|
on Insurance Economics |
|
Issue of 2020‒09‒07
29 papers chosen by Soumitra K. Mallick Indian Institute of Social Welfare and Business Management |
| By: | Yichun Chi; Xun Yu Zhou; Sheng Chao Zhuang |
| Abstract: | We study the design of an optimal insurance contract in which the insured maximizes her expected utility and the insurer limits the variance of his risk exposure while maintaining the principle of indemnity and charging the premium according to the expected value principle. We derive the optimal policy semi-analytically, which is coinsurance above a deductible when the variance bound is binding. This policy automatically satisfies the incentive-compatible condition, which is crucial to rule out ex post moral hazard. We also find that the deductible is absent if and only if the contract pricing is actuarially fair. Focusing on the actuarially fair case, we carry out comparative statics on the effects of the insured's initial wealth and the variance bound on insurance demand. Our results indicate that the expected coverage is always larger for a wealthier insured, implying that the underlying insurance is a normal good, which supports certain recent empirical findings. Moreover, as the variance constraint tightens, the insured who is prudent cedes less losses, while the insurer is exposed to less tail risk. |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2008.07103&r=all |
| By: | Quentin Stoeffler; Michael Carter; Catherine Guirkinger; Wouter Gelade |
| Abstract: | This paper examines whether agricultural insurance can boost investment by small scale farmers in West Africa. We conduct a randomized evaluation to analyze the impacts of index insurance for cotton farmers in Burkina Faso. We find no impact of insurance on cotton, but, consistent with microeconomic theory, we find significant spillover impacts on investment in other agricultural activities. Furthermore, the effects of insurance payouts on farmers hit by a shock confirm the potential of index insurance as a risk-management tool. However, we uncover important flaws in the implementation of the project that limited its impacts. Overall, this study suggests a promising role of index insurance for stimulating investment, but also draws attention to key challenges for an efficient delivery of insurance to small farmers. Finally, the hybrid, mixed methods RCT design that we employ offers lessons for the evaluation of complex interventions where trust, understanding and timing are all important. |
| JEL: | G22 I38 O12 O13 Q12 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27564&r=all |
| By: | Andreas Haller; Stefan Staubli; Josef Zweimüller |
| Abstract: | We study the welfare effects of disability insurance (DI) and derive social-optimality conditions for the two main DI policy parameters: (i) DI eligibility rules and (ii) DI benefits. Causal evidence from two DI reforms in Austria generate fiscal multipliers (total over mechanical cost reductions) of 2.0-2.5 for stricter DI eligibility rules and of 1.3-1.4 for lower DI benefits. Stricter DI eligibility rules generate lower income losses (earnings + transfers), particularly at the lower end of the income distribution. Our analysis suggests that the welfare cost of rolling back the Austrian DI program is lower through tightening eligibility rules than through lowering benefits. Applying our framework to the US DI system suggests that both loosening eligibility rules, and increasing benefits, would be welfare increasing. |
| JEL: | H53 H55 J14 J21 J65 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27602&r=all |
| By: | Naoki Aizawa; You Suk Kim |
| Abstract: | This paper studies government and private marketing activities in the context of the Affordable Care Act health insurance marketplace. Using detailed TV advertising data, we present evidence that government and private advertising are targeted to different geographical areas and provide different messaging content. Then, we estimate the impacts of government and private advertising on consumer demand by exploiting discontinuities in advertising along the borders of local TV markets. We find that government advertising has a market-expansion effect and enhances welfare. We also find that private advertising is not more effective than government advertising in increasing total program enrollment. Although private advertising is still effective in increasing insurer’s own enrollment, it does not have positive spillovers to other insurers but has a modest business-stealing effect. We then develop and estimate an equilibrium model of marketplaces to illustrate mechanisms through which government advertising affects the market equilibrium. Our simulation suggests that government advertising can simultaneously increase total program enrollment and reduce excessive advertising spending among private insurers. |
| JEL: | G2 I1 I3 L1 M3 |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27695&r=all |
