nep-ias New Economics Papers
on Insurance Economics
Issue of 2019‒09‒23
twelve papers chosen by
Soumitra K. Mallick
Indian Institute of Social Welfare and Business Management

  1. UI and DI: Macroeconomic Implications of Program Substitution By Fatih Karahan; Yusuf Mercan
  2. Save, Spend or Give? A Model of Housing, Family Insurance, and Savings in Old Age By Daniel Barczyk; Matthias Kredler; Sean Fahle
  3. Risk pooling and ruin probability, or why high risks are not bad risks. By Debora Zaparova; Sandrine Spaeter
  4. Health Risk, Insurance and Optimal Progressive Income Taxation By Juergen Jung; Chung Tran
  5. Family and Government Insurance: Wage, Earnings, and Income Risks in the Netherlands and the U.S. By Mariacristina De Nardi; Giulio Fella; Gonzalo Paz Pardo; Marike Knoef; Raun Van Ooijen
  6. Systemic risk and insurance regulation By Fabiana Gómez; Jorge Ponce
  7. Health Inequality: Role of Insurance and Technological Progress By Siddhartha Sanghi
  8. Unemployment Insurance and Worker Reallocation: The Experimentation Channel in Job-to-Job Mobility By Yusuf Mercan; Benjamin Schoefer
  9. A disaster under-(re)insurance puzzle: Home bias in disaster risk-bearing By Hiro Ito; Robert N McCauley
  10. Optimal Regional Insurance Provision under Privately Observable Shocks By Darong Dai; Guoqiang Tian; Liqun Liu
  11. Performance Management and Quality Assurance in Primary Healthcare Institutions By Camelia Lucia Bakri; Maria Daniela Pipas
  12. Market-consistent valuation: a step towards calculation stability By Fabrice Borel-Mathurin; Julien Vedani

  1. By: Fatih Karahan (Federal Reserve Bank of New York); Yusuf Mercan (University of Melbourne)
    Abstract: We study the interaction between two large income replacement programs in the United States: Unemployment Insurance (UI) and Social Security Disability Insurance (DI). We start by studying empirically the relationship between UI benefit durations and the number of DI applications and beneficiaries. Using variation in the timing and magnitude of UI extensions across states during the Great Recession, we find that UI extensions are associated with declines in DI applications. To obtain causal inference, we use two identification strategies. First, we exploit the sharp and unexpected decline in benefit durations in Missouri in April 2011, and show that it lead to a sizable increase in DI applications. Second, we use a border discontinuity design and find that the number of DI beneficiaries decreases on the side of the border that extends benefit durations. Motivated by these findings and to understand their implications for policy design, we construct a search model of the labor market with worker heterogeneity in health and skills. In times of low job finding rates, marginal workers claim DI as opposed to UI. The relative generosities of UI and DI programs affects who uses which program. In particular, extending the duration of UI benefits limits the number of unemployed that use DI to replace lost income, keeping more workers attached to the labor force. Such extensions also lead to compositional changes in the labor force, drawing in people with worse health conditions and lower productivity, thereby putting downward pressure on job finding rates. We use the calibrated model, which is quantitatively consistent with the empirical findings, to quantify these tradeoffs and evaluate the implications of the program substitution for policy design and labor market outcomes.
    Date: 2019
  2. By: Daniel Barczyk (McGill University); Matthias Kredler (Universidad Carlos III Madrid); Sean Fahle (SUNY Buffalo)
    Abstract: We propose that interactions among old-age risks, housing, and family insurance are key for understanding the economic behavior of the elderly. Empirically, we find that homeownership reduces dis-saving while increasing the likelihood and persistence of informal care from children, which in turn protects bequests by preventing nursing home entry. Nonetheless, elderly parents and the childless display strikingly similar savings and bequests. Additionally, we calculate that one-fourth of transfers from retired parents to children flow before death. We build a dynamic model featuring strategic interactions between imperfectly-altruistic parent and child households, a housing choice, and long-term-care risk. The model successfully rationalizes our empirical findings. Homes are valuable for inducing care from children, accounting for 10% of ownership. Although the childless have no altruistic motive for saving, they resemble parents because they lack family insurance and thus have a stronger precautionary motive. Parents withhold most transfers until death for strategic reasons.
    Date: 2019
  3. By: Debora Zaparova; Sandrine Spaeter
    Abstract: The aim of this paper is to show that high risks being bad risks is a misinterpretation. We discuss the role of the risk-bearing capital in the insurance process. In particular, we explicit the link between insurer’s risk, capital, size and composition of an insurance pool. Those parameters have a tangible impact on the insurer’s ruin probability when his size is limited. An additional policyholder may increase the ruin probability, while a specific combination of risk types may produce a significant decrease. Those implications should be considered given the legal requirements relative to the insurer’s insolvency. A strategy that consists in attracting only low-risk agents is not necessarily expedient for an insurer.
    Keywords: high risks, insurance, risk loading.
