nep-ias New Economics Papers
on Insurance Economics
Issue of 2019‒10‒07
twenty-two papers chosen by
Soumitra K. Mallick
Indian Institute of Social Welfare and Business Management

  1. Risky Insurance: Insurance Portfolio Choice with Incomplete Markets By Joseph Briggs; Christopher Tonetti
  2. Does Medicare Coverage Improve Cancer Detection and Mortality Outcomes? By Rebecca Mary Myerson; Reginald Tucker-Seeley; Dana Goldman; Darius N. Lakdawalla
  3. Do Health Insurance Mandates Spillover to Education? Evidence from Michigan's Autism Insurance Mandate By Riley Acton; Scott Andrew Imberman; Michael F. Lovenheim
  4. Threat effects of monitoring and unemployment insurance sanctions: evidence from two reforms By Lombardi, Stefano
  5. Investors’ Perspective on Portfolio InsuranceExpected Utility vs Prospect Theories By Raquel M. Gaspar; Paulo M. Silva
  6. The Two Margin Problem in Insurance Markets By Michael Geruso; Timothy J. Layton; Grace McCormack; Mark Shepard
  7. When Income Effects are Large: Labor Supply Responses and the Value of Welfare Transfers By Giulia Giupponi
  8. What hides behind the German labor market miracle? Unemployment insurance reforms and labor market dynamics By Moritz Kuhn; Benjamin Hartung; Philip Jung
  9. Risk preferences in response to earthquake risk: Property value and insurance By Song Shi; Michael Naylor
  10. Lending Standards and Consumption Insurance over the Business Cycle By Kyle Dempsey; Felicia Ionescu
  11. Deposit Insurance and Banks’ Deposit Rates: Evidence from the 2009 EU Policy Change By Matteo, Gatti; Tommaso, Oliviero
  12. Specific Capital, Firm Insurance, and the Dynamics of the Postgraduate Wage Premium By Gu, Ran
  13. The Boomerang College Kids: Coresidence and Job Mismatch By Stefania Albanesi; Ning Zhang; Rania Gihleb
  14. Age discontinuity and nonemployment benefit policy evaluation through the lens of job search theory By Bruno Decreuse; Guillaume Wilemme
  15. Unemployment Dynamics and Unemployment Insurance Extensions under Rational Expectations By Similan Rujiwattanapong
  16. The Distributional Consequences of Rent Seeking By Angelos Angelopoulos; Konstantinos Angelopoulos; Spyridon Lazarakis; Apostolis Philippopoulos
  17. Mortgage Finance in the Face of Rising Climate Risk By Amine Ouazad; Matthew E. Kahn
  18. Insurance ratemaking using the Exponential-Lognormal regression model By Tzougas, George; Yik, Woo Hee; Mustaqeem, Muhammad Waqar
  19. Public Insurance in Heterogeneous Fiscal Federations: Evidence from American Households By Johannes Fleck; Chima Simpson-Bell
  20. CBO’s Medicare Beneficiary Cost-Sharing Model: A Technical Description: Working Paper 2019-08 By Congressional Budget Office
  21. THe Baby Boomers' Retirement and Consumption Savings Puzzle By Abdou Ndiaye
  22. Can Workfare Programs Moderate Conflict? Evidence from India By Fetzer, Thiemo

  1. By: Joseph Briggs (Federal Reserve Board of Governors); Christopher Tonetti (Stanford GSB)
    Abstract: We use a new survey to document significant perceived counterparty risk in annuity, life insurance, and long-term care insurance markets. We find that nonpayment risk significantly predicts insurance product ownership. In fact, annuity and long-term care insurance markets would be approximately twice as large if products were perceived as risk-free. To interpret our measures, we develop a new lifecycle model of the joint demand for these three products that allows for uninsurable counterparty risk and other dimensions of incomplete markets. We find that these risks significantly decrease insurance demand, and, as a result, welfare costs of sub-optimal insurance portfolios are small. However, the welfare costs of counterparty risk and incomplete markets – whether real or perceived – are large relative to a complete market benchmark.
