nep-ias New Economics Papers
on Insurance Economics
Issue of 2020‒06‒29
nineteen papers chosen by
Soumitra K. Mallick
Indian Institute of Social Welfare and Business Management

  1. Common Practice: Spillovers from Medicare on Private Health Care By Michael L. Barnett; Andrew Olenski; Adam Sacarny
  2. Medicaid Expansion and the Mental Health of College Students By Benjamin W. Cowan; Zhuang Hao
  3. The Response to Dynamic Incentives in Insurance Contracts with a Deductible: Evidence from a Differences-in-Regression-Discontinuities Design By Klein, Tobias; Salm, Martin; Upadhyay, Suraj
  4. Insurable losses, pre-filled claims forms and honesty in reporting By William G. Morrison; Bradley J. Ruffle
  5. The Effect of Unemployment Benefits on the Duration of Unemployment Insurance Receipt: New Evidence from a Regression Kink Design in Missouri, 2003-2013 By Card, David; Johnston, Andrew C.; Leung, Pauline; Mas, Alexandre; Pei, Zhuan
  6. Optimal Unemployment Benefits in the Pandemic By Mitman, Kurt; Rabinovich, Stanislav
  7. Institutions, Opportunism and Prosocial Behavior: Some Experimental Evidence By Cabrales, Antonio; Clots-Figueras, Irma; Hernán-González, Roberto; Kujal, Praveen
  8. Federal Reinsurance for Terrorism Risk and Its Effects on the Budget: Working Paper 2020-04 By Perry Beider; David Torregrosa
  9. Equalizing Incomes in the Future : Why Structural Differences in Social Insurance Matter for Redistribution Preferences By Fetscher, Verena
  10. Collaborative Governance Approaches in Dealing with Financial Deficits in the JKN-KIS Program in Indonesia By Miptahul Janah
  11. The challenges of universal health insurance in developing countries : Evidence from a large-scale randomized experiment in Indonesia By Banerjee, Abhijit; Finkelstein, Amy; Hanna, Rema; Olken, Benjamin; Ornaghi, Arianna; Sumarto, Sudarno
  12. Reinsurance demand and liquidity creation: A search for bi-causality By Desjardins, Denise; Dionne, Georges; Koné, N’Golo
  13. Coastal Flood Risk in the Mortgage Market: Storm Surge Models' Predictions vs. Flood Insurance Maps By Amine Ouazad
  14. Insurance Policy Thresholds for Economic Growth in Africa By Asongu, Simplice; Odhiambo, Nicholas
  15. Health Shocks and the Evolution of Earnings over the Life-Cycle By Michael Keane; Elena Capatina; Shiko Maruyama
  16. Redistribution with Performance Pay By Pawel Doligalski; Abdoulaye Ndiaye; Nicolas Werquin
  17. Subjective Complexity Under Uncertainty By Quitz\'e Valenzuela-Stookey
  18. The Effect of Job Loss and Unemployment Insurance on Crime in Brazil By Britto, Diogo; Pinotti, Paolo; Sampaio, Breno
  19. Sequential Fundraising and Social Insurance By Amir Ban; Moran Koren

  1. By: Michael L. Barnett; Andrew Olenski; Adam Sacarny
    Abstract: Efforts to raise the productivity of the U.S. health care system have proceeded slowly. One potential explanation is the fragmentation of payment across insurers. Each insurer's efforts to improve care could influence how doctors practice medicine for other insurers, leading to unvalued externalities. We study these externalities by examining the unintended private insurance spillovers of a public insurer's intervention. In 2015, Medicare randomized warning letters to doctors to curtail overuse of antipsychotics. Even though the letters did not mention private insurance, they reduced prescribing to privately insured patients by 12%. The reduction to Medicare patients was 17%, and we cannot reject one-for-one spillovers. The results imply that physicians experience large costs to setting insurer-specific medical practice styles. If private insurers conducted a similar intervention with their own limited information, they would stem half as much prescribing as a social planner able and willing to better target the intervention. Our findings establish that insurers can affect health care well outside their direct purview, raising the question of how to match their private objectives with their scope of influence.
    JEL: H44 I13 I18
    Date: 2020–05
  2. By: Benjamin W. Cowan; Zhuang Hao
    Abstract: Reported mental health problems have risen dramatically among U.S. college students over time, as has treatment for these problems. An open question is how healthcare access affects diagnosis of mental illness and treatments such as prescription psychotropic medication use. We examine the effect of state-level Medicaid expansion following the 2014 implementation of the Affordable Care Act on the diagnosis of mental health conditions and psychotropic prescription drug use of a national sample of college students. We find that students from disadvantaged backgrounds are more likely to report being on public insurance after 2014 in expansion states relative to non-expansion states, while more advantaged students do not see this increase. Both diagnosis of common mental health conditions and psychotropic drug use increase following expansion for disadvantaged students relative to advantaged ones, which translates into an elimination of the pre-treatment gap in these outcomes by family background in expansion states. However, these changes are not associated with short-term improvements in measures of mental health status or academic outcomes.
