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on Insurance Economics |
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Issue of 2021‒01‒25
24 papers chosen by Soumitra K. Mallick Indian Institute of Social Welfare and Business Management |
| By: | Peter Windsor; Jeffery Yong; Michelle Chong-Tai Bell |
| Abstract: | The paper explores the use of accounting standards for insurer solvency assessment in the context of the implementation of IFRS 17. The paper is based on the results of a survey of 20 insurance supervisors. Overall, IFRS 17 is a welcome development but there will be challenges of implementation. Not many insurance supervisors currently intend to use IFRS 17 as a basis for solvency assessment of insurers. Perceived shortcomings can be overcome by supervisors providing clear specifications where the principles-based standard allows a range of approaches. Accounting standards can provide a ready-made valuation framework for supervisors developing new solvency frameworks. |
| Keywords: | International Financial Reporting Standards;Insurance companies;Accounting standards;Insurance;Solvency;WP,insurance contract,insurance supervisor,impact study,insurance liability,measurement approach,solvency position |
| Date: | 2020–07–31 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2020/146&r=all |
| By: | Mariacristina De Nardi; Giulio Fella |
| Abstract: | We document new facts about risk in male wages and earnings, household earnings, and pre- and post-tax income in the Netherlands and the United States. We find that, in both countries, earnings display important deviations from the typical assumptions of linearity and normality. Individual-level male wage and earnings risk is relatively high at the beginning and end of the working life, and for those in the lower and upper parts of the income distribution. Hours are the main driver of the negative skewness and, to a lesser extent, the high kurtosis of earnings changes. Even though we find no evidence of added-worker effects, the presence of spousal earnings reduces the variability of household income compared to that of male earnings. In the Netherlands, government transfers are a major source of insurance, substantially reducing the standard deviation, negative skewness, and kurtosis of income changes. In the U.S. the role of family insurance is much larger than in the Netherlands. Family and government insurance reduce, but do not eliminate nonlinearities in household disposable income by age and previous earnings in either country. |
| Keywords: | Self-insurance; Wage risk; Social insurance; Life cycle; Progressive taxation; Redistribution |
| JEL: | D31 E24 H31 J31 |
| Date: | 2020–10–26 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmoi:89239&r=all |
| By: | Jurjen Kamphorst (Erasmus University Rotterdam); Vladimir Karamychev (Erasmus University Rotterdam) |
| Abstract: | We offer a theory of how the combination of budget constraints and insurance drives up prices. A natural context for our theory is the health care market, where drug prices can be very high. Our model predicts that monopoly prices for orphan drugs are inversely related to the prevalence up until a maximum price. This is supported by empirical evidence in the literature. As a result, prices of drugs sold by a monopoly treating rare serious diseases are doomed to go sky high. |
| Keywords: | Monopoly pricing, Insurance, Orphan Drugs |
| JEL: | D42 G22 I13 |
| Date: | 2021–01–14 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20210005&r=all |
| By: | Jacob Bikker; Jack Bekooij |
| Abstract: | This paper investigates the impact of market forces on competitive behaviour and efficiency in healthcare by investigating the Dutch healthcare insurance reform in 2006. This reform replaced the dual system of public and private insurance with a single compulsory health insurance scheme, in which insurance providers compete for customers in a free market. We measure competition directly from either shifts in market shares, or developments in profits. Using formal tests we find that in each approach a structural break occurs after the reform: competition is significantly higher after 2006 than before. Several robustness tests confirm this outcome. Nevertheless, we find that the health insurance sector is still less competitive than the banking, manufacturing and service industries, and even less competitive than life insurance. |
| Keywords: | (regulated) competition; concentration; healthcare insurance; performance-conduct-structure model; Boone-indicator; scale economies |
| JEL: | G22 H51 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:705&r=all |
| By: | Blasco, Sylvie (GAINS, Université du Maine); Fontaine, Francois (Paris School of Economics) |
