nep-ias New Economics Papers
on Insurance Economics
Issue of 2021‒12‒20
nineteen papers chosen by
Soumitra K. Mallick
Indian Institute of Social Welfare and Business Management

  1. Are There “Hot Spots†of Primary Impairments among New SSDI Awardees – and Do We Know Why? By Jody Schimmel Hyde; Anna Hill; Jonathan Schwabish; Aaron R. Williams
  2. Preferences for In-Kind and In-Cash Home Care Insurance By de Bresser, Jochem; Knoef, Marike; van Ooijen, Raun
  3. Preferences for In-Kind and In-Cash Home Care Insurance By de Bresser, Jochem; Knoef, Marike; van Ooijen, Raun
  4. General Equilibrium Effects of Insurance Expansions: Evidence from Long-Term Care Labor Markets By Martin Hackmann; Joerg Heining; Roman Klimke; Maria Polyakova; Holger Seibert
  5. The impact of U.S. employer-sponsored insurance in the 20th century By Vegard M. Nygaard; Gajendran Raveendranathan
  6. Machine Learning Methods: Potential for Deposit Insurance By Defina, Ryan
  7. A General Surplus Decomposition Principle in Life Insurance By Julian Jetses; Marcus C. Christiansen
  8. Insurance and the temporality of climate ethics: accounting for climate change in US flood insurance By Elliott, Rebecca
  9. The Geographic Dynamics of Deposit Insurance By Defina, Ryan
  10. Lapse-based insurance By Gottlieb, Daniel; Smetters, Kent
  11. The Responsiveness of Medicaid Spending to the Federal Subsidy By M. Kate Bundorf; Daniel P. Kessler
  12. A Lifecycle Approach to Insurance Solvency By Yuechen Dai; Tonghui Xu
  13. Optimal index insurance and basis risk decomposition: an application to Kenya By Matthieu Stigler; David Lobell
  14. Five Emerging Issues in Deposit Insurance By Van Roosebeke, Bert; Defina, Ryan
  15. On a Markovian game model for competitive insurance pricing By Claire Mouminoux; Christophe Dutang; Stéphane Loisel; Hansjoerg Albrecher
  16. Climate Change Fever: Can Deposit Insurers Stay Cool? By Van Roosebeke, Bert; Defina, Ryan
  17. Income and Extratropical Cyclones in New Zealand By Apurba, Roy; Ilan, Noy; Harold E., Cuffe
  18. The Aggregate-Demand Doom Loop: Precautionary Motives and the Welfare Costs of Sovereign Risk By Francisco Roldán
  19. Banking Resolution: Expansion of the Resolution Toolkit and the Changing Role of Deposit Insurers By Defina, Ryan

  1. By: Jody Schimmel Hyde; Anna Hill; Jonathan Schwabish; Aaron R. Williams
    Abstract: This paper examines local-level variation in the primary disabling conditions of new awardees for Social Security Disability Insurance (SSDI) from 2005 through 2018.
    Keywords: Disability, Social Security Disability Insurance, disabling conditions, impairments, local-level factors
  2. By: de Bresser, Jochem (Tilburg University, Center For Economic Research); Knoef, Marike; van Ooijen, Raun
    Keywords: long-term care insurance; home care; Willingness to pay; discrete choice experiment; saving motives; health expectations
    Date: 2021
  3. By: de Bresser, Jochem (Tilburg University, School of Economics and Management); Knoef, Marike; van Ooijen, Raun
    Date: 2021
  4. By: Martin Hackmann (UCLA, NBER, and CESifo); Joerg Heining (Institut für Arbeitsmarkt-und Berufsforschung (IAB)); Roman Klimke (Harvard University); Maria Polyakova (Stanford University, NBER and CESifo); Holger Seibert (Institut für Arbeitsmarkt-und Berufsforschung (IAB))
    Abstract: Arrow (1963) hypothesized that demand-side moral hazard induced by health insurance leads to supply-side expansions in healthcare markets. Capturing these effects empirically has been challenging, as non-marginal insurance expansions are rare and detailed data on healthcare labor and capital is sparse. We combine administrative labor market data with the geographic variation in the rollout of a universal insurance program—the introduction of long-term care (LTC) insurance in Germany in 1995—to document a substantial expansion of the inpatient LTC labor market in response to insurance expansion. A 10 percentage point expansion in the share of insured elderly leads to 0.05 (7%) more inpatient LTC firms and four (13%) more workers per 1,000 elderly in Germany. Wages did not rise, but the quality of newly hired workers declined. We find suggestive evidence of a reduction in old-age mortality. Using a machine learning algorithm, we characterize counterfactual labor market biographies of potential inpatient LTC hires, finding that the reform moved workers into LTC jobs from unemployment and out of the labor force rather than from other sectors of the economy. We estimate that employing these additional workers in LTC is socially efficient if patients value the care provided by these workers at least at 25% of the market price for care. We show conceptually that, in the spirit of Harberger (1971), in a second-best equilibrium in which supply-side labor markets do not clear at perfectly competitive wages, subsidies for healthcare consumption along with the associated demand-side moral hazard can be welfare-enhancing.