    JEL: I12 I13 I14
    Date: 2020–06
  3. By: Klein, Tobias; Salm, Martin; Upadhyay, Suraj
    Abstract: We develop a new approach to quantify how patients respond to dynamic incentives in health insurance contracts with a deductible. Our approach exploits two sources of variation in a differences-in-regression-discontinuities design: deductible contracts reset at the beginning of the year, and cost-sharing limits change over the years. Using rich claims-level data from a large Dutch health insurer we find that individuals are forward-looking. Changing dynamic incentives by increasing the deductible by e100 leads to a reduction in healthcare spending of around 3% on the first days of the year and 6% at the annual level. The response to dynamic incentives is an important part of the overall effect of cost-sharing schemes on healthcare expenditures-much more so than what the previous literature has suggested.
    Keywords: Dynamic incentives; Health Insurance; Patient cost-sharing
    JEL: H51 I13
    Date: 2020–04
  4. By: William G. Morrison (Department of Economics, Wilfrid Laurier University, Canada); Bradley J. Ruffle (Department of Economics, McMaster University, Canada; Rimini Centre for Economic Analysis)
    Abstract: We design a series of laboratory experiments to investigate the effects of purchasing insurance and of pre-filled claim forms on dishonesty in loss reporting. In our experiment, participants report the outcome of privately rolling two dice where the numbers rolled map to a payoff distribution with the possibility of losses in earned income. Prior to this reporting task, participants bid for a limited number of insurance contracts which issue an indemnity payment equal to each insured individual’s reported loss. We find that dishonest reporting is significantly more prevalent among insured individuals relative to the uninsured, consistent with an ‘entitlement bias’. Further we find that prefilling the reporting form with the most probable outcome only modestly constrains dishonest reporting among both insured and uninsured individuals. We explore reasons why pre-filled forms should be applied with caution.
    Keywords: experimental economics, pre-filled forms, pre-populated fields, insurance, dishonesty, claim build-up
    JEL: C91 D82 G22
    Date: 2020–06
  5. By: Card, David (University of California, Berkeley); Johnston, Andrew C. (University of California, Merced); Leung, Pauline (Princeton University); Mas, Alexandre (Princeton University); Pei, Zhuan (Cornell University)
    Abstract: We provide new evidence on the effect of the unemployment insurance (UI) weekly benefit amount on unemployment insurance spells based on administrative data from the state of Missouri covering the period 2003-2013. Identification comes from a regression kink design that exploits the quasi-experimental variation around the kink in the UI benefit schedule. We find that UI durations are more responsive to benefit levels during the recession and its aftermath, with an elasticity between 0.65 and 0.9 as compared to about 0.35 pre-recession.
    Keywords: unemployment insurance, benefits, labor supply, employment, unemployment
    JEL: J64 J65 D91
    Date: 2020–06
  6. By: Mitman, Kurt (Stockholm University); Rabinovich, Stanislav (University of North Carolina, Chapel Hill)
    Abstract: How should unemployment benefits vary in response to the economic crisis induced by the COVID-19 pandemic? We answer this question by computing the optimal unemployment insurance response to the COVID-induced recession.We compare the optimal policy to the provisions under the CARES Act—which substantially expanded unemployment insurance and sparked an ongoing debate over further increases—and several alternative scenarios. We find that it is optimal first to raise unemployment benefits but then to begin lowering them as the economy starts to reopen — despite unemployment remaining high. We also find that the $600 UI supplement payment implemented under CARES was close to the optimal policy. Extending this UI supplement for another six months would hamper the recovery and reduce welfare. On the other hand, a UI extension combined with a re-employment bonus would further increase welfare compared to CARES alone, with only minimal effects on unemployment.
