nep-ias New Economics Papers
on Insurance Economics
Issue of 2021‒01‒04
seventeen papers chosen by
Soumitra K. Mallick
Indian Institute of Social Welfare and Business Management

  1. Optimal Sustainable Intergenerational Insurance By Francesco Lancia; Alessia Russo; Tim Worrall
  2. Denmark; Financial Sector Assessment Program-Technical Note-Insurance Regulation and Supervision By International Monetary Fund
  3. United States; Financial Sector Assessment Program-Technical Note-Insurance Supervision and Regulation By International Monetary Fund
  4. How Does Climate Change Interact with the Financial System? A Survey By Kakuho Furukawa; Hibiki Ichiue; Noriyuki Shiraki
  5. Do Disability Benefits Hinder Work Resumption After Recovery? By Pierre Koning; Paul Muller; Roger Prudon
  6. Norway; Financial Sector Assessment Program-Technical Note-Insurance Sector Oversight By International Monetary Fund
  7. United States; Financial Sector Assessment Program-Technical Note-Financial Crisis Preparedness and Deposit Insurance By International Monetary Fund
  8. Building better retirement systems in the wake of the global pandemic By Mitchell, Olivia S.
  9. A Congestion Theory of Unemployment Fluctuations By Yusuf Mercan; Benjamin Schoefer; Petr Sedláček
  10. Italy; Financial Sector Assessment Program-Technical Note-Insurance Sector Regulation and Supervision By International Monetary Fund
  11. Portfolio Similarity and Asset Liquidation in the Insurance Industry By Giulio Girardi; Kathleen W. Hanley; Stanislava Nikolova; Loriana Pelizzon; Mila Getmansky Sherman
  12. Denmark; Financial System Stability Assessment-Press Release; and Statement by the Executive Director for Denmark By International Monetary Fund
  13. Denmark; Financial Sector Assessment Program-Technical Note-Financial Safety Net and Crisis Management Arrangements By International Monetary Fund
  14. United States; Financial Sector Assessment Program-Technical Note-Risk Analysis and Stress Testing the Financial Sector By International Monetary Fund
  15. Taking cover: human capital accumulation in the presence of shocks and health insurance By Font-Gilabert, Paulino
  16. Italy; Financial Sector Assessment Program-Technical Note-Financial Safety Net and Crisis Management Arrangements By International Monetary Fund
  17. How Does Cost-Sharing Impact Spending Growth and Cost-Effective Treatments? Evidence from Deductibles By Claudio Lucarelli; Molly Frean; Aliza S. Gordon; Lynn M. Hua; Mark Pauly

  1. By: Francesco Lancia; Alessia Russo; Tim Worrall
    Abstract: Optimal intergenerational insurance is examined in a stochastic overlapping generations endowment economy with limited enforcement of risk-sharing transfers. Transfers are chosen by a benevolent planner who maximizes the expected discounted utility of all generations while respecting the participation constraint of each generation. We show that the optimal sustainable intergenerational insurance is history dependent. The risk from a shock is unevenly spread into the future, generating heteroscedasticity and autocorrelation of consumption even in the long run. The optimum can be interpreted as a social security scheme characterized by a minimum welfare entitlement for the old and state-contingent entitlement thresholds.
    Keywords: Intergenerational insurance, Limited commitment, Risk sharing, Stochastic overlapping generations
    JEL: D64 E21 H55
    Date: 2020–12
  2. By: International Monetary Fund
    Abstract: Denmark’s insurance sector is highly developed with a particularly high penetration and density in the life sector. Traditionally, work-related life insurance and pension savings are offered as a combined package, and life insurance companies dominate the market for mandatory pension schemes for employees. The high penetration explains the overall size of the insurance sector, which exceeds those of peers from other Nordic countries and various other EU member states. Assets managed by the insurance industry amounted to 146 percent of the GDP at end-2018, compared to 72 percent for the EU average.
    Keywords: Insurance;Insurance companies;Solvency;Pension spending;Insurance supervision;ISCR,CR,risk assessment,business intelligence tool,insurance undertaking,DFSA plan,DFSA data,DFSA staff,DFSA supervision,insurance sector,insurance supervisor
    Date: 2020–08–12
  3. By: International Monetary Fund
    Abstract: This Technical Note (TN) is a targeted review of cross-cutting themes building on the detailed assessment of the Insurance Core Principles (ICPs) conducted in 2015. The targeted review was chosen, in part, due to the performance of the U.S. insurance regulatory system in the 2015 detailed assessment where it was assessed that the U.S. observed 8 ICPs, largely observed 13 ICPs and partly observed 5 ICPs. The analysis relied on a targeted self-assessment against a subset of ICPs covering valuation and solvency, risk management, conduct, winding-up, corporate governance and enforcement, and the objectives, powers and responsibility of supervisors. The choice of subjects covered in this review is based on those aspects most significant to financial stability and a follow-up on key recommendations from the 2015 detailed assessment. The focus of the analysis has been on the state-based system of regulation and supervision, reflecting the existing institutional setup.