    Date: 2019
  2. By: Rebecca Mary Myerson; Reginald Tucker-Seeley; Dana Goldman; Darius N. Lakdawalla
    Abstract: Medicare is the largest government insurance program in the United States, providing coverage for over 60 million people in 2018. This paper analyzes the effects of Medicare insurance on health for a group of people in urgent need of medical care – people with cancer. We used a regression discontinuity design to assess impacts of near-universal Medicare insurance at age 65 on cancer detection and outcomes, using population-based cancer registries and vital statistics data. Our analysis focused on the three tumor sites with recommended screening before and after age 65: breast, colorectal, and lung cancer. At age 65, cancer detection increased by 72 per 100,000 population among women and 33 per 100,000 population among men; cancer mortality also decreased by 9 per 100,000 population for women but did not significantly change for men. In a placebo check, we found no comparable changes at age 65 in Canada. This study provides the first evidence to our knowledge that near-universal access to Medicare at age 65 is associated with improvements in population-level cancer mortality, and provides new evidence on the differences in the impact of health insurance by gender.
    JEL: I13 I18 I28
    Date: 2019–09
  3. By: Riley Acton; Scott Andrew Imberman; Michael F. Lovenheim
    Abstract: Social programs and mandates are usually studied in isolation, but interaction effects could create spillovers to other public goods. We examine how health insurance coverage affects the education of students with Autism Spectrum Disorder (ASD) in the context of state-mandated private therapy coverage. Since Medicaid benefits under the mandate were far weaker than under private insurance, we proxy for Medicaid ineligibility and estimate effects via triple-differences. While we find little change in ASD identification, the mandate crowds-out special education supports for students with ASD by shifting students to less restrictive environments and reducing the use of ASD specialized teacher consultants. A lack of short-run impact on achievement supports our interpretation of the service reductions as crowd-out and indicates that the shift does not academically harm students with ASD.
    Keywords: special education, health insurance, insurance mandate
    JEL: I18 I21
    Date: 2019
  4. By: Lombardi, Stefano (IFAU - Institute for Evaluation of Labour Market and Education Policy)
    Abstract: This paper studies threat effects of unemployment insurance (UI) benefit sanctions on job exit rates. Using a difference-in-differences design, I exploit two reforms of the Swedish UI system that made monitoring and sanctions considerably stricter at different points in time for different jobseeker groups. The results show that men and long-term unemployed individuals respond to the tighter monitoring and the threat of sanctions by finding jobs faster, whereas women do not. I also estimate the effect of receiving a sanction on the job exit rates and find significant sanction imposition effects. However, a decomposition exercise shows that these sanction imposition effects explain very little of the overall reform effects, so that most of the reform effects arise through threat effects. A direct policy implication is that the total impact of monitoring and sanctions may be severely underestimated when focusing solely on the effects on those actually receiving sanctions.
    Keywords: monitoring and sanctions; unemployment insurance; threat effects
    JEL: J08 J64 J65
    Date: 2019–09–26
  5. By: Raquel M. Gaspar; Paulo M. Silva
    Abstract: This study supports the use of behavioural finance to explain the popularity of portfolio insurance. Portfolio insurance strategies are important financial solutions sold to institutional and individual investors, that protect against downside risk while maintaining some upside valuation potential. The way some of these strategies are engineered has been criticised, and portfolio insurance itself blamed for increasing market volatility in depressed markets. Despite this, investors keep on buying portfolio insurance that has a solid market share. This study contributes to understand the phenomenon. We compare investors' decision using two distinct frameworks: expected utility theory and behavioural theories. Based upon Monte Carlo simulation techniques we compare portfolio insurance strategies against uninsured basic benchmark strategies. We conclude that cumulative prospect theory may be a viable framework to explain the popularity of portfolio insurance. However, among portfolio insurance strategies, naive strategies seem to be preferable to most commonly traded strategies.
