Wealth, Income, and Optimal Insurance

Abstract

This article considers the decision to purchase insurance against possible losses of a property or wealth. The decision involves a standard economic trade-off between the benefit of protection against loss and the cost of insurance premium. The premium is paid out of the income and decreases the consumption of other goods and services, rather than out of wealth and decreases the property or wealth. The demand for insurance depends mainly on the income and preferences. As a result, unlike in the standard model, a fair premium is neither necessary nor sufficient for the optimality of full coverage insurance. Rather, the individuals with higher incomes purchase full coverage insurance even at unfair prices of insurance while the individuals with lower income purchase partial coverage insurance at a fair price. Copyright The Journal of Risk and Insurance, 2007.

Flood Insurance Coverage in the Coastal Zone

“…On the other hand, if full insurance is legally required with strictly enforced provisions, insurance coverage may not be an object of discretionary choice. Variations in optimal coverage choice can also be explored through the introduction of different forms of utility in (e.g., Braun and Muermann, 2004; Lee, 2007) or through defining utility over changes in wealth (Kahneman and Tversky, 1979). Though not explicitly considered in model , the likelihood and expected magnitude of disaster assistance may affect the demand for flood insurance.…”

Optimal Health Insurance and Trade-Off between Health and Wealth

“…The trade-off between the two factors is a central issue for social policy and household risk management. A large body of literature has investigated the problem both theoretically and numerically (e.g., [21,[29][30][31][32]…”

“…To the best of our knowledge, our work is among the first efforts to solve individual-level optimal health insurance. Inspired by the existing literature on utility of health and utility of wealth (e.g., [21,[27][28][29][30][31][32]), we employ the utility function Uðh, wÞ = h − log ðwÞ to describe the trade-off between health and wealth, where h denotes health status and w denotes wealth. To solve our optimization problem, we extend the method proposed by Arrow [1][2][3], Raviv [6], Gollier and Schlesinger [8], Zhou et al [14], and Fan [33].…”

The Impact of Public Insurance on Private Insurance Demand

“…Likewise, Hoy and Robson (1981) derived the condition for insurance to be a Giffen (extremely inferior) good, while Briys, Dionne, and Eeckhoudt (1989) later generalized Hoy and Robson's (1981) analysis. Subsequently, Austin and Fischhoff (2010) modified the model in Lee (2007) so as to separate the concepts of income and wealth and Hau (2008) investigated the conditions where coinsurance-type insurance creates inferior and Giffen goods. Most recently, Zhou, Wu, and Wu (2010) showed that insurance is an inferior good when a loss limit constraint exists for the insurer, while Lee (2012) suggested that decreasing the degree of absolute risk aversion is not a necessary and sufficient condition for insurance to be an inferior good.…”