    Keywords: Insurance;Insurance companies;Natural disasters;Financial statements;Solvency;ISCR,CR,insurance regulator,holding company,life insurance,risk management,balance sheet,financial condition,State insurance act,state insurance department,State insurance regulator,State regulator
    Date: 2020–08–10
  4. By: Kakuho Furukawa (Bank of Japan); Hibiki Ichiue (Bank of Japan); Noriyuki Shiraki (Bank of Japan)
    Abstract: We survey the growing literature on the interaction between climate change, which is likely associated with a growing intensity and frequency of natural disasters, and the financial system. Assets, in particular properties, do not adequately price in climate risks although disclosure and communication help alleviate the mispricing of assets. Further, natural disasters restrict the credit supply from affected banks even in areas not directly hit by the disaster; however, this negative impact is less severe for banks with more capital. Meanwhile, insurance provides some protection for the economy, firms, and households against the impact of natural disasters, but there are several challenges such as low coverage and moral hazard. Finally, our survey considers policy implications for financial authorities.
    Keywords: Asset Pricing; Banking; Insurance; Climate Change; Natural Disaster; Financial Stability
    JEL: G12 G21 G22 G41 Q54 R31
    Date: 2020–12–24
  5. By: Pierre Koning (Vrije Universiteit Amsterdam); Paul Muller (Vrije Universiteit Amsterdam); Roger Prudon (Vrije Universiteit Amsterdam)
    Abstract: While a large share of Disability Insurance recipients are expected to recover, outflow rates from temporary disability schemes are typically negligible. We estimate the disincentive effects of disability benefits on the response to a (mental) health improvement using administrative data on all Dutch disability benefit applicants. We compare those below the DI eligibility threshold with those above and find that disincentives significantly reduce work resumption after health improves. Approximately half of the response to recovery is offset by benefits. Structural labor supply model estimates suggest disincentive effects are substantially larger when the workers’ earnings capacity is fully restored.
    Keywords: Disability insurance, Mental health, Labor supply, Health shocks
    JEL: J08 I1 J22
    Date: 2020–12–21
  6. By: International Monetary Fund
    Abstract: The Norwegian insurance sector is well-capitalized. In recent years, the authorities have taken steps to recapitalize weak insurers and to boost capital for the overall industry. Risk-resilience has been strengthened by stronger retention of profits leading to accumulation of reserves, better risk management, and higher capital in the run-up to the implementation of the Solvency II regulatory regime.
    Keywords: Insurance companies;Insurance;Financial stability assessment;Solvency;Stress testing;ISCR,CR,FSA issues circular,FSA-run stress test,insurance undertaking,risk outlook,inspection program,main focus,nonlife insurance,risk assessment
    Date: 2020–08–12
  7. By: International Monetary Fund
    Abstract: The U.S. authorities should preserve the considerable progress in the resiliency, recoverability, and resolvability of financial companies and insured depository institutions (IDIs), and intensify financial crisis preparedness efforts. After a decade of resolution planning, the development of the U.S. resolution regime is more advanced than in other major economies. This regime, together with the strong track record of the deposit insurance system (DIS) for banks and the federal banking agencies’ (FBAs) preparation for resolution, provide a strong foundation for crisis preparedness. Bank holding companies (BHCs) have integrated recovery and resolution planning (RRP) into business-as-usual (BAU) activities, increasing their resiliency; this process has deepened the FBAs’ understanding of the BHCs’ business models and RRP capabilities. The FBAs should continue their own annual resolution planning and mitigate the recent changes that reduced the BHCs’ RRP. These efforts should be complemented by further interagency crisis preparedness, including particularly with the U.S. Department of the Treasury (UST), given its essential role in critical aspects of crisis responses. Finally, further refinements relating to cross-border resolution also deserve attention.