| By: | Valentina Avramescu (Dimitrie Cantemir Christian University of Bucharest, Romania,) |
| Abstract: | The paper presents the topic regarding the insurance of assets, defining the insurance agreement and the notion of "asset" in the legal sense, the principles underlying the insurance, the classification of the assets, the distribution of the insurances according to their object, as well as the object of the insurance of assets mentioned in the insurance agreement. Also, the specific elements of this type of agreement can be found in the paper: the period of insurance of assets, the beginning and termination of liability, the insured interest- a condition imposed on the insurance agreement arising from the principle of damage compensation, the insured risk, that future and possible event, the conditions that an event must fulfil and also the insured case. |
| Keywords: | insurance, movable assets, immovable assets, insured risk, insured case |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:smo:kpaper:0026va&r=all |
| By: | Leila Agha; Soomi Kim; Danielle Li |
| Abstract: | This paper studies how insurance coverage policies affect incentives for pharmaceutical innovation. In the United States, the majority of drugs are sold to Pharmacy Benefit Managers (PBMs), which administer prescription drug plans on behalf of insurers. Beginning in 2012, PBMs began adopting “closed formularies”, excluding coverage for certain drugs, including many newly approved drugs, when adequate substitutes were available. We show that this policy reshaped upstream R&D activity and led pharmaceutical firms to shift investment away from therapeutic classes at greater risk of facing coverage exclusions. This move translated into a relative decline in the number of drug candidates that appear more incremental in their therapeutic contribution: that is, those in drug classes with more pre-existing therapies and less scientifically novel research. |
| JEL: | I11 O31 O32 O33 O38 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27563&r=all |
| By: | James A Kahn; Benjamin S Kay |
| Abstract: | We provide new evidence that credit supply shifts contributed to the U.S. subprime mortgage boom and bust. We collect original data on both government and private mortgage insurance premiums from 1999-2016, and document that prior to 2008, premiums did not vary across loans with widely different observable characteristics that we show were predictors of default risk. Then, using a set of post-crisis insurance premiums to fit a model of default behavior, and allowing for time-varying expectations about house price appreciation, we quantify the mispricing of default risk in premiums prior to 2008. We show that the flat premium structure, which necessarily resulted in safer mortgages cross-subsidizing riskier ones, produced substantial adverse selection. Government insurance maintained a flatter premium structure even post-crisis, and consequently also suffered from adverse selection. But after 2008 the government reduced its exposure to default risk through a combination of higher premiums and rationing at the extensive margin. |
| Keywords: | financial crisis, mortgage insurance, housing finance, default risk |
| JEL: | G21 E44 E32 |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:875&r=all |
| By: | Ammar Farooq; Adriana D. Kugler; Umberto Muratori |
| Abstract: | We present new evidence on the impact of more generous unemployment insurance (UI) on workers’ ability to find jobs better suited to their skills. Using Longitudinal Employer-Household Dynamics data, we find the UI extensions introduced in the U.S. improved the quality of worker-job matches. Using Current Population Survey data, we also find that longer UI benefit durations decrease the mismatch between workers’ educational attainments and the educational requirements of jobs. We find bigger effects of UI on match quality for those more likely to be liquidity constrained—women, non-whites and less-educated workers—,suggesting UI extensions improve the functioning of the labor market. |
| JEL: | C55 E24 H23 J21 J31 J64 J65 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27574&r=all |
| By: | Tümmler, Mario; Thiemann, Matthias |
