nep-ias New Economics Papers
on Insurance Economics
Issue of 2020‒05‒04
eighteen papers chosen by
Soumitra K. Mallick
Indian Institute of Social Welfare and Business Management

  1. The Macroeconomic Effects of Lockdown Policies By Stéphane Auray; Aurélien Eyquem
  2. The Role of Caseworkers in Unemployment Insurance: Evidence from Unplanned Absences By Amelie Schiprowski
  3. High water, no marks? Biased lending after extreme weather By Garbarino, Nicola; Guin, Benjamin
  4. Can the Unemployed Borrow? Implications for Public Insurance By J. Carter Braxton; Kyle F. Herkenhoff; Gordon M. Phillips
  5. An Unemployment Re-Insurance Scheme for the Eurozone? Stabilizing and Redistributive Effects By Mathias Dolls
  6. Product diversification as a performance boosting strategy? Drivers and impact of diversification strategies in the property-liability insurance industry By Patty Duijm; Ilke van Beveren
  7. Do People Have a Bias for Low-Deductible Insurance? By Howard Kunreuther; Mark Pauly
  8. Estimating the Demand Factors and Willingness to Pay for Agricultural Insurance By Osman Gulseven
  9. Benefit Duration, Job Search Behavior and Re-Employment By Andreas Lichter; Amelie Schiprowski
  10. Unemployment Risks and Intra-Household Insurance By Javier Fernández-Blanco
  11. A multivariate micro-level insurance counts model with a Cox process approach By Benjamin Avanzi; Gregory Clive Taylor; Bernard Wong; Xinda Yang
  12. Ageing-Driven Migration and Redistribution: Comparing Policy Regimes By Assaf Razin; Alexander Horst Schwemmer
  13. Maturity Structure and Liquidity Risk By David Andolfatto
  14. Government Unemployment Insurance for All? The Fall of the Berlin Wall and Social Preferences Evolution By Maqsood Aslam; Etienne Farvaque; Alexander Mihailov
  15. Redistribution with Performance Pay By Doligalski, Pawel; Werquin, Nicolas; Ndiaye, Abdoulaye
  16. Minimizing the Ruin Probability under the Sparre Andersen Model By Linlin Tian; Lihua Bai
  17. Labor Market and Fiscal Policy During and After the Coronavirus By Paul Gomme
  18. Relationship lending and employment decisions in firms' bad times By Pierluigi Murro; Tommaso Oliviero; Alberto Zazzaro

  1. By: Stéphane Auray (CREST-Ensai and ULCO); Aurélien Eyquem (Université Lyon, Université Lumière Lyon 2)
    Abstract: A tractable incomplete-market model with unemployment, sticky prices, and a fiscal side is used to quantify the macroeconomic effects of lockdown policies and the mitigating effects of raising government spending and implementing UI benefit extensions. We find that the effects of lockdown policies, although we are relatively conservative about the size of the lockdown, are huge: unemployment doubles on impact and almost triples even for relatively short lockdown durations. Output falls dramatically and debt-output ratios increase by several tens of percentage points. In addition, the surge in unemployment risk triggers a rise in precautionary savings that make such shocks Keynesian supply shocks: aggregate demand falls by more than aggregate supply, and lockdown policies are deflationary. Unfortunately, we find that raising public spending and extending UI benefits stimulate aggregate demand or improve risk-sharing but has little effects on output and unemployment, although they do alleviate the welfare losses of lockdown policies for the households.
    Keywords: Lockdown, Unemployment, Borrowing constraints, Incomplete markets, Government Spending, Unemployment Insurance
    JEL: D52 E21 E62 J64 J65
    Date: 2020–04
  2. By: Amelie Schiprowski
    Abstract: Caseworkers are the main human resources used to provide social services. This paper asks if, and how much, caseworkers matter for the outcomes of unemployed individuals. Using large-scale administrative data, I exploit exogenous variation in unplanned absences among Swiss UI caseworkers. I find that individuals who lose a meeting with their caseworker stay unemployed 5% longer. Results show large heterogeneity in the personal impact of caseworkers: the effect of a foregone meeting is zero for caseworkers in the lower half of the productivity distribution, while it amounts to more than twice the average effect for caseworkers in the upper half.
