nep-ias New Economics Papers
on Insurance Economics
Issue of 2019‒11‒18
six papers chosen by
Soumitra K. Mallick
Indian Institute of Social Welfare and Business Management

  1. Lock-in in Dynamic Health Insurance Contracts: Evidence from Chile By Juan Pablo Atal
  2. Index Based Insurance in Developing Countries: Rational Neglect? By Würtenberger, Daniel
  3. The Impact of Pensions and Insurance on Global Yield Curves By Robin M. Greenwood; Annette Vissing-Jorgensen
  4. Brief Remarks (via pre-recorded video) : a speech at "Supervision in a Digital Era," the 26th Annual Conference of the International Association of Insurance Supervisors, Abu Dhabi, the United Arab Emirates, November 14, 2019. By Quarles, Randal K.
  5. In Search of Lost Time Aggregation By Edmund Crawley
  6. A model free approach to the pricing of downside risk in argentinean stocks By José P. Dapena; Juan A. Serur; Julián R. Siri

  1. By: Juan Pablo Atal (University of Pennsylvania)
    Abstract: Long-term health insurance contracts have the potential to efficiently insure against reclassification risk, but at the expense of other limitations like provider lock-in. This paper empirically investigates the workings of long-term contracts which are subject to this trade-off. Individuals are shielded against premium increases and coverage denial as long as they stay with their initial contract, but those that become higher risk are subject to premium increases or coverage denials upon switching, potentially leaving them locked-in with their original network of providers. I provide the first empirical evidence on the importance of this phenomenon using administrative panel data from the universe of the private health insurance market in Chile, where competing insurers o?er long term contracts. I fit a structural model to yearly plan choices, and am able to jointly estimate evolving preferences for different insurance companies and supply-side underwriting in the form of premium risk-rating and coverage denial. To quantify the welfare effects of lock-in, I compare simulated choices under the current rules to those in a counterfactual scenario with no underwriting. The results show that consumers would be willing to pay around 13 percent more in yearly premiums to avoid lock-in. Finally, I study a counterfactual scenario where long-term contracts are replaced with community-rated spot contracts, and I find only minor general-equilibrium effects on premiums and on the allocation of individuals across insurers. I argue that these small effects are the result of large levels of preference heterogeneity uncorrelated to risk.
    Keywords: Health Insurance, Guaranteed-Renewability, Lock-in
    JEL: D82 G22 I11
    Date: 2019–11–08
  2. By: Würtenberger, Daniel
    Abstract: Microinsurance adoption in developing countries is low, despite its potential to foster economic growth. Recent research is not able to explain the low demand within the neoclassical framework. I contribute to this stream of research by proposing rational as well as boundedly rational explanations for the low attractiveness of microinsurance within a stochastic framework. More precisely, I analyze weather index insurance. My model makes separate predictions for close farmers, whose location is near a weather station, and distant farmers. Results show that the latter ask for less than 50% insurance coverage even under perfect rationality. I extend the model by integrating incorrect beliefs. I can show that a lack of trust reduces insurance demand most for close farmers, while a lack of knowledge about the insurance negatively affects the demand of distant farmers. Moreover, subsidies are more effective for close than for distant farmers.
    Keywords: index insurance,basis risk,microinsurance,developing countries,understanding of insurance products,trust in insurer
    JEL: G22 D91 Q12 O13 O16
    Date: 2019
  3. By: Robin M. Greenwood (Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)); Annette Vissing-Jorgensen (National Bureau of Economic Research (NBER); University of California Berkeley, Haas School of Business)
    Abstract: We document a strong effect of pension and insurance company (P&I) assets on the long end of the yield curve. Using data from 26 countries, the yield spread between 30-year and 10-year government bond yields is negatively related to the ratio of pension assets (in funded and private pension and life insurance arrangements) to GDP, suggesting that preferred-habitat demand by the P&I sector for long-dated assets drives the long end of the yield curve. We draw on changes in regulations in several European countries between 2008 and 2013 to provide well-identified evidence on the effect of the P&I sector on yields and to show that P&I demand is in part driven by hedging linked to the regulatory discount curve. When regulators reduce the dependence of the regulatory discount curve on a particular security, P&I demand for the security falls and its yield increases. These effects extend beyond long government bonds. Our results suggest that pension discount rules can have a destabilizing impact on bond markets that reverses once rules are changed.
    Date: 2019–12
  4. By: Quarles, Randal K. (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2019–11–14
  5. By: Edmund Crawley
    Abstract: In 1960, Working noted that time aggregation of a random walk induces serial correlation in the first difference that is not present in the original series. This important contribution has been overlooked in a recent literature analyzing income and consumption in panel data. I examine Blundell, Pistaferri and Preston (2008) as an important example for which time aggregation has quantitatively large effects. Using new techniques to correct for the problem, I find the estimate for the partial insurance to transitory shocks, originally estimated to be 0.05, increases to 0.24. This larger estimate resolves the dissonance between the low partial consumption insurance estimates of Blundell, Pistaferri and Preston (2008) and the high marginal propensities to consume found in the natural experiment literature.
    Keywords: Consumption ; Income ; Time Aggregation
    JEL: D12 D91 D31 C18 E21
    Date: 2019–11–01
  6. By: José P. Dapena; Juan A. Serur; Julián R. Siri
    Abstract: The return dynamics of Argentina's main stock index, the SP Mer.Val., show a high level of volatility, signaling a higher degree of downside risk. To hedge against that specific risk, investors could buy put options. However, the Argentinean capital markets lacks variety of hedging contracts. The basic availability of put options depends on the possibility of short selling the underlying security, i.e. transfer risk to a third party, something not properly developed in the domestic market. Since data processing power has geometrically increased in the last decades and some mathematic formulas that were helpful for calculation had been surpassed by data gathering and processing that helps to find a better estimate when necessary, in this paper we show the point calculating protection against downside risk in the Argentinean stock market, using real data and programming an algorithm to perform calculations instead of resorting the standard Black-Scholes-Merton formulae, by means of a model free approach to acknowledge the issue.
    Keywords: Asset pricing, options pricing, insurance, capital markets
    JEL: C1 C3 N2 G11
    Date: 2019–11

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