nep-ias New Economics Papers
on Insurance Economics
Issue of 2020‒08‒10
eighteen papers chosen by
Soumitra K. Mallick
Indian Institute of Social Welfare and Business Management

  1. Unemployment benefit duration and startup success By Camarero Garcia, Sebastian; Murmann, Martin
  2. Optimal insurance coverage of low-probability catastrophic risks By Alexis Louaas; Pierre Picard
  3. Liability Insurance: Equilibrium Contracts under Monopoly and Competition By Jorge Lemus; Emil Temnyalov; John L. Turner
  4. How Might Climate Change Influence farmers' Demand for Index-Based Insurance? By Antoine Leblois; Tristan Le Cotty; Elodie Maître d'Hôtel
  5. Uncertain monsoon,irrigation and crop yields: Implications for pricing of insurance products By Hardeep Singh; Digvijay S Negi; Pratap S. Birthal
  6. Optimal Forbearance of Bank Resolution By Schilling, Linda Marlene
  7. Natural Disaster Insurance for Sovereigns: Issues, Challenges and Optimality By Aliona Cebotari; Karim Youssef
  8. The Effect of Patent Litigation Insurance: Theory and Evidence from NPEs By Bernhard Ganglmair; Christian Helmers; Brian J. Love
  9. Out-of-pocket payments, vertical equity and unmet medical needs in France: A national multicenter prospective study on lymphedema By Gregoire Mercier; Jenica Pastor; Valérie Clément; Ulysse Rodts; Christine Moffat; Isabelle Quéré
  10. The introduction of lifetime community rating in the Irish private health insurance market: Effects on coverage and plan choice (Title TBC) By Keegan, Conor
  11. Disability Insurance: Error Rates and Gender Differences By Low, Hamish; Pistaferri, Luigi
  12. Instiutions, Opportunism and Prosocial Behavior: Some Experimental Evidence By Antonio Cabrales; Irma Clots-Figueras; Roberto Hernán-Gonzalez; Praveen Kujal
  13. Parametric insurance and technology adoption in developing countries By Enrico Biffis; Erik Chavez; Alexis Louaas; Pierre Picard
  14. The Impact of Rapid Aging and Pension Reform on Savings and the Labor Supply By Hui He; Lei Ning; Dongming Zhu
  15. Value of Life and Annuity Demand By Pashchenko, Svetlana; Porapakkarm, Ponpoje
  16. If sick-leave becomes more costly, will I go back to work? Could it be too soon? By Olivier Marie; Judit Vall Castello
  17. Macroeconomic stabilisation properties of a euro area unemployment insurance scheme By Kaufmann, Christoph; Attinasi, Maria Grazia; Hauptmeier, Sebastian
  18. Democracy, Redistribution, and Inequality: Evidence from the English Poor Law By Jonathan Chapman

  1. By: Camarero Garcia, Sebastian; Murmann, Martin
    Abstract: Despite the importance of business creation for the economy and a relevant share of new firms being started out of unemployment, most research has focused on analyzing the effect of unemployment insurance (UI) policies on reemployment outcomes that ignore self-employment. In this paper, we assess how UI benefit duration affects the motivation for creating a startup while unemployed and the subsequent firms' success. To do so, we create a comprehensive dataset on founders in Germany that links administrative social insurance with survey data. Exploiting reform- and age-based exogenous variations in potential benefit duration (PBD) within the German UI system, we find that longer PBD leads to longer actual unemployment duration for those becoming self-employed. Furthermore, the UI duration elasticity for these individuals is higher than common estimates for those individuals becoming re-employed. With increasing unemployment benefit duration, the founders' outcomes in terms of self-assessed motivation, sales, and employment growth lessen. This overall causal effect of PBD can be rationalized with a mix of composition and individual-level duration effects. Therefore, our findings suggest that it is important to consider the fiscal externality of UI on startup success when it comes to the (optimal) design of UI systems.