    Keywords: unemployment insurance, caseworkers, job search
    JEL: J64 J65 J68
    Date: 2020
  3. By: Garbarino, Nicola (Bank of England); Guin, Benjamin (Bank of England)
    Abstract: Policymakers have put forward proposals to ensure that banks do not underestimate long-term risks from climate change. To examine how lenders account for extreme weather, we compare matched repeat mortgage and property transactions around a severe flood event in England in 2013–14. First, lender valuations do not ‘mark-to-market’ against local price declines. As a result valuations are biased upwards. Second, lenders do not offset this valuation bias by adjusting interest rates or loan amounts. Third, borrowers with low credit risk self-select into high flood risk areas. Overall, these results suggest that lenders do not track closely the impact of extreme weather ex-post, and that public flood insurance programs may subsidise high income households.
    Keywords: D12; G21; Q51; Q54
    JEL: D12 G21 Q51 Q54
    Date: 2020–03–20
  4. By: J. Carter Braxton; Kyle F. Herkenhoff; Gordon M. Phillips
    Abstract: We show that unemployed individuals maintain significant access to credit. Following job loss, the unconstrained borrow, while the constrained default and delever. Both defaulters and borrowers are using credit to smooth consumption. We quantitatively show that long-term credit relationships and credit-registries allow the unemployed to partially offset income losses using credit. We estimate the model and find that the optimal provision of public insurance is unambiguously lower with greater credit access. Using a utilitarian welfare criterion, the optimal steady-state policy is to lower the replacement rate of public insurance from the current US policy of 41.2% to 38.3%. Moreover, lowering the replacement rate to 38.3% yields welfare gains to the majority of workers along the transition path.
    JEL: D14 E21 E24 J64
    Date: 2020–04
  5. By: Mathias Dolls
    Abstract: This paper develops a decomposition framework to study the importance of different stabilization channels of an unemployment re-insurance scheme for the euro area. Running counterfactual simulations based on household micro data for the period 2000–16, the paper finds that the re-insurance would have cushioned on average 12% (8%) of income losses through interregional (intertemporal) smoothing. These results suggest that the smoothing effect of the re-insurance which is due to asymmetries in labor market shocks would have raised the income insurance of a typical unemployment insurance scheme in the euro area by more than 50%. The simulated re-insurance scheme would have been revenue-neutral at EA-19, but not at the member-state level. Average annual net contributions would have amounted to -0.1–0.1 per cent of GDP. The paper discusses how different variants of the re-insurance might affect the risk of moral hazard.
    Keywords: European fiscal integration, unemployment re-insurance, automatic stabilizers, euro area reform
    JEL: F55 H23 J65
    Date: 2020
  6. By: Patty Duijm; Ilke van Beveren
    Abstract: We investigate the relationship between product diversification and performance in the Dutch property-liability (P&L) insurance industry for the period 2007-2018. We employ a two-step approach: we first investigate the drivers of diversification and, as a second step, we investigate the impact of diversification on risk and return. Our results suggest that the impact of diversification can be beneficial, as it reduces an insurer's risk. Diversification is however also associated with lower returns, while it is not significantly related to risk-adjusted returns. Furthermore, the impact of diversification on performance is contingent upon an insurer's size and its extent of diversification.
    Keywords: insurance companies; diversification; risk; performance
    JEL: G22 G3 L25
    Date: 2020–03
  7. By: Howard Kunreuther; Mark Pauly
    Abstract: Do consumers show a strong bias toward low deductible insurance plans, as many field studies imply? This paper reports on a controlled experiment intended to see whether subjects have a predisposition toward such plans and whether that preference is consistent when their default plan and premiums are changed. Subjects were presented with a scenario where they had to make a decision on whether to purchase a plan with a low deductible (LD) or high deductible (HD) when faced with an illness having a specified probability and cost. Participants had to choose between these plans in two rounds with the identical risk of an illness and specified premiums. If their default option was an LD plan in Round 1, then it was an HD plan in Round 2. The experiment did not show a strong bias toward low deductible health plans. Only slightly more than half of the respondents chose an LD plan even when it was optimal for them to do so. When faced with a default option that was switched in Round 2, 58% of the respondents chose the same plan as they did in Round 1, implying that some but not all subjects resisted the default option in their decision process. Subject choices were correlated with their responses to questions about risk aversion and a desire for peace of mind.
