Recently, White (2007) analysed the international inequalities in Ecological Footprints per capita (EF hereafter) based on a two-factor decomposition of an index from the Atkinson family (Atkinson (1970)). Specifically, this paper evaluated the separate role of environment intensity (EF/GDP) and average income as explanatory factors for these global inequalities. However, in addition to other comments on their appeal, this decomposition suffers from the serious limitation of the omission of the role exerted by probable factorial correlation (York et al. (2005)). This paper proposes, by way of an alternative, a decomposition of a conceptually similar index like Theil’s (Theil, 1967) which, in effect, permits clear decomposition in terms of the role of both factors plus an inter-factor correlation, in line with Duro and Padilla (2006). This decomposition might, in turn, be extended to group inequality components (Shorrocks, 1980), an analysis that cannot be conducted in the case of the Atkinson indices. The proposed methodology is implemented empirically with the aim of analysing the international inequalities in EF per capita for the 1980-2007 period and, amongst other results, we find that, indeed, the interactive component explains, to a significant extent, the apparent pattern of stability observed in overall international inequalities.

Duro, J. A. (GRIT, XREAP); Teixidó-Figueras, J. (GRIT, XREAP)

XREAP2012-17.pdf

In this paper we explore the sectoral and aggregate implications of some endogeneization rules (i.e. on value-added and final demand) which have been common in the Leontief model and have been recently proposed in the Ghosh model. We detect that these rules may give rise in both models to some allegedly pathological behavior in the sense that sectoral or aggregate output, very often, may not follow the logical and economically expected direct relationship with some underlying endogenous variables—namely, output and value-added in the Ghosh model and output and consumption in the Leontief model. Because of the common mathematical structure, whatever is or seems to be pathological in the Ghosh model also has a symmetric counterpart in the Leontief model. These would not be good news for the inner consistency of these linear models. To avoid such possible inconsistencies, we propose new and simple endogeneization rules that have a sound economic interpretation.

Manresa, A. (CREB); Sancho, F.

XREAP2012-18.pdf

A method to estimate an extreme quantile that requires no distributional assumptions is presented. The approach is based on transformed kernel estimation of the cumulative distribution function (cdf). The proposed method consists of a double transformation kernel estimation. We derive optimal bandwidth selection methods that have a direct expression for the smoothing parameter. The bandwidth can accommodate to the given quantile level. The procedure is useful for large data sets and improves quantile estimation compared to other methods in heavy tailed distributions. Implementation is straightforward and R programs are available.

Alemany, R. (RFA-IREA); Bolancé, C. (RFA-IREA); Guillén, M. (RFA-IREA)

XREAP2012-19.pdf

We present a methodology that allows to calculate the impact of a given Long-Term Care (LTC) insurance protection system on the risk of incurring extremely large individual lifetime costs. Our proposed methodology is illustrated with a case study. According to our risk measure, the current Spanish public LTC system mitigates individual risk by more than 30% compared to the situation where no public protection were available. We show that our method can be used to compare risk reduction of alternative LTC insurance plans.

Guillén, M. (RFA-IREA); Comas-Herrera, A.

XREAP2011-07.pdf

Our objective is to analyse fraud as an operational risk for the insurance company. We study the effect of a fraud detection policy on the insurer’s results account, quantifying the loss risk from the perspective of claims auditing. From the point of view of operational risk, the study aims to analyse the effect of failing to detect fraudulent claims after investigation. We have chosen VAR as the risk measure with a non-parametric estimation of the loss risk involved in the detection or non-detection of fraudulent claims. The most relevant conclusion is that auditing claims reduces loss risk in the insurance company.

