Risk-sharing Arrangements Research Articles

Remittances, Informal Loans, and Assets as Risk-Coping Mechanisms: Evidence from Agricultural Households in Rural Philippines

This paper investigates whether agricultural households in rural Philippines insure their consumption and whether they use remittances, informal loans, or assets as ex post risk-coping mechanisms. Since these households have limited access to formal insurance and credit markets, any shocks to their volatile income can have substantial impacts. Using panel data and rainfall shocks as the instrumental variable for income shocks, this paper finds evidence that households depend on their networks of family and friends to partially insure their consumption. 2SLS and OLS estimates show that approximately 27 percent of consumption is insured. International remittances from migrant members replace about 11 percent of income decline while domestic transfers replace about 14 percent. Informal loans, however, decrease as rainfall shocks increase. Borrowers and lenders may be experiencing similar shocks, which would reduce the effectiveness of local risk-sharing arrangements. JEL classification: O12; Q12; D81; D12; F22; F24

Les mécanismes d'assurance au sein de l'Union économique et monétaire : avant, pendant et après la crise

Cet article revisite la crise de la zone euro en examinant les mecanismes d’assurance contre les risques economiques au sein de l’Union economique et monetaire (UEM). L’euro etait cense favoriser la flexibilite et la convergence des economies nationales et on a cru que la politique budgetaire nationale seule pourrait amortir les chocs economiques defavorables. Le resultat a ete tres different. Dans les premieres annees de l’UEM, le partage des risques s’est developpe principalement au travers des marches financiers. Les politiques economiques n’ont guere favorise la flexibilite et la convergence, et la gouvernance budgetaire a failli. La crise financiere mondiale et la crise de la dette souveraine ont enraye les mecanismes de partage des risques au travers des marches financiers. La flexibilite et la convergence etant insuffisantes, et la politique budgetaire nationale n’etant plus en capacite d’amortir les chocs, les deux crises ont laisse la zone euro sans mecanisme d’assurance. L’intervention de la BCE et des autres institutions publiques ne peut y remedier que temporairement. Pour redonner a l’UEM des bases solides et durables, les mecanismes de marche doivent etre repares, la flexibilite et la convergence doivent etre encouragees et la politique budgetaire nationale doit redevenir responsable. De nouvelles institutions europeennes sont souhaitables en complement – et non en substitut – des politiques economiques nationales. Classification JEL : F42, F55.

Facilitating team decision-making through reimbursable contracting strategies1This paper is one of a selection of papers in this Special Issue on Construction Engineering and Management.

Efforts to break down decision-making silos in the architecture, engineering, and construction (AEC) industry have resulted in the evolution of integrated project delivery (IPD). IPD brings together participants to make decisions early in the project cycle. But, anecdotal evidence indicates that IPD is not being implemented as effectively as envisioned. One potential barrier to implementation is the multi-party risk and reward agreement that is a hallmark of IPD. Many owners may be statutorily prohibited from entering into such a risk-sharing contractual arrangement, and countless other organizations “remain skeptical of its practicality.” However, recent case study research established an important link between reimbursable contracting strategies and greater collaboration and information-sharing among parties. The researchers found that more traditional contracting approaches, when combined with a cost reimbursable compensation structure, achieved positive outcomes by properly allocating risk, fostering teamwork, and bringing together diverse experts to address challenging design problems, thus providing a viable alternative to shared risk and reward approaches.

Risk Management and Insurance of Small and Medium Scale Enterprises (Smes) in Nigeria

This study assesses the financing options available to Small and Medium Scale Enterprises (SMEs) in Nigeria to identify the one that is most patronized by them, using Benue and Nasarawa States as case study. Mean scores and standard deviation were used to present and analyze the primary data obtained via questionnaires. Correlation was used to substantiate whether there is similarity in the inherent identified problems of each financing option. Simple percentages combined with mean scores were used to test hypothesis one while Chi-square was used to test hypothesis two. The result shows that SMEs are significantly financed by informal sources of finance than the formal sources of finance. The formal financing options are more organized and as such avoid SMEs because of their risky nature. Predominant SMEs are lacking in good risk management strategies and insurance cover which is why their funding problem still subsists. The major recommendation is that Capacity building and sensitization programmes for all registered SMEs should be put in place by government to enlighten them on the benefits of good risk management and insurance of their businesses. Both the government and the banking sector should mutually agree on a credit guaranteed scheme strategy that will incorporate a risk-sharing arrangement as a way of encouraging the banks to channel funds to the SMEs sub sector for their growth and development which would translate into the national economic growth and sustainable economic development of Nigeria.