    Keywords: portfolio insurance·expected utility·prospect theory·Monte Carlo simulation
    JEL: G11 G13 G17
    Date: 2019–09
  6. By: Michael Geruso; Timothy J. Layton; Grace McCormack; Mark Shepard
    Abstract: Insurance markets often feature consumer sorting along both an extensive margin (whether to buy) and an intensive margin (which plan to buy). We present a new graphical theoretical framework that extends the workhorse model to incorporate both selection margins simultaneously. A key insight from our framework is that policies aimed at addressing one margin of selection often involve an economically meaningful trade-off on the other margin in terms of prices, enrollment, and welfare. For example, while a larger penalty for opting to remain uninsured reduces the uninsurance rate, it also tends to lead to unraveling of generous coverage because the newly insured are healthier and sort into less generous plans, driving down the relative prices of those plans. While risk adjustment transfers shift enrollment from lower- to higher-generosity plans, they also sometimes increase the uninsurance rate by raising the prices of less generous plans, which are the entry points into the market. We illustrate these trade-offs in an empirical sufficient statistics approach that is tightly linked to the graphical framework. Using data from Massachusetts, we show that in many policy environments these trade-offs can be empirically meaningful and can cause these policies to have unexpected consequences for overall social welfare.
    JEL: D82 G22 H51 I1 I13
    Date: 2019–09
  7. By: Giulia Giupponi
    Abstract: I estimate the long-run income effect of welfare transfers on individual labor supply. Using Italian administrative data on the universe of survivor insurance recipients, I implement a regression discontinuity design around a change in survivor insurance generosity based on the spouse's death date. I find that survivors fully offset the benefit loss with increases in earnings. Labor force participation and program substitution are the main margins of adjustment. I consider potential explanations for the large income effect. Evidence suggests that the value of additional income in the widowhood state is large, driving large participation responses to survivor benefit cuts.
    Keywords: income effect, labor supply, valuation of welfare transfers
    JEL: H55 I38 J22
    Date: 2019–10
  8. By: Moritz Kuhn (University of Bonn); Benjamin Hartung (University of Bonn); Philip Jung (TU Dortmund)
    Abstract: A key question in labor market research is how the unemployment insurance system affects unemployment rates and labor market dynamics. We revisit this old question studying the German Hartz reforms. On average, lower separation rates explain 76% of declining unemployment after the reform, a fact unexplained by existing research focusing on job finding rates. The reduction in separation rates is heterogeneous, with long-term employed, high-wage workers being most affected. We causally link our empirical findings to the reduction in long-term unemployment benefits using a heterogeneous-agent labor market search model. Absent the reform, unemployment rates would be 50% higher today.
    Date: 2019
  9. By: Song Shi; Michael Naylor
    Abstract: It is well established that individuals tend not to be very good at utilizing all available information when making decisions involving rare risks. It is also widely accepted that individuals tend to underinsure against low-probability, high-loss events relative to high-probability, low-loss events. The dynamics aspects of changes in rare event risk preference for property value and insurance has, however, not been studied. We use the 2010/11 Canterbury earthquakes to confirm that some households underestimate earthquake risk prior to earthquake experience, and substantially re-evaluate those risk perceptions after a quake. We show that these changes are complex, and time dynamic. We further use a novel risk proxy based on smoking rates to show that uniform disaster insurance premiums reduce information clarity and encourage households to make sub-optimal property location choices, which contradict their risk preferences, thus causing ex-ante subjective risk perception to depart from underlying objective risk.
