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on Insurance Economics |
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Issue of 2022‒01‒03
sixteen papers chosen by Soumitra K. Mallick Indian Institute of Social Welfare and Business Management |
| By: | Rohan Kekre |
| Abstract: | I study unemployment insurance (UI) in general equilibrium with incomplete markets, search frictions, and nominal rigidities. An increase in generosity raises the aggregate demand for consumption if the unemployed have a higher marginal propensity to consume (MPC) than the employed or if agents precautionary save in light of future income risk. This raises output and employment unless monetary policy raises the nominal interest rate. In an analysis of the U.S. economy over 2008-2014, UI benefit extensions had a contemporaneous output multiplier around 1 or higher. The unemployment rate would have been as much as 0.4pp higher absent these extensions. |
| JEL: | D52 E21 E62 J64 J65 |
| Date: | 2021–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29505&r= |
| By: | Andrea Hauser; Carlos Rosa; Rui Esteves; Alexandra Moura; Carlos Oliveira |
| Abstract: | A complete model to analyse and predict future losses in the property portfolio of an insurance company due to hurricanes is proposed. A novel statistical model, in which weather data is not required, is considered. Climate data may not be reliable, or may be difficult to deal with or to obtain, hence we reconstruct the storm behaviour through the registered claims and respective losses. The model is calibrated using the loss data of the property portfolio of the insurance company Fidelidade, from hurricane Leslie, which hit the center of continental Portugal in October 2018. Several scenarios are simulated and risk maps are built. The simulated scenarios can be used to compute risk premiums per risk class in the portfolio. These can be used to adjust the policy premiums accounting for a storm risk. The risk map of the company also depends on its portfolio, namely its exposure, providing a hurricane risk management tool for the insurance company. |
| Keywords: | Risk; Hurricanes; Property Insurance; Regression Models |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:ise:remwps:wp02092021&r= |
| By: | Karim Barigou (SAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon); Lukasz Delong (Warsaw School of Economics - Institut of Econometrics) |
| Abstract: | This paper considers the pricing of equity-linked life insurance contracts with death and survival benefits in a general model with multiple stochastic risk factors: interest rate, equity, volatility, unsystematic and systematic mortality. We price the equity-linked contracts by assuming that the insurer hedges the risks to reduce the local variance of the net asset value process and requires a compensation for the non-hedgeable part of the liability in the form of an instantaneous standard deviation risk margin. The price can then be expressed as the solution of a system of non-linear partial differential equations. We reformulate the problem as a backward stochastic differential equation with jumps and solve it numerically by the use of efficient neural networks. Sensitivity analysis is performed with respect to initial parameters and an analysis of the accuracy of the approximation of the true price with our neural networks is provided. |
| Keywords: | Equity-linked contracts,Neural networks,Stochastic mortality,BSDEs with jumps,Hull-White stochastic interest rates,Heston model |
| Date: | 2021–11–10 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-02896141&r= |
| 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: | 2021–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-03043244&r= |
| By: | Chengxiu Ling; Jiayi Li; Yixuan Liu; Zhiyan Cai |
| Abstract: | Catastrophic losses caused by natural disasters receive a growing concern about the severe rise in magnitude and frequency. The constructions of insurance and financial management scheme become increasingly necessary to diversify the disaster risks. Given the frequency and severity of floods in China, this paper investigates the extreme analysis of flood-related huge losses and extreme precipitations using Peaks-Over-Threshold method and Point Process (PP) model. These findings are further utilized for both designs of flood zoning insurance and flooding catastrophic bond: (1) Using the extrapolation approach in Extreme Value Theory (EVT), the estimated Value-at-Risk (VaR) and conditional VaR (CVaR) are given to determine the cross-regional insurance premium together with the Grey Relational Analysis (GRA) and the Technique for Order Preference by Similarity to an Ideal Solution (TOPSIS). The flood risk vulnerability and threat are analyzed with both the geography and economic factors into considerations, leading to the three layered premium levels of the 19 flood-prone provinces. (2) To hedge the risk for insurers and reinsurers to the financial market, we design a flooding catastrophe bond with considerate trigger choices and the pricing mechanism to balance the benefits of both reinsurers and investors. To reflect both the market price of catastrophe risk and the low-correlated financial interest risk, we utilize the pricing mechanism of Tang and Yuan (2021) to analyze the pricing sensitivity against the tail risk of the flooding disaster and the distortion magnitude and the market risk through the distortion magnitude involved in Wang's transform. Finally, constructive suggestions and policies are proposed concerning the flood risk warning and prevention. |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2112.00562&r= |
