsidy programs.
    Keywords: Health insurance; Moral hazard; Public health; RCTs
    JEL: C93 D91 H31 H42 H51 I12 I13
    Date: 2019–04
  10. By: Hippolyte d'Albis (PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics); Giuseppe Attanasi (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis - UCA - Université Côte d'Azur - CNRS - Centre National de la Recherche Scientifique); Emmanuel Thibault (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - CNRS - Centre National de la Recherche Scientifique - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales)
    Keywords: Self-insurance,annuity,uncertain survival probabilities,smooth ambiguity aversion,charity,experiment
    Date: 2019–05
  11. By: Paulusch, Joachim; Schlütter, Sebastian
    Abstract: Modern regulatory capital standards, such as the Solvency II standard formula, employ a correlation based approach for risk aggregation. The so-called "square-root formula" uses correlation parameters between, for example, market risk, non-life insurance risk and default risk to determine the company's aggregate capital requirement. To support decision-making, companies will allocate the required capital back to business segments and risk drivers. We demonstrate that capital allocations based on the square-root formula can substantially differ from those based on the true risk distribution if correlations are viewed as Pearson or tail correlations. An EVA-maximizing insurer receives misleading steering signals which can induce mispricing of risk and a default probability substantially above the desired level. To make the square-root formula feasible for business steering, we propose partial-derivative-implied correlations which reflect how marginal exposure changes impact the aggregate capital requirement. We show that the square-root formula in combination with partial-derivative-implied correlations provides capital allocations in line with the true risk distribution.
    Keywords: Solvency II,Tail correlation,Risk aggregation,Capital allocation
    JEL: G22 G28 G32
    Date: 2019

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