    Keywords: entrepreneurship,unemployment insurance,fiscal externality
    JEL: D22 J21 J23 J44 J62 J64 J65 L11 L25 L26 M13
    Date: 2020
  2. By: Alexis Louaas (CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - CNRS - Centre National de la Recherche Scientifique - X - École polytechnique - ENSAE ParisTech - École Nationale de la Statistique et de l'Administration Économique); Pierre Picard (CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - CNRS - Centre National de la Recherche Scientifique - X - École polytechnique - ENSAE ParisTech - École Nationale de la Statistique et de l'Administration Économique)
    Abstract: Catastrophic risks are often characterised by a low probability , a high severity and a large number of affected individuals. Taking these specificities into account, we analyse the capacity of insurance contracts to provide coverage for those risks, independently from the market failures frequently observed in practice. On the demand side, we characterise individual preferences under which the willingness to pay for the coverage of large losses remains significant, although their occurrence probability is very small. On the supply side, the correlation between individual losses affects the insurance pricing through the insurers' cost of capital. Analysing the interaction between demand and supply yields the key determinants of insurability and of a socially optimal risk sharing strategy.
    Keywords: risk aversion,capital costs JEL classification: D81,catastrophic risk,Disaster insurance,D86,G22,G28 *
    Date: 2020–06–19
  3. By: Jorge Lemus (University of Illinois Urbana-Champaign); Emil Temnyalov (University of Technology Sydney); John L. Turner (University of Georgia)
    Abstract: In liability lawsuits (e.g. product liability or patent infringement), a third party demands compensation from a firm. Verifying that the firm harmed the third party requires a costly lawsuit, so parties often negotiate a settlement agreement. Liability insurance improves the firmÕs bargaining leverage when negotiating this settlement. We study this leverage effect of insurance and characterize equilibrium contracts under symmetric and asymmetric information: in a competitive market, only a pooling equilibrium with under-insurance may exist; in a monopolistic setting, the insurer offers at most two contracts which under-insure low-risk types and may inefficiently induce high-risk types to litigate.
    Keywords: liability; insurance; litigation; bargaining; adverse selection; competitive equilibrium; monopoly
    JEL: C7 D82 G22 K1 K41
    Date: 2019–07–01
  4. By: Antoine Leblois (CEE-M - Centre d'Economie de l'Environnement - Montpellier - FRE2010 - UM - Université de Montpellier - CNRS - Centre National de la Recherche Scientifique - Montpellier SupAgro - Institut national d’études supérieures agronomiques de Montpellier - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Tristan Le Cotty (CIRED - Centre International de Recherche sur l'Environnement et le Développement - Cirad - Centre de Coopération Internationale en Recherche Agronomique pour le Développement - EHESS - École des hautes études en sciences sociales - AgroParisTech - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique); Elodie Maître d'Hôtel (UMR MOISA - Marchés, Organisations, Institutions et Stratégies d'Acteurs - Cirad - Centre de Coopération Internationale en Recherche Agronomique pour le Développement - Montpellier SupAgro - Centre international d'études supérieures en sciences agronomiques - CIHEAM-IAMM - Centre International de Hautes Etudes Agronomiques Méditerranéennes - Institut Agronomique Méditerranéen de Montpellier - CIHEAM - Centre International de Hautes Études Agronomiques Méditerranéennes - Montpellier SupAgro - Institut national d’études supérieures agronomiques de Montpellier - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)
    Abstract: The low observed uptake of non-subsidised index-based insurance policies in developing countries has been puzzling researchers for about a decade. This paper analyses the role of drought frequency in farmers' demand for index-based insurance in developing countries. While it is typically assumed that an increase in exposure to risk would result in higher demand for index insurance, this paper finds the opposite: an increase in drought frequency may result in lower demand for index insurance under fairly standard conditions. In an expected utility model, we show that the demand for insurance is an inverted U function of drought frequency. We further show that downside basis risk decreases insurance demand under frequent drought conditions. It implies that insurance against similar but more frequent events cannot meet large demand from farmers. To check the empirical relevance of these effects, we conduct an insurance field experiment in Burkina Faso with 205 farmers. We analyse insurance demand for different drought frequencies, different levels of basis risks and different loading factors through incentivised lottery choices. This analysis confirms that for higher drought frequencies, insurance demand is lower. Insurance demand also decreases with basis risk and the loading factor.