| By: | Malik, Ravinder Paul Singh (International Water Management Institute (IWMI)); Amarnath, Giriraj (International Water Management Institute (IWMI)) |
| Abstract: | The International Water Management Institute (IWMI) has recently developed an innovative Index-based Flood Insurance (IBFI) product to facilitate the scaling of flood insurance particularly in vulnerable economies, to provide risk cover to poor farmers against crop losses that occur due to floods. While the product developed is technically very sound, the economics of such an intervention is important to ensure the large-scale acceptance and adoption of the product by different stakeholders and for its sustenance in the long term. This paper attempts at conducting an ex ante assessment of the economics of IBFI from the perspectives of the three main stakeholders: farmers, the insurance company and the government. The paper discusses the methodological challenges and data issues encountered in undertaking an economic analysis of such a product. The issues and processes involved have been empirically demonstrated using a theoretical case study based on a synthesis of information drawn from a host of sources and certain assumptions. Field-based data are now being collected and analyzed from the locations where IBFI has recently been piloted by IWMI. This will help in further refining the process of economic evaluation and identifying the experiences of different stakeholders. |
| Keywords: | Economic analysis; Stakeholders; Disaster risk management; Farmers; State intervention; Flood damage; Crop losses; Compensation; Subsidies; Insurance premiums; Cost benefit analysis; Economic viability; Sustainability; Villages; Remote sensing; Datasets; Models; Developing countries; Case studies |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:iwt:worppr:h050736&r= |
| By: | Malik, Ravinder Paul Singh; Amarnath, Giriraj |
| Abstract: | The International Water Management Institute (IWMI) has recently developed an innovative Index-based Flood Insurance (IBFI) product to facilitate the scaling of flood insurance particularly in vulnerable economies, to provide risk cover to poor farmers against crop losses that occur due to floods. While the product developed is technically very sound, the economics of such an intervention is important to ensure the large-scale acceptance and adoption of the product by different stakeholders and for its sustenance in the long term. This paper attempts at conducting an ex ante assessment of the economics of IBFI from the perspectives of the three main stakeholders: farmers, the insurance company and the government. The paper discusses the methodological challenges and data issues encountered in undertaking an economic analysis of such a product. The issues and processes involved have been empirically demonstrated using a theoretical case study based on a synthesis of information drawn from a host of sources and certain assumptions. Field-based data are now being collected and analyzed from the locations where IBFI has recently been piloted by IWMI. This will help in further refining the process of economic evaluation and identifying the experiences of different stakeholders. |
| Keywords: | Agricultural and Food Policy, Agricultural Finance, Crop Production/Industries, Farm Management, Financial Economics, Institutional and Behavioral Economics, Production Economics |
| Date: | 2021–11–09 |
| URL: | http://d.repec.org/n?u=RePEc:ags:iwmwpb:316618&r= |
| By: | Stefan Jacewitz; Haluk Unal; Chengjun Wu |
| Abstract: | We argue that bank holding companies (BHCs) extend shadow insurance to the prime institutional money market funds (PI-MMFs) they sponsor and that PI-MMFs price this shadow insurance by charging investors significantly higher expense ratios and paying lower net yields. We provide evidence that after September 2008, expense ratios at BHC-sponsored PI-MMFs increased more than at non-BHC-sponsored PI-MMFs. Despite higher expense ratios, BHC-sponsored PI-MMFs did not experience larger redemptions than non-BHC-sponsored PI-MMFs. In addition, we show that expenses ratios increased with BHCs’ financial strength and the likelihood of their support; however, this expense ratio differential disappeared after the 2016 MMF reform. |
| Keywords: | Bank Holding Company; Financial Crisis; Money Market Fund; Banks and banking; Bank Run |
| JEL: | G20 G21 G23 G28 H12 H81 |
| Date: | 2021–08–27 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:93102&r= |
| By: | Sushant Acharya; Keshav Dogra; Sanjay R. Singh (Department of Economics, University of California Davis) |