    Keywords: long-term care, universal insurance expansion, Germany, LTC labor market, second-best efficiency
    JEL: D61 I11 I13 J21 J23
    Date: 2021–11
  5. By: Vegard M. Nygaard; Gajendran Raveendranathan
    Abstract: The introduction of employer-sponsored insurance (ESI) in the 1940s led to the largest decline in the uninsurance rate in U.S. history. To study the fiscal and welfare implications of this insurance expansion, we endogenize the selection of workers into jobs with and without ESI in a general equilibrium life-cycle model where consumers face idiosyncratic health shocks. Our model rationalizes non-targeted empirical patterns related to ESI coverage between 1940 and 2010 and in recent cross-sectional data. ESI leads to moderate welfare gains in the short run (0.5 percent of lifetime consumption for the average consumer) but zero gains or even moderate losses in the long run. The reason is that the health insurance benefit provided by ESI dominates in the short run but the tax increase required to offset ESI tax exemptions dominates in the long run. We substantiate these welfare estimates by showing that our model rationalizes both the level and rise in total ESI tax exemptions. Finally, we show that tax-financed universal health insurance — considered among policymakers in the 1930s — would have led to significantly higher welfare gains.
    Keywords: employer-sponsored insurance; general equilibrium life-cycle; heterogeneous agents; universal health-care insurance; welfare.
    JEL: E24 H51 I13 J33
    Date: 2021–12
  6. By: Defina, Ryan
    Abstract: The field of deposit insurance is yet to realise fully the potential of machine learning, and the substantial benefits that it may present to its operational and policy-oriented activities. There are practical opportunities available (some specified in this paper) that can assist in improving deposit insurers’ relationship with the technology. Sharing of experiences and learnings via international engagement and collaboration is fundamental in developing global best practices in this space.
    Keywords: deposit insurance; machine learning
    JEL: G21
    Date: 2021–09–15
  7. By: Julian Jetses; Marcus C. Christiansen
    Abstract: In with-profit life insurance, the prudent valuation of future insurance liabilities leads to systematic surplus that mainly belongs to the policyholders and is redistributed as bonus. For a fair and lawful redistribution of surplus the insurer needs to decompose the total portfolio surplus with respect to the contributions of individual policies and with respect to different risk sources. For this task, actuaries have a number of heuristic decomposition formulas, but an overarching decomposition principle is still missing. This paper fills that gap by introducing a so-called ISU decomposition principle that bases on infinitesimal sequential updates of the insurer's valuation basis. It is shown that the existing heuristic decomposition formulas can be replicated as ISU decompositions. Furthermore, alternative decomposition principles and their relation to the ISU decomposition principle are discussed. The generality of the ISU concept makes it a useful tool also beyond classical surplus decompositions in life insurance.
    Date: 2021–11
  8. By: Elliott, Rebecca
    Abstract: How is knowledge about future climate change operationalized in governance of the present? This paper addresses this question by examining efforts to repurpose the US National Flood Insurance Program (NFIP) for climate change adaptation. Policymakers and officials initially imagined the challenge to be principally a technical one of accounting for uncertainty in risk assessments and insurance tools. But the conduct and outcome of their efforts reflected instead politically charged normative tensions related to the temporality of climate ethics. NFIP policyholders, constituted as a ‘risk public’ by the instruments of flood insurance, exposed these tensions in mobilizations targeting practices of risk governance. The case shows that practices of ‘accounting for’ climate change and governing it through insurance work out—in however tentative or provisional a fashion—larger moralized disputes over the distribution of burdens, benefits and responsibilities over time.