    JEL: C90 C91 D03 D12 D3 D81 G22 I11 I18
    Date: 2020–04
  8. By: Osman Gulseven
    Abstract: This article investigates the effect of prices and socio-demographic variables on the farmers decision to purchase agricultural insurance. A survey has been conducted to 200 farmers most of whom are engaged in diversified income-generating activities. The logistic estimation results suggest that education and household income from farming activities positively affect the likelihood of purchasing insurance. The demand for insurance is negatively correlated with the premium paid per insured value, suggesting that insurance is a normal good. Farmers are willing to pay (WTP) increasingly higher premiums for contracts with a higher coverage ratio. According to the valuation model, the WTP declines sharply for coverage ratios under 70%.
    Date: 2020–03
  9. By: Andreas Lichter; Amelie Schiprowski
    Abstract: This paper studies how the potential duration of unemployment benefits affects individuals’ job search behavior and re-employment outcomes. We exploit an unexpected reform of the German unemployment insurance scheme in 2008, which increased the potential benefit duration from 12 to 15 months for recipients of age 50 to 54. Based on detailed survey data and difference-in-differences techniques, we estimate that one additional month of benefits reduces the number of filed applications by around 10% on average over the first two months of unemployment. Treatment effects on the reservation wage are positive but statistically insignificant. In a complementary analysis, we use social security data to investigate how the reform affected re-employment outcomes. The difference-in-differences estimates yield an elasticity of 0.24 (0.1) additional months in unemployment (nonemployment) per additional month of potential benefits. A cautious back-of-the-envelope calculation reveals substantial returns to early search effort.
    Keywords: unemployment insurance, job search, re-employment outcomes, natural experiment
    JEL: D83 I38 J64 J68
    Date: 2020
  10. By: Javier Fernández-Blanco
    Abstract: A spouse's income provides consumption insurance, but also increases the risks job-seekers take on in labor markets. We use a tractable directed search model with households to study how much public insurance should be provided in addition to the private insurance arrangements, and how it varies with the spouse's income. Private insurance is provided within the household through the spouse's labor supply and sought in the labor markets by applying to less risky jobs. Both insurance channels are used excessively in the laissez-faire equilibrium. In line with the empirical evidence, and in sharp contrast to the social planner's allocation, the equilibrium exhibits falling job-finding rates over the spouse's income distribution. If spouse's productivity is observable, the planner's allocation can be decentralized by implementing falling unemployment benefits.
    Keywords: unemployment risks, intra-household risk-sharing, directed search, constrained, efficient insurance
    JEL: J08 J22 J64 J65
    Date: 2020–04
  11. By: Benjamin Avanzi; Gregory Clive Taylor; Bernard Wong; Xinda Yang
    Abstract: In this paper, we focus on estimating ultimate claim counts in multiple insurance processes and thus extend the associated literature of micro-level stochastic reserving models to the multivariate context. Specifically, we develop a multivariate Cox process to model the joint arrival process of insurance claims in multiple Lines of Business. The dependency structure is introduced via multivariate shot noise intensity processes which are connected with the help of L\'evy copulas. Such a construction is more parsimonious and tractable in higher dimensions than plain vanilla common shock models. We also consider practical implementation and explicitly incorporate known covariates, such as seasonality patterns and trends, which may explain some of the relationship between two insurance processes (or at least help tease out those relationships). We develop a filtering algorithm based on the reversible-jump Markov Chain Monte Carlo (RJMCMC) method to estimate the unobservable stochastic intensities. Model calibration is illustrated using real data from the AUSI data set.
    Date: 2020–04
  12. By: Assaf Razin; Alexander Horst Schwemmer
    Abstract: Life cycle and insurance-type considerations dominate redistribution policy. Wage and fiscal prospects of ageing dominate migration policy. The paper compares distinct policy regimes, directed at migration and redistribution issues. Migration quotas, provision of social benefits, labor income taxation, and capital income taxation, are all endogenously determined in a policy-optimizing framework. The analysis makes a three-way comparison: free-migration regime vs. restricted-migration regime, welfare-state regime vs. no-migration-quota, no-redistribution regime, and low-income-majority regime vs. high-income-majority regime.
