Comparative risk aversion in two periods: An application to self‐insurance and self‐protection

Abstract

Risk management decisions provide a means to elicit individuals' risk preferences empirically. In such a context, the literature often presumes that the decision to invest in risk management and the benefit of this investment occur contemporaneously. There is, however, no consensus in the theoretical literature that one-period results can be transferred to intertemporal settings. To address this gap, we study the effect of an increase in risk aversion on the demand for risk management in a two-period context. Our findings reproduce the one-period results and, thus, support the focus of previous empirical literature on the structure of the risk rather than on the timing of investments and benefits. We also contrast our results with those obtained by employing widely used but limited preferences to examine risk aversion in intertemporal settings (standard additive expected utility setting, Selden, Epstein and Zin).

Optimal self‐protection and health risk perceptions: Exploring connections between risk theory and the Health Belief Model

“…(1999) and others (see the exhaustive review in Courbage et al., 2013). A similar result was confirmed by Menegatti (2009) and Huber (2022) for a two‐period model. This probability threshold that determines if self‐protection increases or decreases with risk aversion is considered endogenous in the sense that it depends jointly on the preferences of both the benchmark agent and the “more risk averse” agent involved in the comparison.…”

“…After Dionne and Eeckhoudt (1985), showed that self-protection, contrary to self-insurance, can decrease when risk aversion increases, a loss probability threshold over which this effect takes place has been identified in a one-period setting by Jullien et al (1999) and others (see the exhaustive review in Courbage et al, 2013). A similar result was confirmed by Menegatti (2009) and Huber (2022) for a two-period model. This probability threshold that determines if self-protection increases or decreases with risk aversion is considered endogenous in the sense that it depends jointly on the preferences of both the benchmark agent and the "more risk averse" agent involved in the comparison.…”

“…Assumption 1 is required to ensure that self‐protection can be a desirable choice and to guarantee the concavity in ɛ of the utility function U d (Jullien et al., 1999, Condition C1, p. 23). Huber (2022) also stresses the need for this assumption when a Kihlstrom‐Mirman expected utility function is used.…”

Financial Performance Of Sharia Life Insurance Companies In Indonesia

“…If the company can manage and make good investment decisions, it will increase its profits. Investment results have a positive effect on the financial performance of the life insurance company, seen from its profit (Huber, 2022).…”

“…This supports the research by Hidayat et al (2021), which explains that premium income affects profits positively, meaning that the company's profit increases with increasing premium income. Besides receiving funds from customers, the company also must return the funds to customers (Huber, 2022). Therefore, the company will process the funds received by making investments in Sharia financial institutions.…”