| Abstract: | We formalize the idea that the financial sector can be a source of non-fundamental risk. Households’ desire to hedge against price volatility can generate price volatility in equilibrium, even absent fundamental risk. Fearing that asset prices may fall, risk-averse households demand safe assets from leveraged intermediaries, whose issuance of safe assets exposes the economy to self-fulfilling fire sales. Policy can eliminate non-fundamental risk by (i) increasing the supply of publicly backed safe assets, through issuing government debt or bailing out intermediaries, or (ii) reducing the demand for safe assets, through social insurance or by acting as a market maker of last resort. |
| Keywords: | safe assets, self-fulfilling asset market crashes, liquidity, fire sales |
| JEL: | D52 D84 E62 G10 G12 |
| Date: | 2021–12–19 |
| URL: | http://d.repec.org/n?u=RePEc:cda:wpaper:345&r= |
| By: | Nathan Lachapelle (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)); Francesco Pascucci (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)) |
| Abstract: | In this paper we build a quantitative spatial general equilibrium model to study the geographical variation in unemployment rates in the presence of wage rigidities and when workers are allowed to commute from residence to workplace. Calibrating the model on Belgian district data, we find that, were workers' location choice driven only by preferences for amenities, workers would relocate away from the center of the country, generating a less concentrated spatial distribution of economic activity. We also explore the role of unemployment insurance in determining the location choices of workers. We find that when the risk of unemployment is fully insured, workers relocate to districts with initially high unemployment rates, therefore accentuating the spatial misallocation of labor. Removing unemployment insurance would instead not generate significant changes in the spatial distribution of workers. To gauge the magnitude of wage distortions, we compare the observed gross wage levels with the counterfactual market-clearing wages. Removing wage rigidities would generate significant gains in local and total GDP (+3%) and modest gains in the average real net labor income per resident (+1%). Lastly, we determine the level of the employers' social contribution rate that would allow to achieve full employment in all districts. We find that the optimal social contribution rate should be 24%, 12 percentage points lower than the observed rate, while at the same time it would increase fiscal revenue by 1.5%. |
| Keywords: | wage regulation, spatial equilibrium, labor mobility, commuting, local unemployment. |
| JEL: | J3 J5 J61 R12 R23 |
| Date: | 2021–12–09 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvir:2021027&r= |
| By: | Heinzel Christoph; Richard Peter |
| Abstract: | Using a unified approach, we show how precautionary saving, self-protection and self-insurance are jointly determined by risk preferences and the preference over the timing of uncertainty resolution. We cover higher-order risk effects and examine both risk averters and risk lovers. When decision-makers use several instruments simultaneously to respond to income risk, substitutive interaction effects arise. We quantify precautionary and substitution effects numerically and discuss the role of instrument interaction for the inference of preference parameters from precautionary motives. Instruments can differ substantially in the size of the precautionary motive and in the susceptibility to substitution effects. This affects their suitability for the identification of precautionary preferences. |
| Keywords: | Préférences récursives, prudence, comportement de précaution, effets d’interaction, statique comparative. |
| JEL: | D11 D80 D81 G22 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:rae:wpaper:202109&r= |
| By: | Ida Brzezinska |
| Abstract: | This paper uses firm-level data from the Chinese Annual Survey of Industrial Firms (CASIF) for the years 1998-2007 to analyse the impact of the household registration system (Hukou) reform in China on monopsony power of firms. I adopt a multiple-period difference-in¬differences framework to exploit the non-uniform labour market reform implementation. By comparing firms in cities that adopted the reform to firms in cities that did not, I find that relaxing restrictions on geographical labour mobility decreased firms’ monopsony power overall. Further heterogeneity analysis suggests that the effect can be decomposed into two offsetting forces: firms in big cities saw their monopsony power increase, while it diminished for firms in small cities. Consistent with a decrease in monopsony power, firms in reform cities spent 26% more on the worker housing fund and 7% more on unemployment insurance as a result of the Hukou reform. I find that the Hukou reform is positively related with both marginal and average products of labour. |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:csa:wpaper:2021-12&r= |
| By: | Schiele, Valentin; Schmitz, Hendrik |