    Keywords: index-based insurance,extreme events,frequency,basis risk
    Date: 2020
  5. By: Hardeep Singh (Indira Gandhi Institute of Development Research); Digvijay S Negi (Indira Gandhi Institute of Development Research); Pratap S. Birthal (ICAR-National Institute for Agricultural Economics and Policy Research)
    Abstract: A significant body of literature interested in studying the impacts of weather risks on agricultural performance has modeled crop yields as a function of either levels or deviations in seasonal rainfall. However, an aspect that has received little attention in the literature relates to the impact of timing of arrival of monsoon on agricultural performance. In this paper, using a pan India district-level panel dataset for a period of 50 years, we investigate three interrelated issues that are critical for managing the weather-induced agricultural risks. One, we examine the impact of timing of arrival of monsoon on crop yields. Two, we assess the mitigation benefits of irrigation against delayed monsoon. And three, by simulating premium rates for an area yield insurance product at varying levels of irrigation coverage, we argue for differential pricing of insurance products for irrigated and rainfed crops or regions.
    Keywords: Monsoon onset, Crop yields, Irrigation, Crop insurance, Premiums
    JEL: Q10 Q18 Q50 G22
    Date: 2020–05
  6. By: Schilling, Linda Marlene
    Abstract: We analyze optimal strategic delay of bank resolution ('grq forbearance') and deposit insurance coverage. After bad news on the bank's assets, depositors fear for the uninsured part of their deposit and withdraw while the regulator observes withdrawals and needs to decide when to intervene. Optimal policy maximizes the joint value of the demand deposit contract and the insurance fund to avoid inefficient risk-shifting towards the fund while also preventing inefficient runs. Under low insurance coverage, the optimal intervention policy is never to intervene (laissez-faire). Optimal deposit insurance coverage is always interior. The paper sheds light on the differences between the U.S. and the European Monetary Union concerning their bank resolution policies.
    Keywords: bank resolution; bank run; deposit freeze; deposit insurance; Forbearance; global games; mandatory stay; Recovery Rates; suspension of convertibility
    JEL: D8 E6 G21 G28 G33
    Date: 2019–12
  7. By: Aliona Cebotari; Karim Youssef
    Abstract: Natural disasters are a source of economic risks in many countries, especially in smaller and lower-income states, and ex-ante preparedness is needed to manage the risks. The paper discusses sovereign experience with disaster insurance as a key instrument to mitigate the risks; proposes ways to judge the adequacy of insurance; and considers ways to enhance its use by vulnerable countries. The paper especially aims to inform policy decisions on disaster insurance. Through simulations of natural disasters and various insurance options, we find that sovereign decisions on optimal risk transfer involve balancing trade-offs between growth and debt, based on government risk preferences and country risk exposure. The choice of optimal insurance for smaller countries turns out to be more constrained by cost considerations due to their higher exposure, likely resulting in underinsurance; donor grants could help them achieve a more optimal protection. We also find that optimal insurance packages are those that are least costly relative to expected payouts (i.e. have the lowest insurance multiple), which are also the packages that insure less severe (more frequent) disasters.
    Keywords: Real interest rates;Social safety nets;Insurance supervision;Debt service payments;Insurance companies;natural disaster insurance,debt growth tradeoffs,optimal insurance for sovereigns.,WP,insurance package,risk transfer,ex-ante,premia,payout
    Date: 2020–01–17
  8. By: Bernhard Ganglmair; Christian Helmers; Brian J. Love
    Abstract: We analyze the extent to which private defensive litigation insurance deters patent assertion by non-practicing entities (NPEs). We study the effect that a patent-specific defensive insurance product, offered by a leading litigation insurer, had on the litigation behavior of insured patents' owners, all of which are NPEs. We first model the impact of defensive litigation insurance on the behavior of patent enforcers and accused infringers. We show that the availability of defensive litigation insurance can have an effect on how often patent enforcers will assert their patents. We confirm this result empirically showing that the insurance policy had a large, negative effect on the likelihood that a patent included in the policy was subsequently asserted relative to other patents held by the same NPEs and relative to patents held by other NPEs with portfolios that were entirely excluded from the insurance product. Our findings suggest that market-based mechanisms can deter so-called "patent trolling."