    Keywords: flood insurance; climate change; risk; maps; ethics; temporality; T&F deal
    JEL: F3 G3
    Date: 2021–04–03
  9. By: Defina, Ryan
    Abstract: Geography plays a fundamental role in today’s interconnected world. Financial flows operate within a multitude of regulatory and supervisory parameters often heavily influenced by regional factors. While deposit insurance is one factor affecting these flows, it too has been influenced by regional factors, particularly in the past 20 years with the rapid growth and development of deposit insurance systems, and has undergone substantial changes as a result. Understanding geographic dynamics in deposit insurance design enables policy makers to better understand the impact of regional factors on the features of deposit insurance systems and vice versa. Correlation between deposit insurer features in neighbouring jurisdictions offers the potential to facilitate collaboration under the grounds of common history and institutional development, but also introduces many challenges to multiple and bilateral coordination. We explore these issues further and highlight considerations for deposit insurance research, training and more targeted technical assistance initiatives. This paper investigates the associations between the features of deposit insurance systems and geography using a relatively simple statistical approach, and quantified through analysis of data collected by IADI. The results focus on a cross-sectional analysis of 2019 Annual Survey results. An implicit assumption is made that relationships observed in 2019 data are broadly representative of the true underlying dynamics between variables of interest and geography, although further analysis incorporating a time dimension would provide clarity on this assumption. Results suggest that geography is an important factor to consider when exploring a range of deposit insurance data items. However, this effect does not play a role for all aspects of deposit insurance systems, and is subject to a number of caveats. In some instances, the age of deposit insurers (a proxy for maturity in system design and implementation) can influence more than the region as a whole. Moreover, sample sizes used are relatively small so this needs to be taken into account when reviewing the results. Future research directions in this area could seek to broaden the suite of data items considered; conduct a targeted follow-up to further unpack the economic, financial, legal and cultural dynamics driving both inter- and intra-regional variation; or explicitly consider temporal dynamics through appraising longitudinal panels of deposit insurance metrics.
    Keywords: deposit insurance; bank resolution
    JEL: G21 G33
    Date: 2021–04–15
  10. By: Gottlieb, Daniel; Smetters, Kent
    Abstract: Most individual life insurance policies lapse, with lapsers cross-subsidizing non-lapsers. We show that policies and lapse patterns predicted by standard rational expectations models are the opposite of those observed empirically. We propose two behavioral models consistent with the evidence: (i) consumers forget to pay premiums and (ii) consumers understate future liquidity needs. We conduct two surveys with a large insurer. New buyers believe that their own lapse probabilities are small compared to the insurer's actual experience. For recent lapsers, forgetfulness accounts for 37.8 percent of lapses while unexpected liquidity accounts for 15.4 percent.
    JEL: D91 G22
    Date: 2021–08–01
  11. By: M. Kate Bundorf; Daniel P. Kessler
    Abstract: Although economic theory suggests that the federal government can influence spending by states through subsidies to programs that states operate, no recent work has quantified the magnitude of this effect for Medicaid, the largest program of this type in the U.S. We find that Medicaid spending per enrollee responds to the magnitude of the federal subsidy. The Affordable Care Act (ACA) and its subsequent interpretation by the Supreme Court gave states the option to expand eligibility for their Medicaid programs in exchange for increases in the generosity of the federal subsidy. States that exercised this option increased Medicaid spending per enrollee on enrollees who were eligible even before the ACA by approximately 15 percent. Depending on the specification, this translates into an elasticity of Medicaid spending per enrollee with respect to the after-subsidy price of Medicaid to a state of -0.494 to -0.579.