    JEL: D81 G22 G28
    Date: 2019
  4. By: Juergen Jung (Towson University); Chung Tran (Australian National University)
    Abstract: We study the optimal progressivity of personal income taxes in an environment where individuals are exposed to idiosyncratic shocks to health and labor productivity over the lifecycle. Our analysis is based on a large-scale overlapping generations general equilibrium model that is calibrated to the US economy. Our results indicate that the presence of health risk and health insurance has a strong effect on the amount of redistribution and social in- surance provided by progressive income taxes. In an environment with a non-universal health insurance system, such as the US system, the optimal income tax system is highly progressive in order to provide a sufficient level of redistribution to unhealthy low income individuals. The total welfare gain from optimizing the progressivity level is 5.6 percent in compensating lifetime consumption. More inclusive health insurance systems, such as Medicare for all, lead to large decreases in the optimal level of tax progressivity. When health expenditure risk is eliminated, the optimal income tax code becomes more similar to the findings of previous studies that used models without health risk. Our findings highlight the quantitative importance of accounting for the interdependence of health insurance and income taxes when designing optimal income tax policies.
    Date: 2019
  5. By: Mariacristina De Nardi (UCL, Federal Reserve Bank of Chicago, CE); Giulio Fella (Queen Mary, University of London); Gonzalo Paz Pardo (University College London); Marike Knoef (Leiden University, Netspar); 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.
    Date: 2019
  6. By: Fabiana Gómez (University of Bristol); Jorge Ponce (Banco Central del Uruguay)
    Abstract: Without systemic risk exposure, the formal model in this paper predicts that optimal regulation may be implemented by capital regulation (alike that observed in practice) and actuarially fair technical reserve. However, these instruments are not enough when insurance companies are exposed to systemic risk. In this case, prudential regulation should also add a systemic component to capital requirements which is non-decreasing in the firm's exposure to systemic risk. Implementing the optimal policy implies to separate insurance firms in two categories according to their exposure to systemic risk: those with relatively low exposure should be eligible for bailouts, while those with high exposure should not benefit from public support if a systemic event occurs.
    Abstract: Se propone un modelo formal de una empresa de seguros. En la ausencia de riesgo sistémico, el modelo predice que la regulación óptima puede ser implementada mediante un requisito de capital y reservas técnicas similares a lo observado en la práctica. Sin embargo, en el caso de riesgo sistémico, la regulación prudencial debería incorporar un componente sistémico al requerimiento de capital. Para implementar la regulación óptima se debería, además, separar las empresas de seguros en dos categorías: aquellas poco expuestas al riesgo sistémico serían elegibles para asistencia financiera en caso de problemas, mientras que aquellas relativamente más expuestas no accederían a tal asistencia.
    Keywords: Insurance companies, systemic risk, optimal regulation
    JEL: G22 G28
    Date: 2018
  7. By: Siddhartha Sanghi (Washington University in St. Louis)
    Abstract: The paper investigates the role of insurance and technological progress on the rising health inequality across income groups and its aggregate output costs for the US. We develop a continuous-time life-cycle model of an economy where individuals decide consumption-hours worked, whether to take up health insurance, when to visit a doctor, how much to invest in their health capital and whether to engage in bad behavior. A simple version of the model is able to explain about 50% of the gap in life-expectancy across income groups observed in data. In our model, consistent with the pattern in data, uninsured individuals, having deferred the treatment aren’t able to reap the benefits of the technological progress, thus resulting in poorer outcomes. The policy simulation with a plausible public health insurance scheme reduces the disparity in health outcomes to half. We use National Longitudinal Mortality Survey (NLMS), Mortality Differentials Across Communities (MDAC) and linked National Health Interview Survey (NHIS)- Medical Expenditures Panel Survey (MEPS) data to estimate the parameters of the model. As a cross-validation exercise using National Longitudinal Mortality Survey (NLMS) data, we exploit the state variation in Medicaid eligibility and find that among the working age individuals with low family income, Medicaid reduces the probability of dying by 9%. Using propensity score matching estimator, we find that private insurance reduces the probability of dying by upto 25% when compared to the uninsured.
    Date: 2019
  8. By: Yusuf Mercan (University of Melbourne); Benjamin Schoefer (UC Berkeley)
    Abstract: The risk of job loss is concentrated in the early months of the job; after the initially high levels of unemployment risk, jobs become stable. We argue that this initial excess exposure to unemployment risk renders job-to-job transitions risky. We formalize this mechanism in a search and matching model in which job offers are “lotteries”, placing probabilities on job qualities, which are revealed early on in the new job. Workers know the probability weights, and lotteries are heterogeneous in those weights. A set of job quality realizations lead workers to prefer quitting into unemployment. In this model, job mobility is affected by the value of unemployment, which represents the downside risk of accepting a job lottery. This consideration constitutes a mobility friction for employed workers. We explore all these properties and predictions in a calibrated version of the model. We also highlight a new role of unemployment insurance (UI): In our model, UI insures the downside risk of job-to-job transitions, and thereby subsidizes job mobility of workers already employed, and tilts the job composition to ex-ante riskier jobs. We close by discussing potential implications of this new view of unemployment insurance. Our study therefore sheds light on how labor market policies affect the behavior of employed job seekers through a novel “experimentation subsidy” channel.