| Abstract: | Discussions regarding the planned European Deposit Insurance Scheme (EDIS), the missing third pillar of the European Banking Union, have been ongoing since the Commission published its initial legislative proposal in 2015. A breakthrough in negotiations has yet to be achieved. The gridlock on EDIS is most commonly attributed to moral hazard concerns over insufficient risk reduction harboured on the side of northern member states, particularly Germany, due to the weak state of some other member states' banking sectors. While moral hazard based on uneven risk reduction is helpful for explaining divergent member-state preferences on the scope of necessary risk reduction, this does not explain preferences on the institutional design of EDIS. In this paper, we argue that contrary to persistent differences on necessary risk reduction, preferences regarding the institutional design of EDIS have become more closely aligned. We analyse how preferences on EDIS developed in the key member states of Germany, France, and Italy. In all sampled countries, we find path-dependent benefits connected to the current design of national Deposit Guarantee Schemes (DGS) that shifted preferences of the banking sector or significant subsectors in favour of retaining national DGSs. Overall, given that a compromise on riskreduction can be accomplished, we argue that current preferences in these key member states provide an opportunity to implement EDIS in the form of a reinsurance system that maintains national DGSs in combination with a supranational fund. |
| Keywords: | Banking Union,Deposit Insurance,EDIS |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewh:72&r=all |
| By: | Serdar Birinci |
| Abstract: | I document a small spousal earnings response to the job displacement of the family head. The response is even smaller in recessions, when earnings losses are larger and additional insurance is most valuable. I investigate whether the small response is an outcome of the crowding-out effects of government transfers. To accomplish this, I use an incomplete markets model with family labor supply and aggregate fluctuations where predicted spousal labor supply elasticities with respect to transfers are in line with microeconomic estimates both in aggregate and across subpopulations. Counterfactual experiments indeed reveal that generous transfers in recessions discourage the spousal labor supply significantly. I then show that the optimal policy features procyclical means-tested and countercyclical employment-tested transfers, unlike the existing policy that maintains generous transfers of both types in recessions. Abstracting from the incentive costs of transfers on the spousal labor supply changes both the level and cyclicality of optimal transfers. |
| Keywords: | Unemployment; Job Search; Business Cycles; Fiscal Policy and Household Behavior |
| JEL: | E24 E32 H31 J64 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:88548&r=all |
| By: | 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) |
| Date: | 2020–07–03 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-02888881&r=all |
| By: | Denuit, Michel |
| Date: | 2019–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:aiz:louvad:2019028&r=all |
| By: | Alexander W. Bartik; Marianne Bertrand; Feng Lin; Jesse Rothstein; Matt Unrath |
| Abstract: | We use traditional and non-traditional data to measure the collapse and partial recovery of the U.S. labor market from March to early July, contrast this downturn to previous recessions, and provide preliminary evidence on the effects of the policy response. For hourly workers at both small and large businesses, nearly all of the decline in employment occurred between March 14 and 28. It was driven by low-wage services, particularly the retail and leisure and hospitality sectors. A large share of the job losses in small businesses reflected firms that closed entirely, though many subsequently reopened. Firms that were already unhealthy were more likely to close and less likely to reopen, and disadvantaged workers were more likely to be laid off and less likely to return. Most laid off workers expected to be recalled, and this was predictive of rehiring. Shelter-in-place orders drove only a small share of job losses. Last, states that received more small business loans from the Paycheck Protection Program and states with more generous unemployment insurance benefits had milder declines and faster recoveries. We find no evidence that high UI replacement rates drove job losses or slowed rehiring. |
| JEL: | E24 E32 J2 J63 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27613&r=all |
| By: | Fleck, Johannes; Monninger, Adrian |
| Abstract: | This paper shows that individual beliefs on the effectiveness of formal and informal sources of risk sharing determine financial precautionary behavior. We present empirical evidence demonstrating that higher trust in public insurance systems reduces net liquid wealth while higher trust in communal insurance increases it. This dichotomy is consistent with theories on access to private risk sharing networks. Moreover, we find that both types of trust associate positively with the probability to take on financial risk for the purpose of becoming a homeowner and the related loan-to-value ratio. Our findings are robust across a wide range of econometric controls and specifications. JEL Classification: D14, D31, E71, G5 |
| Keywords: | household saving, portfolio liquidity, public and communal insurance |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20202457&r=all |