    Keywords: NPEs, patents, insurance, litigation
    JEL: G22 K41 O34
    Date: 2020–07
  9. By: Gregoire Mercier (CHRU Montpellier - Centre Hospitalier Régional Universitaire [Montpellier], CEPEL - Centre d'Etudes Politiques de l'Europe Latine - CNRS - Centre National de la Recherche Scientifique - UM - Université de Montpellier); Jenica Pastor (CHRU Montpellier - Centre Hospitalier Régional Universitaire [Montpellier]); Valérie Clément (MRE - Montpellier Recherche en Economie - UM - Université de Montpellier); Ulysse Rodts (CHRU Montpellier - Centre Hospitalier Régional Universitaire [Montpellier]); Christine Moffat (UON - University of Nottingham, UK); Isabelle Quéré (CHU Saint-Eloi, CHRU Montpellier - Centre Hospitalier Régional Universitaire [Montpellier], EA 2992 - Caractéristiques féminines des dysfonctions des interfaces cardio-vasculaires - UM1 - Université Montpellier 1 - UM - Université de Montpellier)
    Abstract: Out-of-pocket payments might threaten the vertical equity of financing and generate unmet medical needs. The main objective was to assess the vertical equity of outpatient out-of-pocket payments for lymphedema patients in France. Twenty-seven centres, among which 11 secondary care hospitals and 16 primary care practices participated in this prospective national multicenter study. We measured the lymphedema-specific outpatient out-of-pocket payments over 6 months. The vertical equity of out-of-pocket payments was examined using concentration curves, the Gini coefficient for income, the Kakwani index, and the Reynolds-Smolensky index. We included 231 lymphedema patients aged 7 years or more, living in metropolitan France, and being able to use Internet and email. After voluntary health insurance reimbursement, the mean out-of-pocket payment was equal to 101.4 Euros per month, mainly due to transport (32%) and medical devices (26%). Concentration curves indicated regressivity of out-of-pocket payments. Total out-of-pocket payments represented 10.1% of the income by consumption unit for the poorest quintile and 3.5% for the wealthiest (p
    Date: 2019
  10. By: Keegan, Conor
    Date: 2020
  11. By: Low, Hamish; Pistaferri, Luigi
    Abstract: We show the extent of errors made in the award of disability insurance using matched survey-administrative data. False rejections (Type I errors) are widespread,and there are large gender differences in these type I error rates. Women with a severe, work-limiting, permanent impairment are 20 percentage points more likely to be rejected than men, controlling for the type of health condition, occupation, and a host of demographic characteristics. We investigate whether these gender differences in Type I errors are due to women being in better health than men, to women having lower pain thresholds, or to women applying more readily for disability insurance. None of these explanations are consistent with the data. We use evidence from disability vignettes to suggest that there are different acceptance thresholds for men and women. The differences by gender arise because women are more likely to be assessed as being able to find other work than observationally equivalent men. Despite this, after rejection,women with a self-reported work limitation do not return to work, compared to rejected women without a work limitation.
    Keywords: Disability insurance; gender differences
    JEL: I38 J16
    Date: 2019–12
  12. By: Antonio Cabrales (Dept. of Economics, Universidad Carlos III de Madrid); Irma Clots-Figueras (School of Economics, University of Kent); Roberto Hernán-Gonzalez (Burgundy School of Business); Praveen Kujal (Dept. of Economics, Middlesex University)
    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
  13. By: Enrico Biffis (Imperial College London); Erik Chavez (Imperial College London); Alexis Louaas (CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - CNRS - Centre National de la Recherche Scientifique - X - École polytechnique - ENSAE ParisTech - École Nationale de la Statistique et de l'Administration Économique); Pierre Picard (CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - CNRS - Centre National de la Recherche Scientifique - X - École polytechnique - ENSAE ParisTech - École Nationale de la Statistique et de l'Administration Économique)
    Abstract: Technology adoption is crucial for the development of low income countries. This paper investigates how parametric insurance can contribute to improving access to finance, and hence to technology, for smallholder farmers. In a model with moral hazard, we show that bundling para-metric insurance with loans may lower collateral requirements, thus promoting the financial inclusion of poor households. The case of agricultural input loans and weather-index insurance is studied in detail and related to bundled finance solutions recently piloted among smallholder farmers in Tanzania.