A propósito de la excepcionalidad de las innovaciones farmacológicas para el cáncer

Given that new oncology drugs are frequently involved in departures from the normal technology appraisal processes, the main objective of this article is to analyze these decision-making processes, as well as their impact on the regulation of new approaches to selecting novel drugs and the regulatory steps to deal with risk-sharing arrangements. This analysis was carried out by selecting two drugs, trastuzumab and imatinib, both agents being representive examples of the innovative targeted therapies introduced in the last decade, and by reviewing some international experiences (particularly those of Australia, England, and Wales, pioneers in the application of technology appraisals), centered mainly – but not exclusively – on these two drugs. The review of these experiences indicated that other concerns apart from efficiency are especially important in the evaluation of this type of innovations. In England and Wales (where, in contrast to Australia, the “rule of rescue” has not been adopted) the controversial decision-making processes have resulted in new approaches to the appraisal of end-of-life treatments. Moreover, overlapping or sequential risk-sharing arrangements have led to regulatory steps, paying attention to possible problems of inconsistencies in decision-making and inequalities of access. The case of Spain is critically discussed, with special emphasis on the risk of favoring the application of micro formulae (such as risk-sharing arrangements) over macro formulae. Finally, a strategy is suggested, based on the recently approved Royal Decree-law 9/2011.

Optimal asset taxes in financial markets with aggregate uncertainty

This paper studies Pareto-optimal risk-sharing arrangements in a private information economy with aggregate uncertainty and ex ante heterogeneous agents. I show how to implement Pareto optima as equilibria when agents can trade claims to consumption contingent on aggregate shocks in financial markets. The first result is that if aggregate and idiosyncratic shocks are independent, the implementation of optimal allocations does not require any interventions in financial markets. This result can be extended to dynamic settings in the sense that, in this case, only savings need to be distorted, but not trades in financial markets. Second, I characterize optimal trading distortions in financial markets when aggregate and idiosyncratic shocks are not independent. In this case, optimal asset taxes must be higher for those securities that pay out in aggregate states in which consumption is more volatile. For instance, this can provide an efficiency justification for the frequently observed differential tax treatment of different asset classes, such as debt and equity claims.

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Risk-Sharing Arrangements That Link Payment For Drugs To Health Outcomes Are Proving Hard To Implement

Risk-sharing agreements, under which payers and pharmaceutical manufacturers agree to link payment for drugs to health outcomes achieved, rather than the volume of products used, offer an appealing payment model for pharmaceuticals. Although such agreements have been widely touted, the experience to date mainly demonstrates how hard they are to implement. Barriers include high implementation costs, measurement challenges, and the absence of a suitable data infrastructure. Risk-sharing arrangements could gain traction in the United States as payers and product manufacturers acquire experience with the concept and as measurement techniques and information systems improve. For the foreseeable future, they are likely to remain the exception as drug companies pursue payment models unconnected to data collection or performance assessment.

Risk Sharing in Defined-Contribution Funded Pension System

This paper explores the introduction of collective risk-sharing elements in defined contri- bution pension contracts. We consider status-contingent, age-contingent and asset contingent risk-sharing arrangements. All arrangements raise aggregate welfare, as measured by equiva- lent variations. While working individuals hardly benefit or may even lose, retirees experience substantial welfare gains. An increase in the tax deductability of pension contributions can be beneficial for working cohorts, but comes at the cost of a reduction in aggregate welfare due to efficiency losses. JEL-Code: H550, I380, C610.

The Sharing Dilemma: Joining Groups and Sharing Resources as a Means of Coping with Environmental Risk

A well-known hypothesis, rooted in anthropological studies, posits that individuals join cooperative groups and share resources in order to reduce environmental risk. Forming groups as means of risk-sharing is also witnessed in many poor countries, in which communities employ risk-sharing arrangements, such as group loans with joint liability. Despite its significance for explaining group formation, the 'Social Insurance' hypothesis has hardly been subjected to systematic experimental testing. Here we report results of three experiments, in which environmental risks were modeled as probable gains or probable losses. For gains, the results supported the hypothesis that individuals form groups and share resources in order to reduce risk. For losses, the results revealed an intriguing switch from a reluctance to join groups under low-risk, to ubiquitous readiness to join under high-risk. These results are discussed in light of Prospect Theory and risk-sensitive models, and their significance to the research on risk-sharing is highlighted.