| By: | Lisa B. Kahn (University of Rochester, NBER and IZA); Fabian Lange (McGill University, CIREQ, NBER and IZA); David Wiczer (Stony Brook University) |
| Abstract: | We use job vacancy data collected in real time by Burning Glass Technologies, as well as initial unemployment insurance (UI) claims data to study the impact of COVID-19 on the labor market. Our data allow us to track postings at disaggregated geography and by detailed occupation and industry. We find that job vacancies collapsed in the second half of March and are now 30% lower than their level at the beginning of the year. To a first approximation, this collapse was broad based, hitting all U.S. states, regardless of the intensity of the initial virus spread or timing of stay-at-home policies. UI claims also largely match these patterns. Nearly all industries and occupations saw contraction in postings and spikes in UI claims, regardless of whether they are deemed essential and whether they have work-from-home capability. The only major exceptions are in essential retail and nursing, the "front line" jobs most in-demand during the current crisis. |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:mtl:montec:09-2020&r=all |
| By: | Messacar, Derek |
| Abstract: | This paper investigates the extent to which older Canadian taxfilers, aged 60 to 69, respond to predictable changes in marginal tax rates created by the tax and transfer system by exhibiting sorting behaviour in taxable income. Using administrative tax data for the years from 2001 to 2012, the analysis assesses how individuals respond to changes in marginal tax rates created at the lower bounds of the second, third and fourth federal tax brackets; the lower bounds of the second and third provincial and territorial tax brackets; and the thresholds at which the Old Age Security and Employment Insurance benefits start being clawed back through recovery taxes. |
| Keywords: | Tax rate, Pension income, Old age security pensions, Income taxes, Employment insurance benefits, Administrative data |
| Date: | 2018–11–19 |
| URL: | http://d.repec.org/n?u=RePEc:stc:stcp3e:2018410e&r=all |
| By: | Diana Bonfim; João A. C. Santos |
| Abstract: | The success of deposit insurance arrangements at eliminating bank runs is likely closely tied to their credibility. We investigate this hypothesis building on two episodes which tested the insurance protection offered by the Portuguese arrangement in the midst of the country’s sovereign debt crisis. Our results show that Portuguese depositors responded to foreign banks’ decision to convert their subsidiaries into branches by relocating their deposits into the latter. We find a similar response following the announcement that insured depositors in Cyprus would lose part of their savings. On both instances responses are concentrated on household deposits. Given that foreign banks’ branches offer the insurance protection of these banks’ home countries, rather than that granted by their host country arrangement, our findings confirm that the credibility of the deposit insurance arrangement is critical for the protection it offers banks against the risk of depositor runs. These results show that sovereign-bank links can be detrimental to financial stability through a novel channel: the credibility of deposit insurance. |
| JEL: | G01 G21 G28 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w202011&r=all |
| By: | Natalie Bachas; Peter Ganong; Pascal J. Noel; Joseph S. Vavra; Arlene Wong; Diana Farrell; Fiona E. Greig |
| Abstract: | We use U.S. household-level bank account data to investigate the heterogeneous effects of the pandemic on spending and savings. Households across the income distribution all cut spending from March to early April. Since mid April, spending has rebounded most rapidly for low-income households. We find large increases in liquid asset balances for households throughout the income distribution. However, lower-income households contribute disproportionately to the aggregate increase in balances, relative to their pre-pandemic shares. Taken together, our results suggest that spending declines in the initial months of the recession were primarily caused by direct effects of the pandemic, rather than resulting from labor market disruptions. The sizable growth in liquid assets we observe for low-income households suggests that stimulus and insurance programs during this period likely played an important role in limiting the effects of labor market disruptions on spending. |
| JEL: | E21 E6 E62 H31 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27617&r=all |
| By: | Takeo Hori (Tokyo Institute of Technology); Ryonghun Im (Kyoto University) |
