Pricing Unemployment Insurance – An Unemployment-Duration-Adjusted Approach

This study incorporates the survival analysis of unemployment duration into the insurance pricing framework to measure the fairly-priced premium rate for Taiwan's unemployment insurance (UI) program. Our results suggest that the fair premiums range from 0.2041% to 0.2436% under the 1999-2002 scheme and from 0.1388% to 0.1521% under the 2003-2009 scheme for various possible levels of average unemployment duration in Taiwan, and they are all lower than the current UI premium rate, 1%. This result explains in part why there is a persistent surplus in the UI program. The sensitivity analysis results indicate that the fair premium rate decreases with the hazard rate of exiting from unemployment and increases with the probability of entering into unemployment. The effect of the entering probability is found to be larger than that of the exiting probability. We also provide a wide range of systematic risk coefficient (β) values generated from three alternative methods to measure its impact on fair premium rates and find that the effect of β on premium rates is stronger under the 1999-2002 scheme than that of the 2003-2009 scheme.