    Keywords: COVID-19, epidemic, unemployment insurance, optimal policy
    JEL: J65 E6 H1
    Date: 2020–06
  7. By: Cabrales, Antonio (University College London); Clots-Figueras, Irma (University of Kent); Hernán-González, Roberto (Burgundy School of Business); Kujal, Praveen (Middlesex University Business School, London)
    Abstract: Formal or informal institutions have long been adopted by societies to protect against opportunistic behavior. However, we know very little about how these institutions are chosen and their impact on behavior. We experimentally investigate the demand for different levels of institutions that provide low to high levels of insurance and its subsequent impact on prosocial behavior. We conduct a large-scale online experiment where we add the possibility of purchasing insurance to safeguard against low reciprocity to the standard trust game. We compare two different mechanisms, the private (purchase) and the social (voting) choice of institutions. Whether voted or purchased, we find that there is demand for institutions in low trustworthiness groups, while high trustworthiness groups always demand lower levels of institutions. Lower levels of institutions are demanded when those who can benefit from opportunistic behavior, i.e. low trustworthiness individuals, can also vote for them. Importantly, the presence of insurance crowds out civic spirit even when subjects can choose the no insurance option: trustworthiness when formal institutions are available is lower than in their absence.
    Keywords: institutions, trust, trustworthiness, voting, insurance
    JEL: C92 D02 D64
    Date: 2020–05
  8. By: Perry Beider; David Torregrosa
    Abstract: This paper describes CBO's methods for estimating the costs of the federal terrorism risk insurance program. It also discusses how estimates of the program's budgetary effects would differ if they were produced using accrual-based measures rather than cash-based measures.
    JEL: G22 H42 H60
    Date: 2020–06–26
  9. By: Fetscher, Verena (University of Hamburg)
    Abstract: Why is support for income redistribution among the rich higher in some Western European welfare states than in others? The argument I propose builds on structural differences in the social insurance design. Flat-rate systems provide social benefits in equal amounts to everyone in need, while earnings-related systems provide benefits in relation to previous earnings. These differences in the configuration of the welfare state historically go back to Bismarck and Beveridge and have implications for questions of distributive justice and fairness. If individual incomes have fair and unfair components, earnings-related systems maintain both components during periods of economic hardship, while flat-rate systems equalize fair and unfair income differences. With a combination of observational and experimental data, I show that average support for redistribution among the better-off is higher in earnings-related systems and participants in a laboratory experiment increase transfer shares in allocation problms which maintain given endowment differences
    Date: 2020
  10. By: Miptahul Janah (Coordinating Ministry for Human Development and Cultural Affairs Republic of Indonesia, Indonesia Author-2-Name: Amy Y. Sri Rahayu Author-2-Workplace-Name: Faculty of Administrative Science, University of Indonesia (FIA-UI), 16424, Depok, Indonesia Author-3-Name: Author-3-Workplace-Name: Author-4-Name: Author-4-Workplace-Name: Author-5-Name: Author-5-Workplace-Name: Author-6-Name: Author-6-Workplace-Name: Author-7-Name: Author-7-Workplace-Name: Author-8-Name: Author-8-Workplace-Name:)
    Abstract: Objective - The imbalance in income and expenditure in the JKN-KIS program clearly illustrates the main causes of its financial balance deficit. The government has implemented many top-down programs to overcome this issue, but these efforts have not yet shown any satisfying outcomes. The collaborative efforts in dealing with budget deficit problems in the JKN-KIS program have been carried out by many actors. The extant literature suggests it should be noted that the components are comprehensive and appropriately used in answering problems. This study consists of a theoretical discussion focusing on the potentials and challenges of bottom-up collaborative governance concept as well as a practical example of how this concept works in dealing with financial deficits in the National Health Insurance (JKN) program in Indonesia. Methodology/Technique - This study aims to explain the tendency of collaborative governance approach used. This study is conducted using a post-positivism approach with qualitative and quantitative data analysis using 13 state and non-state institutions for the period of the JKN from 2014 to 2018. Finding & Novelty - The results of the study show that there is no dominant tendency in each existing model. However, there are a "red thread" between collaborative governance models formulated. The results suggest that a bottom-up approach emerges as a critique to the old scheme of top-down approach in which the participation of the citizens or NGOs are not proportionally given. This finding implies that in adopting the bottom-up collaborative governance concept there are significant challenges for the collaborative governance approach in the future. Type of Paper - Review
    Keywords: Financial Deficit; Health Insurance; Collaborative Governance; Bottom-up.