PHP49 Developing Risk Sharing Arrangements – Potential for Brazil and Implications

PHP49 Developing Risk Sharing Arrangements – Potential for Brazil and Implications

The Crowding-Out Effect of Formal Insurance on Informal Risk Sharing Arrangements: An Experimental Study

This paper investigates the crowding-out effect of formal insurance on informal risk-sharing arrangements via theory and laboratory experiment. Our model and simulation predict that the crowding out of private transfers is often more than one-for-one and will reduce the total risk coverage. Furthermore, the existence of a moderate degree of altruism exaggerates the crowding-out effect, especially when there is an ex-ante income inequality. These predictions are mostly supported by the laboratory experiment, except that the crowding-out effect is not more than one-for-one, and hence the total risk coverage is not significantly reduced by formal insurance.

Fostering Long-term Investment and Economic Growth Summary of a High-Level OECD Financial Roundtable

As the OECD is celebrating its 50th anniversary, member countries are exiting from the biggest post-war financial and economic crisis and are trying to put their economies back onto strong, sustainable footing. While financial reforms should provide for a better, more sustainable balance between stability and growth, measures to strengthen the savings-investment channel should foster sustainable growth and development. These issues were explored at a High-Level OECD Financial Roundtable and are summarised in this article. Covered are the topics of financial reform to foster stability and long-term growth, the contribution of institutional investors to long-term growth, and creating a better environment for the financing of business innovation and green growth. With strained public sector finances, private capital needs to fill the funding gap for infrastructure and other long-term projects. Appropriate regulatory incentives to overcome short-termism, as well as risk-sharing arrangements e.g. via publicprivate partnerships, are needed in order to encourage market-based, long-term investment and risk capital financing. Better transparency, information and investor education can also play a role in enhancing long-term savings and investment.

Uninsurable risk and financial market puzzles

We compare the empirical performances of three risk-sharing arrangements involving idiosyncratic skill shocks: (a) where individuals are unable to directly insure their consumption against individual-specific shocks, (b) where agents strike long-term insurance contract with financial intermediaries involving a truth revelation constraint as in Kocherlakota and Pistaferri (2009), (c) full risk sharing. Based on the widely accepted assumption of cross-sectional log-normality of individual consumption levels, we work out closed form expressions of the pricing kernels for (a) and (b). We put these three models to test four financial market anomalies, namely the equity premium, currency premium, risk-free rate, and consumption-real exchange rate puzzles simultaneously in an integrated framework. We find that the pricing kernel associated with (a) outperforms the other two models in terms of the produced estimates of the agent’s preference parameters and the model ability to predict the equity and currency premia, the risk-free rate, and the log growth in the exchange rate. However, the predictive ability is still far from satisfactory for all three models under scrutiny.

Risk Sharing in Defined-Contribution Funded Pension Systems

This paper explores the introduction of collective risk-sharing elements in defined contri-bution pension contracts. We consider status-contingent, age-contingent and asset contingent risk-sharing arrangements. All arrangements raise aggregate welfare, as measured by equiva- lent variations. While working individuals hardly benefit or may even lose, retirees experience substantial welfare gains. An increase in the tax deductability of pension contributions can be beneficial for working cohorts, but comes at the cost of a reduction in aggregate welfare due to efficiency losses.

PHP9 BUDGET IMPACT ANALYSIS OF ORPHAN DRUGS IN BELGIUM: ESTIMATES FROM 2008 TO 2013

Objective: This article aims to calculate the impact of orphan drugs on the Belgian drug budget in 2008 and to forecast its impact over the following 5 years. Method: The 2008 budget impact was calculated by triangulating information derived from multiple Belgian data sources. The 2008–2013 budget impact analysis was based on three scenarios reflecting different levels of growth in the number of registered orphan drugs in the European Union, the number of drugs reimbursed in Belgium, and the average annual cost per patient per drug in Belgium. Results: The orphan drug budget impact amounted to E66.2 million (or 5% of the Belgian hospital drug budget) in 2008. The impact would increase to E130–204 million in 2013, depending on the scenario. Conclusions: This static analysis measured orphan drug costs only, assuming that other components of health expenditure do not change over time. The analysis showed that the budget impact of orphan drugs in Belgium is substantial and rising, thereby putting pressure on total drug expenditure. Policy options to address the rising budget impact include pricing linked to return on investment, risk-sharing arrangements and re-appraisal of orphan drug status if additional indications are approved.