| Abstract: | A large fraction of the eligible unemployed workers does not claim for unemployment insurance (UI) and, among claimants, many do not register immediately upon layoff. This paper argues that, to understand this intriguing phenomenon, one needs to model jointly job search and take-up efforts and to allow for heterogeneity in both dimensions. Estimating such a model using French administrative data, we find substantial heterogeneity in both search and claiming frictions. If half of the sample faces high claiming frictions, many have good employment prospects and exit unemployment quickly. The burden of the claiming difficulties is concentrated on 10% of the sample that suffers both from claiming and job search difficulties. For that reason, the alleviation of the complexity of the claiming process is likely to have very heterogenous effects but little effect on aggregate unemployment duration. Additionally we show that the link between claiming and job search efforts has important implications when measuring how UI parameters impact unemployment duration. |
| Keywords: | unemployment insurance, take-up, job search |
| JEL: | J64 J65 C41 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp14038&r=all |
| By: | Simplice A. Asongu (Yaounde, Cameroon); Nicholas M. Odhiambo (Pretoria, South Africa) |
| Abstract: | In this study, we assess the relevance of decreasing information asymmetry on life and non-life insurance consumption, by using data from 48 African countries during the period 2004-2014. Reduced information asymmetry is proxied by information sharing offices, namely: public credit registries and private credit bureaus. The empirical evidence is based on the Generalised Method of Moments. The findings show that information sharing offices increase insurance consumption with a comparatively higher magnitude in life insurance penetration, relative to non-life insurance penetration. Practical and theoretical implications are discussed. |
| Keywords: | Insurance; Information Asymmetry |
| JEL: | I30 G20 G22 O16 O55 |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:abh:wpaper:20/057&r=all |
| By: | Karim Barigou (SAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon); Valeria Bignozzi (Department of Statistics and Quantitative Methods University of Milano-Bicocca); Andreas Tsanakas (The Business School (formerly Cass), City, University of London) |
| Abstract: | Current approaches to fair valuation in insurance often follow a two-step approach, combining quadratic hedging with application of a risk measure on the residual liability, to obtain a cost-of-capital margin. In such approaches, the preferences represented by the regulatory risk measure are not reflected in the hedging process. We address this issue by an alternative two-step hedging procedure, based on generalised regression arguments, which leads to portfolios that are neutral with respect to a risk measure, such as Value-at-Risk or the expectile. First, a portfolio of traded assets aimed at replicating the liability is determined by local quadratic hedging. Second, the residual liability is hedged using an alternative objective function. The risk margin is then defined as the cost of the capital required to hedge the residual liability. In the case quantile regression is used in the second step, yearly solvency constraints are naturally satisfied; furthermore, the portfolio is a risk minimiser among all hedging portfolios that satisfy such constraints. We present a neural network algorithm for the valuation and hedging of insurance liabilities based on a backward iterations scheme. The algorithm is fairly general and easily applicable, as it only requires simulated paths of risk drivers. |
| Keywords: | Market-consistent valuation,Quantile regression,Solvency II,Cost-of-capital,Dynamic risk measurement |
| Date: | 2020–12–07 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-03043244&r=all |
| By: | Mariacristina De Nardi; Giulio Fella |
| Abstract: | The extent to which households can self-insure and the government can help them to do so depends on the wage risk that they face and their family structure. We study wage risk in the UK and show that the persistence and riskiness of wages depends on one's age and position in the wage distribution. We also calibrate a model of couples and singles with two alternative processes for wages: a canonical one and a flexible one that allows for the much richer dynamics that we document in the data. We use our model to show that allowing for rich wage dynamics is important to properly evaluate the effects of benefit reform: relative to the richer process, the canonical process underestimates wage persistence for women and generates a more important role for in-work benefits relative to income support. The optimal benefit configuration under the richer wage process, instead, is similar to that in place in the benchmark UK economy before the Universal Credit reform. The Universal Credit reform generates additional welfare gains by introducing an income disregard for families with children. While families with children are better off, households without children, and particularly single women, are worse off. |
| Keywords: | Government; Government benefits; Self-insurance; Wage risk; Family |
| JEL: | D15 H24 |
| Date: | 2020–12–23 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmoi:89241&r=all |
| By: | Osberghaus, Daniel; Reif, Christiane |