Ayuso, M. (RFA-IREA); Guillén, M. (RFA-IREA); Bolancé, C. (RFA-IREA)

XREAP2011-08.pdf

The effectiveness of R&D subsidies can vary substantially depending on their characteristics. Specifically, the amount and intensity of such subsidies are crucial issues in the design of public schemes supporting private R&D. Public agencies determine the intensities of R&D subsidies for firms in line with their eligibility criteria, although assessing the effects of R&D projects accurately is far from straightforward. The main aim of this paper is to examine whether there is an optimal intensity for R&D subsidies through an analysis of their impact on private R&D effort. We examine the decisions of a public agency to grant subsidies taking into account not only the characteristics of the firms but also, as few previous studies have done to date, those of the R&D projects. In determining the optimal subsidy we use both parametric and nonparametric techniques. The results show a non-linear relationship between the percentage of subsidy received and the firms’ R&D effort. These results have implications for technology policy, particularly for the design of R&D subsidies that ensure enhanced effectiveness.

Duch-Brown, N. (IEB); García-Quevedo, J. (IEB); Montolio, D. (IEB)

XREAP2011-09.pdf

In a recent paper Bermúdez [2009] used bivariate Poisson regression models for ratemaking in car insurance, and included zero-inflated models to account for the excess of zeros and the overdispersion in the data set. In the present paper, we revisit this model in order to consider alternatives. We propose a 2-finite mixture of bivariate Poisson regression models to demonstrate that the overdispersion in the data requires more structure if it is to be taken into account, and that a simple zero-inflated bivariate Poisson model does not suffice. At the same time, we show that a finite mixture of bivariate Poisson regression models embraces zero-inflated bivariate Poisson regression models as a special case. Additionally, we describe a model in which the mixing proportions are dependent on covariates when modelling the way in which each individual belongs to a separate cluster. Finally, an EM algorithm is provided in order to ensure the models’ ease-of-fit. These models are applied to the same automobile insurance claims data set as used in Bermúdez [2009] and it is shown that the modelling of the data set can be improved considerably.

Bermúdez, Ll. (RFA-IREA); Karlis, D.

XREAP2011-10.pdf

This paper computes and compares alternative quality-adjusted price indexes for new cars in Spain in the period 1990-2000. The proposed hedonic approach simultaneously controls for time-invariant unobserved product e¤ects and time-variant unobserved quality changes, that are assumed to be captured by model age e¤ects. The results show that the non-adjusted price index largely overstates the increase in the cost of living induced by changes in car prices and that previous evidence for this market have not measured the real extent of that bias, probably due to the omission of controls for unobservables. It is also shown that omitting age e¤ects can also lead to misleading conclusions. The estimated price indexes give also some insights on what could have been the determinants of price evolution in the Spanish car market.

Varela-Irimia, X-L. (GRIT)

XREAP2011-11.pdf

This paper analyses the impact of using different correlation assumptions between lines of business when estimating the risk-based capital reserve, the Solvency Capital Requirement (SCR), under Solvency II regulations. A case study is presented and the SCR is calculated according to the Standard Model approach. Alternatively, the requirement is then calculated using an Internal Model based on a Monte Carlo simulation of the net underwriting result at a one-year horizon, with copulas being used to model the dependence between lines of business. To address the impact of these model assumptions on the SCR we conduct a sensitivity analysis. We examine changes in the correlation matrix between lines of business and address the choice of copulas. Drawing on aggregate historical data from the Spanish non-life insurance market between 2000 and 2009, we conclude that modifications of the correlation and dependence assumptions have a significant impact on SCR estimation.

Bermúdez, Ll. (RFA-IREA), Ferri, A. (RFA-IREA), Guillén, M. (RFA-IREA)

XREAP2011-12.pdf

This article focuses on business risk management in the insurance industry. A methodology for estimating the profit loss caused by each customer in the portfolio due to policy cancellation is proposed. Using data from a European insurance company, customer behaviour over time is analyzed in order to estimate the probability of policy cancelation and the resulting potential profit loss due to cancellation. Customers may have up to two different lines of business contracts: motor insurance and other diverse insurance (such as, home contents, life or accident insurance).  Implications for understanding customer cancellation behaviour as the core of business risk management are outlined.

Guillén, M. (RFA-IREA); Pérez-Marín, A. M. (RFA-IREA); Alcañiz, M. (RFA-IREA)

XREAP2011-13.pdf