    Keywords: Financial crises;Crisis prevention;Deposit insurance;Crisis management;Financial Sector Assessment Program;ISCR,CR,resolution regime,FDIC OIG,host resolution authority,FDIC crisis readiness planning,FDIC recordkeeping,FDIC resolution measure,FDIC-administered deposit insurance fund
    Date: 2020–08–10
  8. By: Mitchell, Olivia S.
    Abstract: In the wake of the global pandemic known as COVID-19, retirees, along with those hoping to retire someday, have been shocked into a new awareness of the need for better risk management tools to handle longevity and aging. This paper offers an assessment of the status quo prior to the spread of the coronavirus, evaluates how retirement systems are faring in the wake of the shock. Next we examine insurance and financial market products that may render retirement systems more resilient for the world's aging population. Finally, potential roles for policymakers are evaluated.
    JEL: G23 G51 G53 H55 J26 J32
    Date: 2020
  9. By: Yusuf Mercan; Benjamin Schoefer; Petr Sedláček
    Abstract: In recessions, unemployment increases despite the—perhaps counterintuitive—fact that the number of unemployed workers finding jobs expands. On net, unemployment rises only because even more workers lose their jobs. We propose a theory of unemployment fluctuations resting on this countercyclicality of gross flows from unemployment into employment. In recessions, the abundance of new hires “congests” the jobs the unemployed fill, diminishes their marginal product and discourages further job creation. Countercyclical congestion alone explains about 30–40 percent of U.S. unemployment fluctuations. Besides generating realistic labor market volatility, it also provides a unified explanation for the cyclical labor wedge, the excess earnings losses from job displacement and from graduating during recessions, and the insensitivity of unemployment to labor market policies, such as unemployment insurance.
    Keywords: unemployment, business cycles, recessions
    JEL: E24 J63 J64
    Date: 2020
  10. By: International Monetary Fund
    Abstract: This technical note (TN) provides an update and an assessment of the supervisory framework and practices for the Italian insurance sector since the last assessment concluded in 2013. The mission conducted a target review focusing on the implementation of Solvency II, the financial resilience of insurers, the effectiveness of supervision, and previously identified weaknesses without a full assessment of Italy’s observance with the International Association of Insurance Supervisors (IAIS) Insurance Core Principles (ICPs). Implementation of the European Union (EU) Solvency II Directive in 2016 has significantly strengthened regulation and supervision since the last FSAP, introducing risk-based capital standards, comprehensive insurance group supervision and new requirements on governance, risk management and controls. The supervision of intermediaries has also been strengthened in line with the EU Insurance Distribution Directive in 2018.
    Keywords: Insurance companies;Insurance;Solvency;Stress testing;Macroprudential analysis;ISCR,CR,Solvency II,insurance sector,IVASS statute,sanction power,IVASS authority,IVASS data,IVASS exercise,IVASS sensitivity analysis,market share,risk management
    Date: 2020–08–04
  11. By: Giulio Girardi (Division of Economic and Risk Analysis, U.S. Securities and Exchange Commission, Washington); Kathleen W. Hanley (College of Business and Economics, Lehigh University); Stanislava Nikolova (College of Business, University of Nebraska-Lincoln); Loriana Pelizzon (SAFE-Goethe University Frankfurt); Mila Getmansky Sherman (Isenberg School of Management, University of Massachusetts)
    Abstract: We examine whether the concern of academics and regulators about the potential for insurers to sellsimilar assets due to the overlap in their holdings is justified. We measure this overlap using cosine similarity and find that insurers with more similar portfolios have larger subsequent common sales. We show that faced with a shock to their assets or liabilities, affected insurers with greater portfolio similarity have larger common sales that impact prices. Our measure can be used by regulators to predict the common selling of any institution that reports security or asset class holdings regardless of their public company status making it a useful ex-ante predictor of divestment behavior in times of market stress.
    Keywords: Interconnectedness, asset liquidation, similarity, financial stability, insurance companies, fire sales
    JEL: G11 G18 G2
    Date: 2020
  12. By: International Monetary Fund
    Abstract: Much of the work of the Financial Sector Assessment Program (FSAP) was conducted prior to the COVID-19 pandemic. Given the FSAP’s focus on medium-term challenges and vulnerabilities, however, many of its findings and recommendations for strengthening policy and institutional frameworks remain pertinent. This report reflects key developments and policy changes since the FSAP mission work was completed, and includes illustrative scenarios to quantify the possible implications of the COVID-19 shock on the solvency of systemically important financial institutions (SIFIs). Prior to the COVID-19 pandemic, the Danish authorities had taken important steps to improve financial system resilience. The authorities had actively used macroprudential tools to bolster the robustness of the financial system. The supervision of the banking and insurance sectors had improved. Likewise, recent legislation has strengthened anti-money laundering and combating the financing of terrorism (AML/CFT) supervision. Major reforms such as a new bank resolution framework had also considerably improved Denmark’s financial safety net and crisis management frameworks.