| Abstract: | Individual cognitive functioning declines over time. We seek to understand how adverse physical health shocks in older ages contribute to this development. By use of event-study methods and data from the USA, England and several countries in Continental Europe we find evidence that health shocks lead to an immediate and persistent decline in cognitive functioning. This robust finding holds in all regions representing different health insurance systems and seems to be independent of underlying individual demographic characteristics such as sex and age. We also ask whether variables that are susceptible to policy action can reduce the negative consequences of a health shock. Our results suggest that neither compulsory education nor retirement regulations moderate the effects, thus emphasizing the importance of maintaining good physical health in old age for cognitive functioning. |
| Keywords: | Cognitive decline,health shocks,retirement,education,event study |
| JEL: | J24 J14 I1 I12 J2 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:rwirep:919&r= |
| By: | Robert Clark (Queen's University); Christopher Anthony Fabiilli (Competition Bureau Canada); Laura Lasio (McGill University) |
| Abstract: | We study cartels that operated in the US generic drug industry, leveraging quarterly Medicaid data from 2011-2018 and a difference-in-differences approach comparing the evolution of prices of allegedly collusive drugs with a group of competitive control drugs. Our analysis highlights (i) the difficulty of establishing a suitable control group when collusion is pervasive, (ii) the importance of accounting for market structure changes when defining the control period, and (ii) the existence of across- and within-drug heterogeneity. We focus on six drug markets that that were part of the expanded initial complaint and where there was no entry in the same class during the collusive period, permitting a clean measure of the causal impact of collusion on prices. Our most conservative estimates suggest that collusion led to price increases of between 0% and 166% for each of the six drugs, and damages of between $0 and $3 million for the Medicaid market. |
| Keywords: | antitrust, generic drugs, price fixing |
| JEL: | L41 L12 L13 D22 D43 K21 I18 L65 |
| Date: | 2021–11 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1474&r= |
| By: | Oliwia Komada (Group for Research in Applied Economics (GRAPE)) |
| Abstract: | What are the welfare and macroeconomic effects of family policies and how do they depend on policy composition? I answer those questions in overlapping generations model calibrated to the US. I account for the idiosyncratic income risk, redistribution via social security, and tax and benefit system. I explicitly model child-related tax credit, child care subsidies, and child allowance. I show the expansion of the family policy yields higher welfare. The expenditure on the optimal policy accounts for approximately 3% of GDP. Even though the optimal family policy is three times bigger than the status quo policy, taxes decrease when the optimal policy is implemented. Therefore, reform is self-financing. The structure of family policy is crucial for welfare evaluation. Tax credit and child allowance generate higher welfare gains than child care. |
| Keywords: | family policy, pension system, welfare, income instability |
| JEL: | D21 E62 H31 H55 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:fme:wpaper:62&r= |
| By: | Julian Diaz Saavedra (Department of Economic Theory and Economic History, University of Granada.); Ramon Marimon (European University Institute, UPF - Barcelona GSE, CEPR and NBER.); Joao Brogueira de Sousa (Nova School of Business and Economics.) |
| Abstract: | With ageing population and historical trends of low employment rates, pay-as-you-go (PAYG) pension systems, currently in place in several European countries, imply very large economic and welfare costs in the coming decades, threatening the sustainability of these systems. In an overlapping generations economy with incomplete insurance markets and frictional labour markets, an employment fund, which can be used while unemployed or retired can enhance production efficiency and social welfare. With an appropriate design, the sustainable Backpack employment fund (BP) can greatly outperform – measured by average social welfare in the economy – existing pay-as-you go systems and also Pareto dominate a full privatization of the pension system, as well as a standard fully funded defined contribution pension system. We show this in a calibrated model of the Spanish economy, by comparing steady-state economies after the ongoing demographic transition under these different pension systems and by showing how a front-loaded transition from the PAYG to the BP system, ahead of the ‘ageing transition’, can be Pareto improving (i.e. without losers), while minimizing the cost of the reform. |
| Keywords: | Social security reform, Ageing, Taxation. |
| JEL: | C68 H55 J26 |
| Date: | 2021–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:gra:wpaper:21/15&r= |