| Abstract: | Uninsured investment risks are introduced into a textbook AK model. There are no financial frictions. Depending on insurance market development, asset bubbles emerge in an infinitely-lived agent economy. A collapse of bubbles has short-run impacts. At the moment of the collapse of bubbles, aggregate demand decreases immediately. This instantly triggers sharp declines in all of GDP, consumption, investment, capital utilization, and wealth-to-GDP, although capital remains constant in the short run. Consistently with data, investment decreases more than consumption. The bubbles also has long-run impacts. The decreased investment depresses long-run growth. The economy falls into a prolonged recession. |
| Keywords: | asset bubbles, uninsured idiosyncratic investment risks, instant contraction, aggregate demand, prolonged recession |
| JEL: | E32 E44 G1 |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:1036&r=all |
| By: | Belev, Sergey (Белев, Сергей) (The Russian Presidential Academy of National Economy and Public Administration); Vekerle, Konstantin (Векерле, Константин) (The Russian Presidential Academy of National Economy and Public Administration); Matveev, Evgeniy (Матвеев, Евгений) (The Russian Presidential Academy of National Economy and Public Administration); Leonov, Elisey (Леонов, Елисей) (The Russian Presidential Academy of National Economy and Public Administration); Sokolov, Ilya (Соколов, Илья) (The Russian Presidential Academy of National Economy and Public Administration); Suchkova, Olga (Сучкова, Ольга) (The Russian Presidential Academy of National Economy and Public Administration); Khuzina, Alfiya (Хузина, Альфия) (The Russian Presidential Academy of National Economy and Public Administration) |
| Abstract: | The paper provides an overview of theoretical and empirical studies of the various effects of labor taxation, as well as a review of international social security contribution practices. Three main effects of labor taxation change were identified: intensive margin (the change in working time), extensive margin (whether to participate in job market or not) and the effect of tax evasion. The paper also presents econometric estimation of budget effects. In the presence of high sensitivity to social security premium rates change it is advisable to reduce social security premium rates for low income groups. |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:rnp:wpaper:042038&r=all |
| By: | Pierre-Olivier Goffard (UCBL - Université Claude Bernard Lyon 1 - Université de Lyon, ISFA - Institut de Science Financière et d'Assurances, LSAF - Laboratoire de Sciences Actuarielles et Financières - EA2429 - ISFA - Institut de Science Financière et d'Assurances); Patrick Laub (UCBL - Université Claude Bernard Lyon 1 - Université de Lyon, ISFA - Institut de Science Financière et d'Assurances, LSAF - Laboratoire de Sciences Actuarielles et Financière - ISFA - Institut de Science Financière et d'Assurances) |
| Abstract: | Approximate Bayesian Computation (ABC) is a statistical learning technique to calibrate and select models by comparing observed data to simulated data. This technique bypasses the use of the likelihood and requires only the ability to generate synthetic data from the models of interest. We apply ABC to fit and compare insurance loss models using aggregated data. We present along the way how to use ABC for the more common claim counts and claim sizes data. A state-of-the-art ABC implementation in Python is proposed. It uses sequential Monte Carlo to sample from the posterior distribution and the Wasserstein distance to compare the observed and synthetic data. MSC 2010 : 60G55, 60G40, 12E10. |
| Keywords: | Bayesian statistics,approximate Bayesian computation,likelihood- free inference,risk management |
| Date: | 2020–07–06 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-02891046&r=all |
| By: | Pichler, Stefan (ETH Zurich); Wen, Katherine (Cornell University); Ziebarth, Nicolas R. (Cornell University) |
| Abstract: | A growing economic literature studies the optimal design of social insurance systems and the empirical identification of welfare-relevant externalities. In this paper, we test whether mandating employee access to paid sick leave has reduced influenza-like-illness (ILI) transmission rates as well as pneumonia and influenza (P&I) mortality rates in the United States. Using uniquely compiled data from administrative sources at the state-week level from 2010 to 2018 along with difference-in-differences methods, we present quasi-experimental evidence that sick pay mandates have causally reduced doctor-certified ILI rates at the population level. On average, ILI rates fell by about 11 percent or 290 ILI cases per 100,000 patients per week in the first year. |
| Keywords: | sick pay mandates, population health, flu infection, negative externalities |
| JEL: | H23 H75 I12 I14 I18 J22 J38 J58 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp13530&r=all |
| By: | Tomoaki Kotera (Economist, Institute for Monetary and Economic Studies, Bank of Japan (currently, Assistant Professor, Graduate School of Economics and Management, Tohoku University, E-mail: tomoaki.kotera.b1@tohoku.ac.jp)) |