| Abstract: | Although natural hazard insurance is advocated as an important means of risk management, private insurance demand often remains below critical levels. Prior loss experience and the design of governmental relief schemes are two factors potentially influencing insurance decisions. We address these two elements in monetary incentivized experiments which include representations of natural hazard insurance schemes in Europe. We draw on two very different samples: First, we run a laboratory experiment with a student subject pool in Germany. In addition, we replicate the experiment as an online experiment with citizens of flood-prone areas in the city of Dornbirn (Austria). The experiment reflects two possible designs of governmental relief schemes: partial but guaranteed relief and full but nonguaranteed relief. The risk of loss is kept constant over ten consecutive rounds to analyze the effect of loss experience. In both of our samples, the design of the governmental relief scheme has no effect on insurance decisions. Furthermore, prior loss experience adversely affects insurance decisions. Uninsured subjects tend to remain uninsured after experiencing a loss, and previously insured subjects often switch to non-insurance in the rounds after the loss. These results have important policy implications, e.g., for the optimal design of flood risk communication. |
| Keywords: | Natural hazard insurance,experiment,governmental relief,charity hazard |
| JEL: | C91 D14 H84 Q54 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:20072&r=all |
| By: | International Monetary Fund |
| Abstract: | Financial Sector Assessment Program; Technical Note-Insurance Regulation and Supervision |
| Keywords: | Insurance companies;Insurance;Insurance supervision;Solvency;Legal support in revenue administration;ISCR,CR,financial market,FINMA ordinance,insurance sector,resolution procedure FINMA,FINMA coordination agreement,FINMA group supervision,FINMA staff,institutions FINMA supervise,insurance intermediary |
| Date: | 2019–06–26 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfscr:2019/185&r=all |
| By: | Atmaca, Sümeyra; Kirschenmann, Karolin; Ongena, Steven; Schoors, Koen |
| Abstract: | We employ proprietary data from a large bank to analyze how - in times of crisis - depositors react to a bank nationalization, re-privatization and an accompanying increase in deposit insurance. Nationalization slows depositors fleeing the bank, provided they have sufficient trust in the national government, while the increase in deposit insurance spurs depositors below the new 100K limit to deposit more. Prior to nationalization, depositors bunch just below the then-prevailing 20K limit. But they abandon bunching entirely during state-ownership, to return to bunching below the new 100K limit after re-privatization. Especially depositors with low switching costs are moving money around. |
| Keywords: | deposit insurance,coverage limit,bank nationalization,depositor heterogeneity |
| JEL: | G21 G28 H13 N23 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:20077&r=all |
| By: | Matteo Brachetta; Claudia Ceci |
| Abstract: | We investigate an optimal reinsurance problem for an insurance company facing a constant fixed cost when the reinsurance contract is signed. The insurer needs to optimally choose both the starting time of the reinsurance contract and the retention level in order to maximize the expected utility of terminal wealth. This leads to a mixed optimal control/optimal stopping time problem, which is solved by a two-step procedure: first considering the pure reinsurance stochastic control problem and next discussing a time-inhomogeneous optimal stopping problem with discontinuous reward. Using the classical Cram\'er-Lundberg approximation risk model, we prove that the optimal strategy is deterministic and depends on the model parameters. In particular, we show that there exists a maximum fixed cost that the insurer is willing to pay for the contract activation. Finally, we provide some economical interpretations and numerical simulations. |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2101.04975&r=all |
| By: | International Monetary Fund |
| Abstract: | Financial Sector Assessment Program; Technical Note- Financial Safety Net and Crisis Management Arrangements |
| Keywords: | Banking;Bank resolution framework;Financial crises;Deposit insurance;Lender of last resort;ISCR,CR,State secretariat,insurance fund,financial market,resolution power,steering committee |
| Date: | 2019–06–26 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfscr:2019/191&r=all |
| By: | Yusuf Mercan; Benjamin Schoefer; Petr SedláÄ ek |
| 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 insen¬sitivity of unemployment to labor market policies, such as unemployment insurance. |
| Date: | 2020–12–16 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:927&r=all |
| By: | Jir\^o Akahori; Yuuki Ida; Maho Nishida; Shuji Tamada |
| Abstract: | We introduce a collective model for life insurance where the heterogeneity of each insured, including the health state, is modeled by a diffusion process. This model is influenced by concepts in statistical mechanics. Using the proposed framework, one can describe the total pay-off as a functional of the diffusion process, which can be used to derive a level premium that evaluates the risk of lapses due tothe so-called adverse selection. Two numerically tractable models are presented to exemplify the flexibility of the proposed framework. |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2012.09606&r=all |