    Date: 2020–06–19
  14. By: Hui He; Lei Ning; Dongming Zhu
    Abstract: We study, both empirically and quantitatively, the role of savings and the labor supply in self-insurance channels over the life cycle when one faces not only idiosyncratic income risks, but also changes in longevity risk and pension benefits. We pick China as a case study since China has undergone a dramatic process of rapid aging and a tremendous reduction in social security benefits for the period 1995-2009. We find that both savings and the labor supply are quantitatively important self-insurance channels in responding to changes in longevity risk and pension benefits, and the responses via adjustment to savings and labor supply have significant macroeconomic implications. Applying the model to China, we find that the pension reform and rapid aging together contribute 55 percent of the increase in the household saving rate from 1995 to 2009, and they jointly capture about 64 percent of the drastic increase in the labor supply for the same period.
    Keywords: Pension reforms;Social security;Household survey data;Labor supply;Social welfare programs;Demographic Change,Pension Reform,Saving,Life Cycle,Heterogeneous Agent Model,household save rate,rapid age,pension benefit,save rate
    Date: 2019–03–18
  15. By: Pashchenko, Svetlana; Porapakkarm, Ponpoje
    Abstract: How does the value of life affect annuity demand? To address this question, we construct a portfolio choice problem with three key features: i) agents have access to life-contingent assets, ii) they always prefer living to dying, iii) agents have non-expected utility preferences. We show that as utility from being alive increases, annuity demand decreases (increases) if agents are more (less) averse to risk rather than to intertemporal fluctuations. Put differently, if people prefer early resolution of uncertainty, they are less interested in annuities when the value of life is high. Our findings have two important implications. First, we get better understanding of the well-known annuity puzzle. Second, we argue that the observed low annuity demand provides evidence that people prefer early rather than late resolution of uncertainty.
    Keywords: annuities, value of a statistical life, portfolio choice problem, life-contingent assets, longevity insurance
    JEL: D91 G11 G22
    Date: 2020–05–30
  16. By: Olivier Marie (Erasmus University Rotterdam, ROA, TI, IZA, CEPR, CEP, and CESIfo); Judit Vall Castello (Universitat de Barcelona, IEB and CRES-UPF)
    Abstract: We investigate the impact on work absence of a massive reduction in paid sick leave benefits. We exploit a policy change that only affected public sector workers in Spain and compare changes in the number and length of spells they take relative to unaffected private sector workers. Our results highlight a large drop in frequency mostly offset by increases in average duration. Overall, the policy did reduce number of days lost to sick leave. For some, return to work may have been premature as we document very large increases in both the proportion of relapses and the working accidents rate.
    Keywords: Sickness Insurance, Paid Sick Leave, Absenteeism, Presenteeism, Relapses Contagious Diseases, Benefit Displacement, Working Accidents, Negative Externalities, Spain
    JEL: I12 I13 I18 J22 J28 J32
    Date: 2020
  17. By: Kaufmann, Christoph; Attinasi, Maria Grazia; Hauptmeier, Sebastian
    Abstract: In this paper we use a medium-scale DSGE model to quantitatively assess the macroeconomic stabilisation properties of a supranational unemployment insurance scheme. The model is calibrated to the euro area's core and periphery and features a rich fiscal sector, sovereign risk premia and labour market frictions. Adopting both simple policy rules and optimal policies, our simulations point to enhanced business cycle synchronisation and interregional consumption smoothing. Depending on the exact specification, the results suggest a reduction in the volatility of consumption by up to 49% at the region-level, while the cross-regional correlation of unemployment and inflation increases by up to 52% and 27%, respectively, compared to the decentralised setting. The higher degree of inter-regional risk-sharing comes at the cost of sizable fiscal transfers. Limiting such transfers via claw-back mechanisms implies a much weaker degree of stabilisation across countries. JEL Classification: F45, E63, E62, E24
    Keywords: fiscal union, monetary union, optimal policy, unemployment insurance
    Date: 2020–06
  18. By: Jonathan Chapman (Division of Social Science)
    Abstract: This paper tests whether inequality mediates the effect of democratization on government redistribution. An 1894 democratic reform to councils that provided social insurance in Britain is used as the treatment event in a difference-in-difference analysis. The reform removed institutional features- a graduated franchise, property qualifications, the absence of a secret ballot, and the participation of unelected magistrates- that helped landowners seize control of spending on poor relief after the 1832 Great Reform Act. The results support theories arguing that inequality strengthens elite opposition to democratization: more unequal districts experienced greater increases in government expenditure following the democratic reform.
    Date: 2020–06

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