| Abstract: | An aging economy is widely believed to increase the recipients of Social Security and thus increase the fiscal burden. However, since the health condition of the elderly today is better than before and may continue to improve in the future, the number of elderly workers may increase. This paper studies the quantitative role of old workers in the sustainability of Social Security in an aging economy by developing a computable overlapping generations model with heterogeneous agents in a general equilibrium framework. The distinctive feature of the model is the incorporation of health status linked to survival probability, medical expenditures, and disutility of labor. The model simulation shows that old workers play a significant role in mitigating the fiscal cost and the effect remains pronounced when Social Security reform is implemented. It also highlights the crucial role of the projected future health status of the population in quantifying the fiscal cost. |
| Keywords: | Elderly Workers, Health, Social Security Reform, Benefit Claim, Overlapping Generations |
| JEL: | H55 I13 J22 |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:20-e-12&r=all |
| By: | International Monetary Fund |
| Abstract: | This Financial System Stability Assessment discusses the findings of the IMF mission regarding assessing stability and performance of Polish financial systems. The banking system in the aggregate shows resilience to adverse shocks, although some medium-sized banks appear weak. For the financial system, sovereign-financial institution linkages have increased, while exposures to foreign-exchange mortgages have declined. Important shortcomings have been identified in prudential oversight reflecting budgetary constraints and a governance framework that compromises operational independence. Arrangements for crisis management are generally sound, although measures are required to strengthen the independence of the Bank Guarantee Fund and powers of the Polish Financial Supervision Authority. The Polish authorities have welcomed the IMF’s and World Bank’s comprehensive review of the supervisory and regulatory framework in Poland and provided feedback for every recommendation made in the report. |
| Keywords: | Financial system stability assessment;Macroprudential policies and financial stability;Stress testing;Bank regulations;Bank supervision;Insurance supervision;Capital markets;Anti-money laundering;Combating the financing of terrorism;Crisis management;Financial crises;Financial systems;Financial markets;Financial institutions;cooperative bank,BGF,NBP,solvency,credit union |
| Date: | 2019–02–06 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfscr:2019/039&r=all |
| By: | Joao A. C. Santos; S. Vish Viswanathan |
| Abstract: | We provide evidence that credit lines offer liquidity insurance to borrowers. Borrowers are able to extensively use their credit lines in recessions and ahead of credit line cuts. In fact drawdowns and changes in drawdowns predict internal credit rating downgrades and credit line cuts, suggesting substantial liquidity access before credit line cuts. Credit line cuts are concentrated on borrowers who do not use credit lines, and when they occur they still leave borrowers with funds to draw down. Building on this evidence, we develop a model where syndicates faced with liquidity shocks continue to support credit line commitments due to the continuation value of their relationship with borrowers. Our model yields a set of predictions that find support in the data, including the substantial increase in the lead bank's retained loan share and in the commitment fees on the credit lines issued during the financial crisis of 2008-09. Consistent with the model, credit lines with higher expected drawdown rates pay higher commitment fees, and lead banks often increase their credit line investments in response to the failure of syndicate members, reducing borrowers' risk exposure to bank failures. |
| JEL: | G21 G23 G3 |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27701&r=all |
| By: | Michael J. Fishman; Jonathan A. Parker; Ludwig Straub |
| Abstract: | We develop a tractable dynamic model of credit markets in which lending standards and the quality of potential borrowers are endogenous. Competitive banks privately choose their lending standards: whether to pay a cost to screen out some unprofitable borrowers. Lending standards have negative externalities and are dynamic strategic complements: tighter screening worsens the future pool of borrowers for all banks and increases their incentives to screen in the future. Lending standards can amplify and prolong temporary downturns, affecting lending volume, credit spreads, and default rates. We characterize constrained-optimal policy which can generally be implemented as a government loan insurance program. When markets recover, they may do so only slowly, a phenomenon we call “slow thawing.” Finally, we show that limits on lending such as from capital constraints naturally incentivize tight lending standards, further amplifying shocks to credit markets. |