    Date: 2019
  9. By: Hiro Ito; Robert N McCauley
    Abstract: The losses from the 2011 earthquakes in Japan remained in Japan, while reinsurance spread the losses from that year’s New Zealand earthquake to the rest of the world.This paper finds that the Japanese case is more typical: losses from natural disasters are shared internationally to a generally very limited extent. This finding of home bias in disaster risk-bearing poses a puzzle of international risk-sharing. We decompose international risk-sharing into the portion of losses insured and the portion ofinsurance that is internationally re-insured. We find that the failure of international risk-sharing begins at home with low participation in insurance. Regression analysis points to economic development and institutional/legal quality as important determinants of insurance participation. We propose a new method to measure international reinsurance payments with balance of payments data. This method identifies for the first time the cross-border flow of reinsurance payments to 88 economies that experienced insured disasters in the 1985–2017 period. Regression analysis of these data points to small size and de facto financial integration as positively related to the reinsurance share, as one might expect. However, we also find that more internationally wealthy economies reinsure less, suggesting that net foreign assets substitute for international sharing of disaster risk. For advanced economies, a lack of international risk-sharing is correlated with a lack of fiscal space. Thus, the governments under more pressure to provide ex post government insurance through the budget have less room to manoeuvre to do so. At high levels of public debt, a lack of ex ante insurance can turn disaster risk into financial risk.
    Keywords: international risk-sharing, earthquake insurance; reinsurance
    JEL: F32 G15 G22 Q54
    Date: 2019–08
  10. By: Darong Dai (Shanghai University of Finance and Economics); Guoqiang Tian (Texas A & M University); Liqun Liu (Texas A&M University)
    Abstract: We study the design and implementation of optimal regional insurance provision against privately observable shocks to the degree of intergenerational externality (DIE) induced by, or the degree of technological progress (DTP) for producing, intergenerational public goods (IPGs). We obtain four main results. First, the intertemporal allocation is not distorted only at the endpoints of type distribution, and insurance is incomplete. Second, if the grant to bottom type is distorted upward, then its debt must be distorted downward, and vice versa; the direction of distortion is qualitatively reversed between top and bottom types. Third, for all but the endpoints, there is a grant scheme, which is nonlinear and monotonic in debt, that decentralizes welfare optimum. For the endpoints, however, the implementation grant scheme is independent of debt. Fourth, when regions differ in DIE in the course of implementation, grant and debt are complementary in insurance provision; when regions differ in DTP, they are complementary with observable output of, but are substitutive with observable expenditure on, the IPGs.
    Date: 2019
  11. By: Camelia Lucia Bakri („Sanor†Medical Center of Cluj-Napoca, Cl); Maria Daniela Pipas („Sanor†Medical Center of Cluj-Napoca, Cl)
    Abstract: Applying the new health reform gives an unprecedented interpretation to most of the definitions known under a certain form in the socio-economic, general and managerial relationships in particular. In this context, most specialists support the definition of quality of care by optimal patient care based on the use of standard treatment protocols, additional and individual services that are applied in the system of interactions and interpersonal relationships between physician and patient. Obviously, the way in which healthcare managers are addressing quality differs greatly according to organizational culture, personality, experience and training. Good quality management consists of planning, organizing, practical implementation, leadership by applying the most effective organizational decisions, control and evaluation, and last but not least, reviewing the necessary measures to model management services and processes so that they can respond permanently to the most stringent needs of beneficiaries, suppliers, financiers, etc.
    Keywords: quality, health, management, patient, treatment
    Date: 2019–04
  12. By: Fabrice Borel-Mathurin (ACPR - Autorité de Contrôle Prudentiel et de Résolution - Autorité de Contrôle Prudentiel et de Résolution); Julien Vedani (SAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon)
    Abstract: In this paper we address some of the stability issues raised by the European life insurance regulation valuation scheme. Via an in-depth study of the so-called economic valuation framework, shaped through the market-consistency contract we first point out the practical interest of one of the El Karoui, Loisel, Prigent & Vedani (2017) propositions to enforce the stability of the cutoff dates used as inputs to calibrate actuarial models. This led us to delegitimize the argument of the no-arbitrage opportunity as a regulatory criteria to frame the valuation, and as an opposition to the previously presented approach. Then we display tools to improve the convergence of the economic value estimations be it the V IF or the SCR, using usual variance reduction methods and a specific work on the simulation seeds. Through various implementations on a specific portfolio and valuation model we decrease the variance of the estimators by over 16 times.
    Keywords: European regulation,life insurance,no-arbitrage opportunity,economic valuation conver- gence,market-consistency *
    Date: 2019–09–10

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