    JEL: H11 H71 H72 H75 H77
    Date: 2021–11
  12. By: Yuechen Dai; Tonghui Xu
    Abstract: At present, most well-known insurance regulatory bodies focus on reviewing the solvency of insurance companies within a one-year period. However, the operation of insurance companies is a long-term business, with most policyholders planning on holding a policy over many years, not just one. This research adopts a new perspective for measuring the insolvency risk faced by insurance companies over a longer time period by estimating their full expected lifetime (the number of periods into the future that an insurer can be expected to remain solvent, given their initial capital reserves), which has significance for insurance regulation. This research uses python numerical methods to simulate the operating conditions of insurance companies with different initial reserves, and capture the period in which the company becomes insolvent. The results show that, as is logical, the higher is the initial reserve fund, the longer one can expect the company will be in business before insolvency. In addition, our simulation model helps to explain how the relevant probability density for the insolvency date, given an initial reserve fund, can be estimated. By comparing different probability density functions, we find that a lognormal density form provides a reasonable starting point for the density in question.
    Keywords: Insurance regulation, simulation, insolvency
    JEL: C02 C15 C63
    Date: 2021–11–01
  13. By: Matthieu Stigler; David Lobell
    Abstract: Index insurance is a promising tool to reduce the risk faced by farmers, but high basis risk, which arises from imperfect correlation between the index and individual farm yields, has limited its adoption to date. Basis risk arises from two fundamental sources: the intrinsic heterogeneity within an insurance zone (zonal risk), and the lack of predictive accuracy of the index (design risk). Whereas previous work has focused almost exclusively on design risk, a theoretical and empirical understanding of the role of zonal risk is still lacking. Here we investigate the relative roles of zonal and design risk, using the case of maize yields in Kenya. Our first contribution is to derive a formal decomposition of basis risk, providing a simple upper bound on the insurable basis risk that any index can reach within a given zone. Our second contribution is to provide the first large-scale empirical analysis of the extent of zonal versus design risk. To do so, we use satellite estimates of yields at 10m resolution across Kenya, and investigate the effect of using smaller zones versus using different indices. Our results show a strong local heterogeneity in yields, underscoring the challenge of implementing index insurance in smallholder systems, and the potential benefits of low-cost yield measurement approaches that can enable more local definitions of insurance zones.
    Date: 2021–11
  14. By: Van Roosebeke, Bert; Defina, Ryan
    Abstract: Deposit insurers operate within an ever-evolving global financial system. This Policy Brief offers an overview of five emerging issues that are expected to significantly affect the activities of deposit insurers in the near future – climate change, utilisation of financial technology (‘fintech’), Covid-19 policy implications, deposit insurers’ role in resolution, and cross-border considerations. These issues were selected for inclusion based on their relevance to the operations of deposit insurers, connection to the IADI Core Principles for Effective Deposit Insurance Systems, and relative weight assigned in recent dialogue within the international community. Following a description of each of the issues, this Policy Brief explains why these issues are relevant to deposit insurers and identifies relevant global and regional policy initiatives. Deposit insurers may wish to consider these five emerging issues within the context of their own domestic policy settings, and to calibrate their response accordingly.
    Keywords: deposit insurance; bank resolution
    JEL: G21 G33
    Date: 2021–09–20
  15. By: Claire Mouminoux (BETA - Bureau d'Économie Théorique et Appliquée - UNISTRA - Université de Strasbourg - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Christophe Dutang (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS - Centre National de la Recherche Scientifique - Université Paris Dauphine-PSL - PSL - Université Paris sciences et lettres); Stéphane Loisel (SAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon); Hansjoerg Albrecher (UNIL - Université de Lausanne)
    Abstract: In this paper, we extend the non-cooperative one-period game of Dutang et al. (2013) to model a non-life insurance market over several periods by considering the repeated (one-period) game. Using Markov chain methodology, we derive general properties of insurer portfolio sizes given a price vector. In the case of a regulated market (identical premium), we are able to obtain convergence measures of long run market shares. We also investigate the consequences of the deviation of one player from this regulated market. Finally, we provide some insights of long-term patterns of the repeated game as well as numerical illustrations of leadership and ruin probabilities.