    JEL: F2 F22 H3 H4 J11
    Date: 2020–04
  13. By: David Andolfatto
    Abstract: This paper studies the optimal maturity structure for government debt when markets for liquidity insurance are incomplete or non-competitive. There is no fiscal risk. Government debt in the model solves a dynamic inefficiency. Issuing debt in short and long maturities solves a liquidity insurance problem, but optimal yield curve policy is only possible if long-duration debt is rendered illiquid. Optimal policy is implementable through treasury operations only--adjustments in the primary deficit are not necessary.
    Keywords: liquidity; yield curve; Maturity structure
    JEL: E4 E5
    Date: 2020–04
  14. By: Maqsood Aslam (Université de Lille, Faculté des Sciences Economiques et Sociales); Etienne Farvaque (Université de Lille, Faculté des Sciences Economiques et Sociales); Alexander Mihailov (Department of Economics, University of Reading)
    Abstract: The paper makes use of the natural experiment of the length, and abrupt end, of the Cold War in Europe to examine empirically the persistence and evolution of social preferences. Using data from six West and four East European countries plus Germany in the 2016 wave of the International Social Survey Program, we focus on the role of government in providing living standard to the unemployed. We find an “East-West divide” of attitudes, still existing in 2016 across Europe, a generation after the collapse of communism. Perhaps surprisingly, the divide reveals less support in Eastern Europe for a role of the government in correcting adverse labor market outcomes, which we attribute empirically to preference persistence in the older generation (educated during communism). Nevertheless, we also show that social preferences do evolve, relatively fast, as the younger generation (educated after communism) does not reveal the same beliefs. We interpret the East-West Europe divide in terms of two hypotheses, reinforcing each other even if originating in the respective worldviews of the opposite social fractions that coexisted inside the communist society, and contributing both to preference persistence in the older generation: (i) the “lazy unemployed” stigma indoctrinated by the communist propaganda and those loyal to it; and (ii) the “defiance of the state apparatus” experience transmitted by dissidents and silent opponents to the regime. Our main results and their suggested interpretation are corroborated by several robustness checks and placebo tests.
    Keywords: social preferences, East-West Europe divide, communism, survey data, role of government, unemployment insurance
    JEL: D83 D91 H53 P16 P51
    Date: 2020–04–01
  15. By: Doligalski, Pawel; Werquin, Nicolas; Ndiaye, Abdoulaye
    Abstract: Half of the jobs in the U.S. feature pay-for-performance. We study nonlinear income taxation in a model where such contracts arise in private labor markets that are constrained by moral hazard frictions. We derive novel formulas for the incidence of arbitrarily nonlinear reforms of any given tax code on both the mean of earnings and their sensitivity to performance. We show theoretically and quantitatively that, follow- ing an increase in tax progressivity, the higher performance-sensitivity caused by the crowding-out of insurance provided by firms is almost fully offset by a countervailing performance-pay effect driven by labor supply responses. As a result, earnings risk is hardly affected by policy. We then turn to the normative analysis of a government that levies taxes and transfers to redistribute income across workers with different levels of uninsurable productivity. We find that setting taxes without accounting for the endogeneity of private insurance is close to optimal. Thus, the common concern that standard models of taxation underestimate the cost of redistribution is, in the context of performance-based compensation, overblown.
    Date: 2020–04
  16. By: Linlin Tian; Lihua Bai
    Abstract: In this paper, we consider the problem of minimizing the ruin probability of an insurance company in which the surplus process follows the Sparre Andersen model. Similar to Bai et al. \cite{bai2017optimal}, we recast this problem in a Markovian framework by adding another dimension representing the time elapsed since the last claim. After Markovization, We investigate the regularity properties of the value function and state the dynamic programming principle. Furthermore, we show that the value function is the unique constrained viscosity solution to the associated Hamilton-Jacobi-Bellman equation. It should be noted that there is no discount factor in our paper, which makes it tricky to prove the uniqueness. To overcome this difficulty, we construct the strict viscosity supersolution. Then instead of comparing the usual viscosity supersolution and subsolution, we compare the supersolution and the strict subsolution. Eventually we show that all viscosity subsolution is less than the supersolution.