    Keywords: Christchurch earthquake; Insurance; Property Value; seismic risk
    JEL: R3
    Date: 2019–01–01
  10. By: Kyle Dempsey (The Ohio State University); Felicia Ionescu (Federal Reserve Board)
    Abstract: How much do changes in credit supply affect consumers’ ability to insure against income risk over the business cycle and what is the valuation of such insurance? Using loan-level data from the Senior Loan Officer Opinion Survey (SLOOS), we construct measures of key credit supply variables, such as lending standards and terms for consumer credit in the U.S. and build a heterogeneous model of unsecured credit and default that accounts for credit supply dynamics as estimated from these data. Our economy is quantitatively consistent with key features of the unsecured credit market, earnings dynamics, and measures of consumption volatility in the U.S. We find that variability in standards and terms for credit is welfare improving despite the loss in consumption insurance that such an environment may induce. The key mechanism behind this result is the asymmetric effect that changes in standards induce for loan pricing in good and bad states of the economy.
    Date: 2019
  11. By: Matteo, Gatti; Tommaso, Oliviero
    Abstract: Deposit insurance is one of the main pillars of banking regulation meant to safeguard financial stability. In early 2009, the EU increased the minimum deposit insurance limit from €20,000 to €100,000 per bank account with the goal of achieving greater stability in the financial markets. Italy had already set a limit of €103,291 in 1994. We evaluate the impact of the new directive on the banks’ average interest rate on customer deposits by comparing banks in the Eurozone countries to those in Italy, before and after the policy change. The comparability between the two groups of banks is improved by means of a propensity score matching. We find that the increase in the deposit insurance limit led to a significant decrease in the cost of funding per unit of customer deposit and that the effect is stronger for riskier banks, suggesting that the policy reduced the risk premium demanded by depositors.
    Keywords: Deposit Insurance, Average Deposit Interest Rate, Cost of Deposit Funding
    JEL: G21 G28
    Date: 2019–09
  12. By: Gu, Ran
    Abstract: Postgraduate degree holders experience lower cyclical wage variation than those with undergraduate degrees. Moreover, postgraduates have more specific human capital than undergraduates. Using an equilibrium search model with long-term contracts and imperfect monitoring of worker effort, this paper attributes the cyclicality of the postgraduate-undergraduate wage gap to the differences in specific capital. Imperfect monitoring creates a moral hazard problem that requires firms to pay efficiency wages. More specific capital leads to lower mobility, thereby alleviating the moral hazard and improving risk-sharing. Estimates reveal that specific capital explains the differences both in labour turnover and in wage cyclicality across education groups.
    Keywords: specific human capital, postgraduate, wage premium, wage cyclicality, long-term contracts
    JEL: E24 E32 I24 J31 J64
    Date: 2019–09–02
  13. By: Stefania Albanesi (University of Pittsburgh); Ning Zhang (University of Pittsburgh); Rania Gihleb (University of Pittsburgh)
    Abstract: This paper demonstrates that living together with parents can work as an insurance against labor market friction for college graduates. Cores- idence with parents alleviates the student debt burden and job searching pressure during economic downturns and facilitates the the pursuit of jobs with better match and higher earnings. Using SIPP data, we estimate the parameters of a dynamic life-cycle model to show that: (1) job types, earn- ings, asset and preference jointly aect the dynamics of coresidence; (2) coresidence can work as an insurance for college graduates in labor mar- ket to nd a better matched job; (3) coresidence has long-term impact on youth earnings through job search.
    Date: 2019
  14. By: Bruno Decreuse (Aix-Marseille University); Guillaume Wilemme (Aix-Marseille University)
    Abstract: A recent strand of papers use sharp regression discontinuity designs (RDD) based on age discontinuity to study the impacts of minimum income and unemployment insurance benefit extension policies. This design challenges job search theory, which predicts that such RDD estimates are biased. Owing to market frictions, people below the age threshold account for future eligibility to the policy. This progressively affects their search outcomes as they get closer to entitlement. Comparing them to eligible people leads to biased estimates because both groups of workers are actually treated. We provide a nonstationary job search model and illustrate the theoretical biaseson the datasets used in the literature. Our results suggest that the employment impact of minimum income policies are (significantly) under-estimated, whereas the impacts of benefit extensions on nonemployment duration are (not significantly) over-estimated.