    JEL: I13 I18
    Date: 2020–06–02
  11. By: Banerjee, Abhijit (MIT); Finkelstein, Amy (MIT); Hanna, Rema (Harvard University); Olken, Benjamin (MIT); Ornaghi, Arianna (University of Warwick); Sumarto, Sudarno (TNP2K and SMERU)
    Abstract: To assess ways to achieve widespread health insurance coverage with financial solvency in developing countries, we designed a randomized experiment involving almost 6,000 households in Indonesia who are subject to a nationally mandated government health insurance program. We assessed several interventions that simple theory and prior evidence suggest could increase coverage and reduce adverse selection : substantial temporary price subsidies (which had to be activated within a limited time window and lasted for only a year), assisted registration, and information. Both temporary subsidies and assisted registration increased initial enrollment. Temporary subsidies attracted lowercost enrollees, in part by eliminating the practice observed in the no subsidy group of strategically timing coverage for a few months during health emergencies. As a result, while subsidies were in effect, they increased coverage more than eightfold, at no higher unit cost ; even after the subsidies ended, coverage remained twice as high, again at no higher unit cost. However, the most intensive (and effective) intervention – assisted registration and a full one-year subsidy – resulted in only a 30 percent initial enrollment rate, underscoring the challenges to achieving widespread coverage
    Date: 2020
  12. By: Desjardins, Denise (HEC Montreal, Canada Research Chair in Risk Management); Dionne, Georges (HEC Montreal, Canada Research Chair in Risk Management); Koné, N’Golo (University of Montreal, Department of Economics)
    Abstract: We analyze the relationship between insurers’ liquidity creation and reinsurance demand. Early theoretical contributions on liquidity creation propose that financial institutions enhance economic growth by creating liquidity in the economy. Liquidity creation means financing relatively illiquid assets with relatively liquid liabilities. However, liquidity creation exposes insurers to financial risks. There is a trade-off between getting higher returns on risky investments and being able to compensate clients at a low cost when unexpected claims happen. Unexpected claims can be protected by reinsurance, which introduces a second trade-off between reinsurance demand and liquidity creation. This trade-off can be more important for insurers that have fewer diversification opportunities. Our main empirical results, from regularized GMM and ML-SME methods of estimation, show similar positive bi-causal effects between liquidity creation and reinsurance demand for small insurers (22% of insurance activity). The link between the two activities is not significant for large insurers (60% of insurance activity). We obtain mixed results for medium insurers. In all estimations, the standard GMM model is rejected.
    Keywords: Reinsurance demand; liquidity creation; causality; bi-causality; Generalized Method of Moments; Maximum Likelihood; Structural Equation Modeling.
    JEL: C13 C18 C33 C58 G21 G22
    Date: 2020–06–19
  13. By: Amine Ouazad
    Abstract: Prior literature has argued that flood insurance maps may not capture the extent of flood risk. This paper performs a granular assessment of coastal flood risk in the mortgage market by using physical simulations of hurricane storm surge heights instead of using FEMA's flood insurance maps. Matching neighborhood-level predicted storm surge heights with mortgage files suggests that coastal flood risk may be large: originations and securitizations in storm surge areas have been rising sharply since 2012, while they remain stable when using flood insurance maps. Every year, more than 50 billion dollars of originations occur in storm surge areas outside of insurance floodplains. The share of agency mortgages increases in storm surge areas, yet remains stable in the flood insurance 100-year floodplain. Mortgages in storm surge areas are more likely to be complex: non-fully amortizing features such as interest-only or adjustable rates. Households may also be more vulnerable in storm surge areas: median household income is lower, the share of African Americans and Hispanics is substantially higher, the share of individuals with health coverage is lower. Price-to-rent ratios are declining in storm surge areas while they are increasing in flood insurance areas. This paper suggests that uncovering future financial flood risk requires scientific models that are independent of the flood insurance mapping process.
    Date: 2020–06
  14. By: Asongu, Simplice; Odhiambo, Nicholas
    Abstract: This study investigates the role of insurance in economic growth on a panel of forty-eight countries in Africa for the period 2004-2014. The research question the study seeks to answer is the following: what thresholds of insurance penetration positively affect economic growth in Africa? The empirical evidence is based on Generalized Method of Moments. Life insurance increases economic growth while the effect of non-life insurance is not significant. Increasing both life insurance and non-life insurance has negative net effects on economic growth. From an extended analytical exercise, 4.149 of life insurance premium (% of GDP) is the minimum critical mass required for life insurance to positively affect economic prosperity while 1.805 of non-life insurance premium (% of GDP) is the minimum threshold required for non-life insurance to positively affect economic prosperity. Thresholds are also provided from the Hansen (1999) Panel Threshold Regression technique using a balanced sample of 28 countries.