| JEL: | D82 E51 G21 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27610&r=all |
| By: | Eduardo Ramos-P\'erez; Pablo J. Alonso-Gonz\'alez; Jos\'e Javier N\'u\~nez-Vel\'azquez |
| Abstract: | Currently, legal requirements demand that insurance companies increase their emphasis on monitoring the risks linked to the underwriting and asset management activities. Regarding underwriting risks, the main uncertainties that insurers must manage are related to the premium sufficiency to cover future claims and the adequacy of the current reserves to pay outstanding claims. Both risks are calibrated using stochastic models due to their nature. This paper introduces a reserving model based on a set of machine learning techniques such as Gradient Boosting, Random Forest and Artificial Neural Networks. These algorithms and other widely used reserving models are stacked to predict the shape of the runoff. To compute the deviation around a former prediction, a log-normal approach is combined with the suggested model. The empirical results demonstrate that the proposed methodology can be used to improve the performance of the traditional reserving techniques based on Bayesian statistics and a Chain Ladder, leading to a more accurate assessment of the reserving risk. |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2008.07564&r=all |
| By: | Marco Pagano (University of Naples Federico II, CEPR, CSEF, ECGI and EIEF) |
| Abstract: | Labor income risk is key to the welfare of most people. This risk is mainly insured “within the firm” and by public institutions, rather than by financial markets. This paper starts by asking why such insurance is provided within the firm, and what determines its boundaries. It identifies four main constraining factors: availability of a public safety net, moral hazard on the employees’ side, moral hazard on the firms’ side, and workers’ wage bargaining power. These factors explain three empirical regularities: (i) family firms provide more employment insurance than nonfamily firms; (ii) the former pay lower real wages, and (iii) firms provide less employment insurance where public unemployment benefits are more generous. The paper also explores the connection between risk sharing and firms’ capital structure: greater leverage calls for high wages to compensate employees for greater job risk; nevertheless, firms may want to lever up strategically in order to offset the bargaining power of labor unions. Hence, the distributional conflict between shareholders and workers may limit risk sharing within the firm. By contrast, bondholders and workers are not necessarily in conflict, as both are harmed by firms’ risk-taking. In principle, firms may also insure employees against uncertainty about their own talent, but their capacity to do so is constrained by workers’ inability to commit to their employer: in the presence of labor market competition, high-talent employees will leave unless paid in line with their high productivity, making uncertainty about talent uninsurable. The paper concludes by showing that risk sharing within firms has declined steadily in the last three decades, and by discussing the financial, competitive, technological and institutional developments that may have conjured this outcome. |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:eie:wpaper:2019&r=all |
| By: | International Monetary Fund |
| Abstract: | This paper presents Financial System Stability Assessment of Australian financial systems. The report highlights that financial supervision and systemic risk oversight have been enhanced. And the authorities have taken successful policy action to calm rapid growth in riskier segments of the mortgage market. Restrictions on the growth of investor loans and the share of interest-only mortgages, as well as the introduction of stronger lending standards, appear to have led to a slowdown in mortgage credit growth, and the housing market is now cooling. Financial supervision shows generally high conformity to international best practices, although there are opportunities to close identified gaps and strengthen arrangements. Steps are recommended to bolster the independence and resourcing of the regulatory agencies, by removing constraints on their policy making powers and providing additional budgetary autonomy and flexibility. The paper explains that greater formalization and transparency of the work of the Council of Financial Regulators would further buttress the financial stability framework. |
| Keywords: | Bank credit;Financial soundness indicators;Deposit insurance;Central banks;Nominal effective exchange rate;Bank liquidity;APRA,RBA,superannuation,household debt,Australian bank |
| Date: | 2019–02–21 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfscr:2019/054&r=all |