| By: | International Monetary Fund |
| Abstract: | Financial Sector Assessment Program; Technical Note-Insurance Stress Testing |
| Keywords: | Stress testing;Insurance companies;Sovereign bonds;Insurance;Solvency;ISCR,CR,investment,sovereign bond,capital,holding |
| Date: | 2019–06–26 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfscr:2019/186&r=all |
| By: | Daniel Borup (Aarhus University, CREATES and the Danish Finance Institute (DFI)); David E. Rapach (Washington University in St. Louis and Saint Louis University); Erik Christian Montes Schütte (Aarhus University, CREATES and the Danish Finance Institute (DFI)) |
| Abstract: | We generate a sequence of now- and backcasts of weekly unemployment insurance initial claims (UI) based on a rich trove of daily Google Trends (GT) search-volume data for terms related to unemployment. To harness the information in a high-dimensional set of daily GT terms, we estimate predictive models using machine-learning techniques in a mixed-frequency framework. In a simulated out-of-sample exercise, now- and backcasts of weekly UI that incorporate the information in the daily GT terms substantially outperform models that ignore the information. The relevance of GT terms for predicting UI is strongly linked to the COVID-19 crisis. |
| Keywords: | Unemployment insurance, Internet search, Mixed-frequency data, Penalized regression, Neural network, Variable importance |
| JEL: | C45 C53 C55 E24 E27 J65 |
| Date: | 2021–01–11 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2021-02&r=all |
| By: | Zhuo Jin; Zuo Quan Xu; Bin Zou |
| Abstract: | We study an optimal dividend problem for an insurer who simultaneously controls investment weights in a financial market, liability ratio in the insurance business, and dividend payout rate. The insurer seeks an optimal strategy to maximize her expected utility of dividend payments over an infinite horizon. By applying a perturbation approach, we obtain the optimal strategy and the value function in closed form for log and power utility. We conduct an economic analysis to investigate the impact of various model parameters and risk aversion on the insurer's optimal strategy. |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2012.06703&r=all |
| By: | International Monetary Fund |
| Abstract: | This Financial System Stability Assessment paper discusses that Canada has enjoyed favorable macroeconomic outcomes over the past decades, and its vibrant financial system continues to grow robustly. However, macrofinancial vulnerabilities—notably, elevated household debt and housing market imbalances—remain substantial, posing financial stability concerns. Various parts of the financial system are directly exposed to the housing market and/or linked through housing finance. The financial system would be able to manage severe macrofinancial shocks. Major deposit-taking institutions would remain resilient, but mortgage insurers would need additional capital in a severe adverse scenario. Housing finance is broadly resilient, notwithstanding some weaknesses in the small non-prime mortgage lending segment. Although banks’ overall capital buffers are adequate, additional required capital for mortgage exposures, along with measures to increase risk-based differentiation in mortgage pricing, would be desirable. This would help ensure adequate through-the cycle buffers, improve mortgage risk-pricing, and limit procyclical effects induced by housing market corrections. |
| Keywords: | Mortgages;Housing prices;Insurance;Insurance companies;Banking;ISCR,CR,housing market,financial system,credit risk,government bond,capital ratio |
| Date: | 2019–06–24 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfscr:2019/177&r=all |
| By: | Alexander Glauner |
| Abstract: | In the classical static optimal reinsurance problem, the cost of capital for the insurer's risk exposure determined by a monetary risk measure is minimized over the class of reinsurance treaties represented by increasing Lipschitz retained loss functions. In this paper, we consider a dynamic extension of this reinsurance problem in discrete time which can be viewed as a risk-sensitive Markov Decision Process. The model allows for both insurance claims and premium income to be stochastic and operates with general risk measures and premium principles. We derive the Bellman equation and show the existence of a Markovian optimal reinsurance policy. Under an infinite planning horizon, the model is shown to be contractive and the optimal reinsurance policy to be stationary. The results are illustrated with examples where the optimal policy can be determined explicitly. |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2012.09648&r=all |
| By: | International Monetary Fund |