    Date: 2019
  15. By: Similan Rujiwattanapong (Aarhus University)
    Abstract: This paper investigates the impact of partially endogenous unemployment insurance (UI) extensions on the dynamics of unemployment and its duration structure in the US. Using a search and matching model with endogenous separations, variable job search intensity, on-the-job search and worker heterogeneity, I allow for the maximum UI duration to depend on unemployment and for UI benefits to depend on observable employment characteristics. The model can account for a large fraction of the observed rise in the long-term unemployment and realistic dynamics of the unemployment duration distribution during the Great Recession. Eliminating all UI extensions during the Great Recession could potentially lower the unemployment rate by 0.9-3.4 percentage points via both the responses of job search and vacancy posting incentives. Disregarding rational expectations about the timing of UI extensions implies an overestimation of unemployment by up to 2 percentage points. Once the heterogeneity in UI status and benefit level is accounted for, unobserved heterogeneity of workers does not account for much of the incidence of long-term unemployment.
    Date: 2019
  16. By: Angelos Angelopoulos; Konstantinos Angelopoulos; Spyridon Lazarakis; Apostolis Philippopoulos
    Abstract: Rent seeking leads to a misallocation of resources that worsens economic outcomes and reduces aggregate welfare. We conduct a quantitative examination of the distributional effects of rent extraction via the financial sector. Rent seeking introduces a possibility for insurance against idiosyncratic earnings risk that is more valuable for poorer households that are lacking in means of self insurance. However, it also creates a wedge that discourages savings, thus reducing self insurance via asset accumulation. When the model is calibrated to US data, the distorting effects dominate, implying welfare losses for all households, and an increase in wealth inequality. Nevertheless, welfare losses are bigger for households with higher initial wealth. Therefore, a policy reform to reduce rent seeking via the financial sector, despite being Pareto improving, will benefit predominantly wealthier households.
    Keywords: conditional welfare changes, wealth distribution, rent seeking
    JEL: E02 D31 H10
    Date: 2019
  17. By: Amine Ouazad; Matthew E. Kahn
    Abstract: Recent evidence suggests an increasing risk of natural disasters of the magnitude of hurricane Katrina and Sandy. Concurrently, the number and volume of flood insurance policies has been declining since 2008. Hence, households who have purchased a house in coastal areas may be at increasing risk of defaulting on their mortgage. Commercial banks have the ability to screen and price mortgages for flood risk. Banks also retain the option to securitize some of these loans. In particular, bank lenders may have an incentive to sell their worse flood risk to the two main agency securitizers, the Federal National Mortgage Association, commonly known as Fannie Mae, and the Federal Home Loan Mortgage Corporation, known as Freddie Mac. In contrast with commercial banks, Fannie and Freddie follow observable rules set by the FHFA for the purchase and the pricing of securitized mortgages. This paper uses the impact of one such sharp rule, the conforming loan limit, on securitization volumes. We estimate whether lenders’ sales of mortgages with loan amounts right below the conforming loan limit increase significantly after a natural disaster that caused more than a billion dollar in damages. Results suggest a substantial increase in securitization activity in years following such a billion-dollar disaster. Such increase is larger in neighborhoods for which such a disaster is “new news”, i.e. does not have a long history of hurricanes. Conforming loans are riskier in dimensions not observed in publicly available data sets: the borrowers have lower credit scores and they are more likely to become delinquent or default. A structurally estimated model of mortgage pricing with asymmetric information suggests that bunching at the conforming loan limit is an increasing function of perceived price volatility and declining price trends. A simulation of the impact of increasing climate risk on mortgage origination volumes with and without the GSEs suggests that the GSEs may act as an implicit insurer, i.e a substitute for the declining National Flood Insurance Program.