    Keywords: Markov chains Mathematics Subject Classification (2010): MSC 60J10,solvency constraint,non-cooperative game,consumers' price sensitivity,game theory,Markov chains Mathematics Subject Classification (2010): MSC 91G05,Markov chains Mathematics Subject Classification (2010): MSC 91A20
    Date: 2021–10–29
  16. By: Van Roosebeke, Bert; Defina, Ryan
    Abstract: Whereas research regarding the impact of climate change on the global financial system is ever growing, the impact of climate change and risks related therewith on deposit insurance has remained largely undealt with in literature. As global financial standard-setters have set the treatment of climate risks high on the agenda , this Policy Brief represents the first attempt to identify five core challenges that climate change may pose to the activity of deposit insurers and their ability to deliver on key objectives. The paper also classifies the challenges as to their risk-nature as well as to their directness, urgency and the feasibility of deposit insurers’ to respond to them. Given the novel nature of these issues as well as the high uncertainty and long time horizon inherent to them, the discussion here is by no means meant to be exhaustive. It is also recognised that the scale and degree to which climate change affects deposit insurers may vary significantly. This may be so due to differences in mandates or geographical exposure to climate risks. Nevertheless, the breath and scope of climate change-related risks as well as financial standard-setters’ omnipresent activities in the field make this topic of strategic interest to the deposit insurance community. The links between these challenges and the IADI Core Principles underscores the strategic urgency of this contemporary policy issue.
    Keywords: deposit insurance; bank resolution; climate change
    JEL: G21 G33 Q54
    Date: 2021–10–15
  17. By: Apurba, Roy; Ilan, Noy; Harold E., Cuffe
    Abstract: Aotearoa New Zealand is highly vulnerable to extratropical cyclones because of its unique location in the midlatitude south pacific region. This study empirically investigates the impact of the extratropical cyclones on individual income, combining the data from Statistics New Zealand’s Integrated Data Infrastructure (IDI) and the weather-related insurance claims data from the Earthquake Commission. Our sample covers the administrative longitudinal panel data of all the IRD registered individual taxpayers between 2010 and 2019. We estimate a set of panel regressions with individual and time-fixed effects to assess the impact of extratropical cyclones on the affected individual’s annual income. We find that income from salaries and wages is negatively affected by the cyclones across various specifications. Extratropical cyclones also negatively affect the total individual income from wages and salaries, benefit and compensation, and sole tradership. However, we have limited success in identifying individual characteristics influencing the affected people's income level in our study.
    Keywords: Extratropical Cyclone, Disaster Insurance, Earthquake Commission, New Zealand, Incomes,
    Date: 2021
  18. By: Francisco Roldán
    Abstract: Sovereign debt crises coincide with deep recessions. I propose a model of sovereign debt that rationalizes large contractions in economic activity via an aggregate-demand amplification mechanism. The mechanism also sheds new light on the response of consumption to sovereign risk, which I document in the context of the Eurozone crisis. By explicitly separating the decisions of households and the government, I examine the interaction between sovereign risk and precautionary savings. When a default is likely, households anticipate its negative consequences and cut consumption for self-insurance reasons. Such shortages in aggregate spending worsen economic conditions through nominal wage rigidities and boost default incentives, restarting the vicious cycle. I calibrate the model to Spain in the 2000s and find that about half of the output contraction is caused by default risk. More generally, sovereign risk exacerbates volatility in consumption over time and across agents, creating large and unequal welfare costs even if default does not materialize.
    Keywords: Sovereign risk;default;heterogeneous agents;precautionary motives;aggregate demand;WP;default probability;government debt;debt price;default incentive;open economy
    Date: 2020–12–18
  19. By: Defina, Ryan
    Abstract: In this Policy Brief, we provide quantitative evidence demonstrating that the resolution toolkit has expanded considerably since the 2008 Global Financial Crisis (GFC). Purchase and assumption transactions, bridge bank facilitation and bail-in mechanisms have all become more available for bank resolution purposes. The use of such resolution tools is increasingly subject to least cost rules and to systemic failure considerations. These resolution tools may be available to different authorities, such as deposit insurers or resolution authorities, depending on the jurisdiction in question. Two of the three statistical models applied point to a significant increase in resolution powers for deposit insurers.
    Keywords: deposit insurance; bank resolution
    JEL: G21 G33
    Date: 2021–08–20

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