| Abstract: | Swiss financial institutions are well capitalized and could withstand the severe shocks under the adverse stress test scenarios, but macrofinancial vulnerabilities are deepening. Important reforms have been made since the 2014 FSAP, but several critical recommendations and emerging challenges have yet to be fully addressed. Capital buffers have increased across all categories of banks, and while the two global systemically important banks have downsized and deleveraged significantly since the global financial crisis, since 2013 they have been growing again. Macroprudential measures have not been taken since 2014 and is constrained by having only one mandated tool and a self-regulation agreement with banks. The financial supervisor (FINMA) has developed into a trusted supervisor, but as a small entity, it relies heavily on external auditors to conduct on-site supervision; the associated conflict of interest and supervisory objectivity risks need to be carefully managed. The combination of an ex-post funding mechanism, a low cap on banks’ contributions, and a private deposit insurance agency run by active bankers, weakens the crisis management arrangements. |
| Keywords: | Banking;Insurance companies;Mortgages;Stress testing;Bank resolution framework;ISCR,CR,interest rate,banking sector,financial system,return on equity,market share |
| Date: | 2019–06–26 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfscr:2019/183&r=all |
| By: | Jiaying Gu; Thomas M. Russell |
| Abstract: | This paper considers (partial) identification of a variety of parameters, including counterfactual choice probabilities, in a general class of binary response models with possibly endogenous regressors. Importantly, our framework allows for nonseparable index functions with multi-dimensional latent variables, and does not require parametric distributional assumptions. We demonstrate how various functional form, independence, and monotonicity assumptions can be imposed as constraints in our optimization procedure to tighten the identified set, and we show how these assumptions have meaningful interpretations in terms of restrictions on latent types. In the special case when the index function is linear in the latent variables, we leverage results in computational geometry to provide a tractable means of constructing the sharp set of constraints for our optimization problems. Finally, we apply our method to study the effects of health insurance on the decision to seek medical treatment. |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2101.01254&r=all |
| By: | Costas Meghir (Cowles Foundation, Yale University, NBER, IZA, CEPR, and Institute for Fiscal Studies); Ahmed Mushfiq Mobarak (Cowles Foundation, Yale University); Ahmed Corina Mommaerts (University of Wisconsin – Madison); Ahmed Melanie Morten (Stanford University and NBER) |
| Abstract: | We document that an experimental intervention offering transport subsidies for poor rural households to migrate seasonally in Bangladesh improved risk sharing. A theoretical model of endogenous migration and risk sharing shows that the effect of subsidizing migration depends on the underlying economic environment. If migration is risky, a temporary subsidy can induce an improvement in risk sharing and enable profitable migration. We estimate the model and find that the migration experiment increased welfare by 12.9%. Counterfactual analysis suggests that a permanent, rather than temporary, decline in migration costs in the same environment would result in a reduction in risk sharing. |
| Keywords: | Informal Insurance, Migration, Bangladesh, RCT |
| JEL: | D12 D91 D52 O12 R23 |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:2185r2&r=all |
| By: | Roozbeh Hosseini; Karen A. Kopecky; Kai Zhao |
| Abstract: | Using a dynamic panel approach, we provide empirical evidence that negative health shocks reduce earnings. The effect is primarily driven by the participation margin and is concentrated in less educated individuals and those with poor health. We build a dynamic, general equilibrium, life cycle model that is consistent with these findings. In the model, individuals whose health is risky and heterogeneous choose to either work, or not work and apply for social security disability insurance (SSDI). Health affects individuals’ productivity, SSDI access, disutility from work, mortality, and medical expenses. Calibrating the model to the United States, we find that health inequality is an important source of lifetime earnings inequality: nearly 29 percent of the variation in lifetime earnings at age 65 is due to the fact that Americans face risky and heterogeneous life cycle health profiles. A decomposition exercise reveals that the primary reason why individuals in the United States in poor health have low lifetime earnings is because they have a high probability of obtaining SSDI benefits. In other words, the SSDI program is an important contributor to lifetime earnings inequality. Despite this, we show that it is ex ante welfare improving and, if anything, should be expanded. |
| Keywords: | earnings; health; frailty; inequality; disability; dynamic panel estimation; life-cycle models |
| JEL: | D52 D91 E21 H53 I13 I18 |
| Date: | 2021–01–04 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:89469&r=all |