The European Unemployment Insurance 2.0: the Reinsurance Mechanism Miroslav Beblavý (with Daniel Gros and Ilaria Maselli) CEPS
Why Reinsurance? Appropriateness of the solution always depends on problem definition Reinsurance is the best solution to the following problem - how can EU have: Significant value added in helping member states absorb large shocks and stabilize their economy At the smallest possible cost And with minimum intervention into how national welfare states function?
The ingredients of reinsurance Considerable upgrade / intellectual development compared to the EP study conducted by CEPS 2013/2014 The trigger = what starts the mechanism The claim = materialised utility of insurance The deductible = amount paid before the EUI pays The actual payout = claim deductible The contribution = the annual premium charged per country
Reinsurance simulation How reinsurance would have worked in Europe between 2000-2012 EU27 as if they had been in the EU at the time Principal data used: GDP, unemployment and short term unemployment, passive labour market expenditure, nominal compensation per employee, duration of unemployment benefits Using time series starting in 1990 10-year average for benchmarks in several variables where data unavailable, simulation used
Trigger Large unemployment shocks, however trigger can be made as sensitive as desired: Short term unemployment > 10 yrs average + x st dev X = 0.1-1-2-3 Brussels rain, storms and tornado shelter Why short-term unemployment? NB: Small triggers (0.1 of SD = Brussels rain ) can be done, but the mechanism is not really suitable for that (sharp borders), mechanisms a la Dullien are more suited for such policy preferences
Chart n of cases 25 Number of EUI cases, had it been in place since 2000 (EU27) 20 15 10 1 2 3 0.1 5 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
N. of cases since 2000 N. of cases since 2000 Trigger Number of interventions of EUI increases with Short-term unemploy ment rate Divergence around it 20 18 16 14 12 10 8 6 4 2 0 2,0 2,5 3,0 3,5 4,0 4,5 Short-term unemployment rate in EU28 (unweighted average) 20 18 16 14 12 10 8 6 4 2 0 0,00 0,50 1,00 1,50 2,00 2,50 Standard deviation of short-term unemployment rate in EU28
Claim Notional formula for calculating the amount actual use is up to national governments Claim = 0.8 UST x 0.4 MonthlyNCE x 12 Months 80% of short-term unemployment = < 12 months 40% of national compensation of employee 12 months of benefits
Euros Claim, euros 160 000 000 000 140 000 000 000 120 000 000 000 100 000 000 000 80 000 000 000 stdev = 3 stdev = 2 stdev = 1 stdev = 0.1 60 000 000 000 40 000 000 000 20 000 000 000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
% of EU27 GDP Claim, % of EU27 GDP 1,40 1,20 1,00 stdev = 1 stdev = 2 stdev = 3 stdev = 0.1 0,80 0,60 0,40 0,20 0,00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Deductible Why a deductible? if we stay within the class of contracts with the same expected loss, EU [expected utility] maximizers prefer a contract with full (100%) insurance above a fixed deductible. Which deductible: Based on additionality principle Equal to passive labour market expenditure for short term unemployed Since we do not have data for what is the share of STU in PLMP, just overall PLMP data, we simulate by adjusting PLMP data to duration of UB in the country the longer the duration of UB, smaller % of PLMP is counted as larger portions of the expenditure go to non short-term unemployed Range used from 0.5 for Belgium and Netherlands to 1.0 for most countries
months Max duration of UB by country 40 38 35 30 25 24 24 24 20 15 10 5 3 5 5 5 6 6 8 9 11 12 12 12 12 12 12 12 12 12 14 15 17 18 0
Payout Spain Estonia Cumulative payout - 2008/12 Greece Slovenia Romania Czech Republic Ireland Sweden Finland Poland stdev = 3 stdev = 2 stdev = 1 stdev = 0.1 Netherlands Italy Germany Belgium 0,0 1,0 2,0 3,0 4,0 5,0 6,0 7,0 8,0 % of GDP
Contribution Basic contribution: 0.1% of GDP if the overall fund holds less than 0.5% of GDP Experience rating: basic contribution is multiplied by a coefficient that reflects country balance with the fund over the last ten years Technically: Coefficient = sum of 10 annual coefficients Annual coefficient 0.1 if the country balance in a given year is positive or negative, but less than 0.1% of GDP country balance in a given year expressed as a % of GDP if it is negative and equal or higher than 0.1% of GDP
Contribution, average 2000/12 Poland Estonia Latvia Slovakia Lithuania Spain Bulgaria Greece United Kingdom Romania Malta Czech Republic Hungary Slovenia Cyprus Ireland Austria Netherlands Sweden Finland Portugal Luxembourg Italy France Germany Denmark Belgium stdev = 3 stdev = 2 stdev = 1 stdev = 0.1 0,00 0,05 0,10 0,15 0,20 0,25 0,30 0,35 0,40 0,45 0,50 % of GDP
Balance 2000-2012 Poland Slovakia Finland Austria Netherlands Luxembourg France Germany Denmark Belgium Italy Sweden Ireland Portugal Czech Republic Romania Croatia Malta Hungary Bulgaria United Kingdom Lithuania Slovenia Cyprus Latvia Greece Estonia Spain stdev = 3 stdev = 2 stdev = 1 stdev = 0.1-4,0-3,0-2,0-1,0 0,0 1,0 2,0 3,0 4,0 % of GDP
Pay out at the EU level 60 000 000 000 50 000 000 000 40 000 000 000 30 000 000 000 stdev = 0.1 stdev = 1 stdev = 2 stdev = 3 20 000 000 000 10 000 000 000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Contributions at the EU level 30 000 000 000 25 000 000 000 20 000 000 000 stdev = 0.1 stdev = 1 stdev = 2 stdev = 3 15 000 000 000 10 000 000 000 5 000 000 000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Overall balance of the fund, EU level 80 000 000 000 60 000 000 000 40 000 000 000 20 000 000 000 0-20 000 000 000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012-40 000 000 000-60 000 000 000 stdev = 0.1 stdev = 1 stdev = 2 stdev = 3
Conclusions Because of data availability issues, we could only simulate how the mechanism would have worked Simulation showed that: For a small average contribution, it delivers large shock absorption capacities Due to threshold issue, it is not suitable for EU-level absorption of small national shocks Optimal trigger is between 1 and 2 S.D. of short-term unemployment Large symmetric crisis can exhaust the fund so the following is needed: Either a larger annual payment should be envisioned Or a backstopping / one-time contribution Or scaling down the mechanism