    Date: 2020–04
  17. By: Paul Gomme
    Abstract: What are the likely effects of coronavirus-related restrictions on the labor market and the macroeconomy? What are the likely effects of government policies on the unemployment rate and output? I develop a model to answer these questions. Labor markets search frictions are captured as follows: Unemployed workers searching for a job, and firm vacancies come together in a matching function that determines the number of new firm-worker pairing. The remainder of the macroeconomy in the model is based on neoclassical foundations. I feed into this model ‘educated guesses’ for the impact effects of four exogenous shocks; the shocks then dissipate over the 18 months that the coronavirus is likely to directly affect the economy. First, relative to the pre-coronavirus U.S. economy, the job separation probability initially quadruple. While this is a rather large increase, on impact the job separation probability is not much higher than it was during the Great Recession. These separations are intended to reflect the outcome of lost revenues and the inability of workers to get to work in light of widespread lockdowns. To match the U.S. experience – a immediate and large increase in unemployment – the model simply needs such a large increase in separations. Second, match efficiency falls by 40%, capturing the difficulties workers and firms have in meeting when many firms are closed, and workers are restricted to their homes. Third, vacancy posting costs double. These costs capture a combination of the aforementioned difficulties firms have in recruiting when they are closed, and the inability of firms to obtain financing, some of which is used to pay for the up-front costs of recruiting. Finally, total factor productivity falls by 10%, capturing the loss in productivity of working from home, as well as disruptions to supply chains. By way of comparison, over the Great Recession, total factor productivity fell by 6.5%. When all four shocks are in play, absent a policy response, the outlook is dire: The model predicts that unemployment will peak at over 22.5% and output will fall by over 20%. I consider four labor market policies. As with the shocks, these policies fade out over the 18 months of the coronavirus, reflecting the likelihood that these programs will be wound down, and that over time fewer firms and workers will quality for these programs. The first policy is a straight wage subsidy of 50%. While this policy reduces unemployment (by less than two percent) and cushions the fall in output (by 1.3 percentage points), it is not nearly as good as the second policy: a wage subsidy along with an employment guarantee (modeled as a return of the job separation probability to its pre-coronavirus value). This second policy is designed to get at policies in several countries, including Denmark and Canada, that tie the receipt of government help with firms’ wage bills to those firms limiting job losses. Under this second policy, the unemployment rate initially rises to just over 10%, before falling gradually to its original value of 3.5%. Despite the improved unemployment performance, the model predicts a 14% decline in output. The third policy is more generous unemployment insurance. This policy is not particularly efficacious in terms of labor market outcomes: the model predicts a small increase in unemployment, and a slightly larger dip in output. To be sure, there are other reasons to increase the generosity of transfer programs like unemployment insurance; lowering the unemployment rate is simply not one of them. The final policy is a 50% subsidy to vacancy posting costs. This is a reduced-form way of incorporating a variety of programs aimed directly at firms, including various loan programs. Such a reduction in the cost of a vacancy lowers the peak unemployment rate by as much as six percentage points. What if it takes a few months to actually implement these labor market policies? The model predicts that unemployment will be higher, and output lower, and for longer. A delay of one month implies a peak to the unemployment rate of 15.1% compared to just over 10.3% if there is no delay.
    Date: 2020–04–27
  18. By: Pierluigi Murro (LUISS-Guido Carli University.); Tommaso Oliviero (University of Naples Federico II and CSEF); Alberto Zazzaro (University of Naples Federico II, CSEF and MoFiR)
    Abstract: Using firm-level survey information, we investigate whether relationship lending affects firms' employment decisions when they experience negative shocks on sales. We find that firms maintaining long-lasting relationships with their main bank show a significantly lower sensitivity of employment growth rate to shocks in sales. This result is robust to measurement issues and to an instrumental variable strategy, and is stronger for young, small, human-capital-intensive firms. Our findings indicate that relationship lending acts as an insurance for firms' employees against adverse sales fluctuations, especially for firms whose internal workforce is more valuable and is thus substitutable at larger costs.
    Keywords: employment, relationship banking, insurance
    JEL: G32 G38 H53 J65
    Date: 2020–04

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