    Keywords: Insurance; Economic Growth
    JEL: G20 I28 I30 O16 O55
    Date: 2019–01
  15. By: Michael Keane (School of Economics, UNSW Business School, UNSW Sydney); Elena Capatina (Research School of Economics, Australian National University); Shiko Maruyama (Economics Discipline Group, UTS Business School, University of Technology Sydney)
    Abstract: We study the contribution of health shocks to earnings inequality and uncertainty in labor market outcomes. We calibrate a life-cycle model of labor supply and savings that incorporates health and health shocks. Our model features endogenous wage formation via human capital accumulation, employer sponsored health insurance, and meanstested social insurance. We find a substantial part of the impact of health shocks on earnings arises via reduced human capital accumulation. Health shocks account for 15% of lifetime earnings inequality for U.S. males, with two-thirds of this due to behavioral responses. In particular, it is optimal for low-skill workers – who often lack employer sponsored insurance – to curtail labor supply to maintain eligibility for means-tested transfers that protect them from high health care costs. This causes low-skill workers to invest less in human capital. Provision of public health insurance can alleviate this problem and enhance labor supply and human capital accumulation.
    Keywords: Health, Health Shocks, Human Capital, Income Risk, Precautionary Saving, Earnings Inequality, Health Insurance, Welfare
    JEL: D91 E21 I14 I31
    Date: 2020–06
  16. By: Pawel Doligalski; Abdoulaye Ndiaye; Nicolas Werquin
    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 a given tax code on both the mean of earnings and their sensitivity to performance. We show theoretically and quantitatively that, following 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.
    Keywords: tax incidence, optimal taxation, moral hazard, performance pay
    JEL: D61 D82 D86 H21 H22
    Date: 2020
  17. By: Quitz\'e Valenzuela-Stookey
    Abstract: Complexity of the problem of choosing among uncertain acts is a salient feature of many of the environments in which departures from expected utility theory are observed. I propose and axiomatize a model of choice under uncertainty in which the size of the partition with respect to which an act is measurable arises endogenously as a measure of subjective complexity. I derive a representation of incomplete Simple Bounds preferences in which acts that are complex from the perspective of the decision maker are bracketed by simple acts to which they are related by statewise dominance. The key axioms are motivated by a model of learning from limited data. I then consider choice behavior characterized by a "cautious completion" of Simple Bounds preferences, and discuss the relationship between this model and models of ambiguity aversion. I develop general comparative statics techniques, and explore applications to portfolio choice, contracting, and insurance choice.
    Date: 2020–06
  18. By: Britto, Diogo (Bocconi University); Pinotti, Paolo (Bocconi University); Sampaio, Breno (Universidade Federal de Pernambuco)
    Abstract: We investigate the effect of job loss and unemployment benefits on criminal behavior, exploiting individual-level data on the universe of workers and criminal cases in Brazil over the 2009-2017 period. We match workers displaced upon plausibly exogenous mass layoffs with observationally-equivalent control groups to identify dynamic treatment effects of job loss while allowing for treatment effect heterogeneity. In our preferred specification, the probability of criminal prosecution increases by 23% upon job loss and remains approximately constant during the following years. Our unusually large dataset allows us to precisely estimate increases in almost all types of crimes - including offenses with no economic motivation - as well as spillover effects on other household members. The estimated effects remain robust when restricting to arrests "in flagrante", which are less subject to differential reporting by employment status. We then evaluate the mitigating effect of unemployment benefits leveraging on discontinuous changes in eligibility. Regression discontinuity estimates suggest that unemployment benefits covering 3 to 5 months after displacement completely offset potential crime increases upon job loss, especially for liquidity-constrained individuals, although this effect completely vanishes upon benefit expiration. Our findings point at liquidity constraints and psychological stress as main drivers of criminal behavior upon job loss, while substitution between time on the job and leisure does not seem to play an important role.
    Keywords: unemployment, crime, unemployment insurance, registry data
    JEL: K42 J63 J65
    Date: 2020–05
  19. By: Amir Ban; Moran Koren
    Abstract: Seed fundraising for ventures often takes place by sequentially approaching potential contributors, whose decisions are observed by other contributors. The fundraising succeeds when a target number of investments is reached. When a single investment suffices, this setting resembles the classic information cascades model. However, when more than one investment is needed, the solution is radically different and exhibits surprising complexities. We analyze a setting where contributors' levels of information are i.i.d. draws from a known distribution, and find strategies in equilibrium for all. We show that participants rely on {\em social insurance}, i.e., invest despite having unfavorable private information, relying on future player strategies to protect them from loss. {\em Delegation} is an extreme form of social insurance where a contributor will unconditionally invest, effectively delegating the decision to future players. In a typical fundraising, early contributors will invest unconditionally, stopping when the target is "close enough", thus {\em de facto} delegating the business of determining fundraising success or failure to the last contributors.
    Date: 2020–05

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