    Keywords: Stress testing;Banking;Financial Sector Assessment Program;Insurance companies;Covered bonds;ISCR,CR,th e DFSA,stress test endeavour,FSAP solvency stress test analysis,Danish authorities,financial system
    Date: 2020–08–12
  13. By: International Monetary Fund
    Abstract: Since the 2014 FSAP, Denmark’s financial safety net and crisis management frameworks, including bank resolution, have improved significantly. In response to the FSAP and the transposition of the pertinent European Union (EU) rules, Denmark has enacted major reforms including new legislation for resolution and deposit insurance, introduced a resolution framework for banks and mortgage credit institutions (MCIs), designated two national resolution authorities, established resolution colleges, changed the governance of the deposit insurance system (DIS) and revived cross-border cooperation through the Nordic-Baltic Stability Group (NBSG), including through revising an earlier memorandum of understanding (MOU) and conducting a joint crisis simulation in 2019.
    Date: 2020–08–12
  14. By: International Monetary Fund
    Abstract: The U.S. financial system is very large, well-diversified, and home to numerous financial institutions which are significant at a global scale. Eight Global Systemically Important Banks (G-SIBs) are incorporated in the U.S., as well as several other large financial institutions, such as asset managers, insurers, and money market funds. Assets of the financial system amounted to about US$100 trillion at end-2019 and accounted for 500 percent of GDP. While the eight G-SIBs dominate the U.S. banking landscape, banking system assets represent only about 22 percent of total financial system assets. The systemic risk assessment (including stress testing) of this FSAP reflect the highly diversified nature of the U.S. financial system and focuses on banks, mutual and money market funds, insurance companies as well as cross-institutional and cross-sectoral linkages and exposures.
    Keywords: Commercial banks;Stress testing;Banking;Insurance companies;Loans;ISCR,CR,financial system,fixed income,sensitivity analysis,credit card,mutual fund,student loan
    Date: 2020–08–10
  15. By: Font-Gilabert, Paulino
    Abstract: Using the expansion of a large-scale health insurance program in Mexico and variation in local rainfall levels, I estimate whether the program-induced increase in healthcare coverage protected the educational attainment of primary school children in the event of adverse climatic shocks. Results show that the universalization of healthcare mitigated the negative effect of atypical rainfall on test scores, particularly in more marginalized and rural areas. An analysis of the mechanisms at play shows a reduced incidence of sickness among children, lower demand for their time, and higher stability in household consumption among program-eligible families exposed to rainfall shocks.
    Date: 2020–12–15
  16. By: International Monetary Fund
    Abstract: The Italian financial safety net and crisis-management framework has been substantially strengthened since the 2013 FSAP. Among others, the authorities have enhanced the early intervention framework, introduced a new resolution regime (including recovery and resolution planning requirements), and introduced reforms of the two deposit guarantee schemes (DGS) that are active in Italy. Further enhancements at the Banking Union level, as outlined in the 2018 Financial System Stability Assessment for the euro area (IMF Country Report No. 18/226)—including the introduction of an adequately funded common deposit guarantee scheme, a harmonized bank liquidation framework and a finetuning of state aid rules—would yield further benefits for Italy.
    Keywords: Banking;Bank resolution framework;Bank resolution;Deposit insurance;Lender of last resort;ISCR,CR,financial support,member bank,banking group,BNP Paribas,depositor preference regime
    Date: 2020–08–04
  17. By: Claudio Lucarelli; Molly Frean; Aliza S. Gordon; Lynn M. Hua; Mark Pauly
    Abstract: The growth of health care spending has been a longstanding policy concern. Over the years, several innovations have been proposed to lower levels of health care spending; however, their impact has been limited and not sustained over time. Costly new technology, while often an improvement to existing care, has been identified as a principal driver of health care spending growth. Recent literature has shown that high deductible health plans (HDHP) can have an immediate impact on levels of health care spending, but their medium- and long-run effects on spending growth remain unknown. In this paper, we use multiple-employer-group claims data from a large national insurer to (i) study whether HDHPs reduce the growth in spending over four years compared to lower deductible alternatives; and (ii) explore the mechanisms behind any reductions in growth by looking at whether HDHPs reduce the use of low- vs. high-value treatments. We find that HDHPs have a limited effect on spending growth, with a statistically significant reduction observed only for prescription drugs. HDHPs are not associated with significantly lower growth in spending on highly cost-effective medicines in a sample of drugs but do reduce spending growth for less cost-effective drugs.
    JEL: I11 I13
    Date: 2020–11

This nep-ias issue is ©2021 by Soumitra K. Mallick. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.