    JEL: G21 Q54
    Date: 2019–09
  18. By: Tzougas, George; Yik, Woo Hee; Mustaqeem, Muhammad Waqar
    Abstract: This paper is concerned with presenting the Exponential-Lognormal (ELN) regression model as a competitive alternative to the Pareto, or Exponential-Inverse Gamma, regression model that has been used in a wide range of areas, including insurance ratemaking. This is the first time that the ELN regression model is used in a statistical or actuarial context. The main contribution of the study is that we illustrate how maximum likelihood estimation of the ELN regression model, which does not have a density in closed form, can be accomplished relatively easily via an Expectation-Maximisation type algorithm. A real data application based on motor insurance data is examined in order to emphasise the versatility of the proposed algorithm. Finally, assuming that the number of claims is distributed according to the classic Negative Binomial and Poisson-Inverse Gaussian regression models, both the a priori and a posteriori, or Bonus–Malus, premium rates resulting from the ELN regression model are calculated via the net premium principle and compared to those determined by the Pareto regression model that has been traditionally used for modelling claim sizes.
    Keywords: Exponential-Lognormal regression model; EM Algorithm; Motor Third Party Liability Insurance; ratemaking
    JEL: F3 G3
    Date: 2019–06–26
  19. By: Johannes Fleck (European University Institute); Chima Simpson-Bell (European University Institute)
    Abstract: The literature on fiscal federalism usually argues that policies involving income reallocation should be administered by the highest level of government. This argument, however, neglects a uniformity constraint, which limits regional variation in its tax and welfare policies. Our paper explores the extent to which income support for poor households varies across US states due to the interaction between the federal government’s uniformity constraint and regional variations in local economic conditions and the net transfer policies of state governments. Our results are based on a simulation of the combined response of federal and state net transfers to a pre-tax earnings shock. They point to large differences in the level of insurance against income shocks experienced by households with low incomes in different states.
    Date: 2019
  20. By: Congressional Budget Office
    Abstract: CBO uses a model to estimate the federal budgetary effects of proposed changes to the cost-sharing structure of the Medicare fee-for-service program. This paper describes that model, the analyses it can support, and an illustrative option for changing Medicare’s cost-sharing structure.
    JEL: C63 H51 I13 I18
    Date: 2019–10–03
  21. By: Abdou Ndiaye (Federal Reserve Bank of Chicago)
    Abstract: As America's largest generation, the baby boom generation, approaches re- tirement in increasing numbers, we should expect that the consumption and savings decisions of this group would have a signicant social and economic eect, to some degree directly through changing demand for goods, but more interestingly in determining the necessity or plausibility Social Security and Medicare reform. According to standard theoretical macroeconomic models, individuals maximize their welfare by maintaining relatively constant consump- tion throughout their lives, saving when income is high and borrowing or using savings when income is low, as in retirement or during unemployment. The question addressed is thus whether boomers adhere to this predicted consump- tion trend, and whether they behave as predicted when faced with a shock like the Great Recession or face a health shock. This paper will use panel data on consumption, wealth, and other variables from PSID between 2001 and 2015 in the United States. It then uses the Consumption Expenditures Survey as a robustness check for results. The paper will then explore some policy implica- tions.
    Date: 2019
  22. By: Fetzer, Thiemo (University of Warwick)
    Abstract: Can public interventions persistently reduce conflict? Adverse weather shocks, through their impact on incomes, have been identified as robust drivers of conflict in many contexts. An effective social insurance system moderates the impact of adverse shocks on household incomes, and hence, could attenuate the link between these shocks and conflict. This paper shows that a public employment program in India, by providing an alternative source of income through a guarantee of 100 days of employment at minimum wages, effectively provides insurance. This has an indirect pacifying effect. By weakening the link between productivity shocks and incomes, the program uncouples productivity shocks from conflict, leading persistently lower conflict levels.
    Keywords: social insurance, civil conflict, India, NREGA, insurgency JEL Classification: D74, H56, J65, Q34
    Date: 2019

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