How much is the life of a cancer patient worth? A pharmaco-economic perspective

Countries struggle to accommodate the introduction of new effective cancer medicines, while containing costs. Our objective is to comment on several pharmaco-economic challenges involved in determining the value of cancer medicines by reviewing cost-effectiveness thresholds for cancer medicines in several countries and by discussing the cost-effectiveness of anti-cancer biotechnology and orphan medicines. A literature search was carried out of PubMed, Centre for Reviews and Dissemination databases, Cochrane Database of Systematic Reviews and EconLit up to August 2009. Health technology assessment agencies in England and Scotland are willing to incur a higher cost per quality-adjusted life year for cancer medicines than for other medicines. Risk-sharing arrangements have been implemented to optimize the value of cancer medicines. The cost-effectiveness of biotechnology medicines in cancer care is challenged by their high price, and depends on the ability to identify the most responsive target population, through use of suitable biomarkers. The evaluation of orphan medicines in cancer care needs to balance the absence of an alternative therapy for a life-threatening disease against the high cost-effectiveness ratio, and usually weak clinical data. Current strategies used to inform decisions on the funding of expensive anti-cancer medicines are commented on to highlight important issues and problems. Pharmaco-economic evaluation is an important tool for assessing the value of cancer medicines and to inform evidence-based decision making in cancer care. Value-judgments such as preferential consideration of anti-cancer medicines can then be made explicitly.

A Conceptual Framework for Retirement Products: Risk Sharing Arrangements Between Providers and Retirees

Voluntary annuity markets are in most countries smaller than the theoretical and part of the empirical literature would suggest. There are both demand and supply constraints that hamper the development of annuity markets. In particular, traditional products available in most countries can require excessive minimum capital requirements for given investment opportunities available to providers. Investment and longevity risk should be shared between providers and annuitants so that supply constraints can be relaxed. Alternative annuity products, which imply risk sharing, could be backed by substantially lower capital investments or, equivalently, provided at substantially lower prices to consumers.

Health care costs during the last 12 months of life in Israel: estimation and implications for risk-adjustment

Accumulating research shows that decedents' costs are high, they increase towards death, and they comprise a large proportion of total lifetime costs. The objectives of this paper are (i) to examine the Israeli pattern of medical care cost during the 12 months prior to death by gender, age, and chronic conditions, and (ii) to examine the implications of the results for the Israeli risk adjustment scheme. For the first objective, we used 12 month follow-up data on a cohort of decedents. For the second objective, we supplemented the data with a cross-section of enrollees (survivors and decedents in 2004). With regard to the first objective, we found that the broad Israeli patterns of cost match previous studies from other countries. With respect to the second objective, we argue that since the cost during the last 12 months of life is very high and is concentrated among relatively few persons, in order to prevent any adverse incentives caused by the combination of age-based risk adjustment and segmentation of end-of-life health care, death should be introduced into the existing retrospective risk-sharing arrangement.

Global variations in reimbursement of new cancer therapeutics: Improving access through risk-sharing agreements.

6050 Background: The cost of cancer treatments are rising globally. We examined access to new cancer therapeutics among various countries to identify innovative strategies to increase reimbursement when cost is a concern. Methods: We surveyed England (ENG), Scotland (SCO), France (FRA), Italy (ITA), Germany (DEU), Netherlands (NLD), Finland (FIN), Sweden (SWE), Australia (AUS), New Zealand (NZL) and Canada (Province of Ontario) (CAN), regarding their respective reimbursement decisions for 10 cancer therapeutics (Bevacizumab, Bortezomib, Cetuximab, Erlotinib, Imatinib, Pemetrexed, Rituximab, Sorafenib, Sunitinib and Traztuzumab) to determine access as of December 31, 2009, indications reimbursed and new approaches to purchasing, e.g., risk-sharing arrangements (RSAs). RSAs were defined as either price volume agreements, volume caps, patient access schemes involving free drug, or payment by results based on outcomes. If health authorities quoted ‘special pricing arrangements’ (SPAs) for reasons of confidentiality, this was taken to include RSAs. Results: 67% of countries implemented a RSA for ≥ 1 cancer therapeutic studied. ENG, SCO, FRA, ITA, AUS implemented them nationally. SWE and CAN implemented them regionally/provincially. Countries that factor disease severity in reimbursement decisions (FIN, FRA, and SWE) and/or strong price negotiations or rebates (FRA, ITA, DEU) reimbursed a median average of 100% (range 90%, 100%) of 42 identified licensed indications (FRA 90%; ITA, FIN, DEU and SWE 100%). Countries/provinces where the main driver for reimbursement is cost effectiveness, reimbursed a median average of 49% (range 26%, 88%) (NLD 88%; AUS 55%; CAN 52%; ENG 45%; SCO 40%; NZL 26%). Health authorities in 5 of these countries had a high rate of rejecting initial submissions due to excessive costs (NZL 87%; AUS 71%; SCO 61%; ENG and CAN 50%). Applying RSAs to the rejected submissions led to approval of 2 indications in SCO, 3 in ENG, and SPAs led to approval of 4 indications in CAN and 9 in AUS. Conclusions: Access to innovative cancer therapeutics is highly variable globally. RSAs appear to enhance reimbursement where there are concerns with costs for new cancer agents. No significant financial relationships to disclose.