Racial Differences in the Demand for Life Insurance

The objective of this article is to measure racial differences in the proportion of human capital that households protect with life insurance. Using the 2004 Survey of Consumer Finances data, racial differences in two stages of the process are tested, where it is assumed that households must decide both whether or not to purchase life insurance and how much of their human capital to insure (if they decide to purchase). Among married and cohabitating households, we find that, controlling for demographics and other factors, there is little difference in life insurance ownership between black and white households but that white households insure a larger proportion of their human capital than black households.     

Consumers’ collision insurance decisions: a mental models approach to theory evaluation

Using interviews with 74 drivers, we elicit and analyze how people think about collision insurance coverage and decide whether to buy coverage, and if so, what deductible level to carry. We compare respondents’ judgments and behaviors to predictions of three models: baseline expected utility (EU) theory, which predicts that insurance is an inferior good, meaning more wealthy people buy less; a modified EU model, which incorporates income constraints and suggests that property insurance is a normal good, meaning more wealthy people buy more; and a mental accounting model which predicts that consumers budget income across consumption categories. The results suggest they purchase insurance as a normal good, guided by a cognitive model that emphasizes budget constraints. Verbal reports reveal a desire to balance two conflicting goals in deductible decisions: keeping premiums ‘affordable’ and keeping deductible level ‘affordable.’ Thus, wealth does not distinguish people by risk aversion, but by ability to pay. In other words, the behavior of less wealthy people is not driven by greater risk aversion, but by their lesser ability to pay, both now and later. We find that a simple heuristic using only vehicle value accounts for most decisions of whether to purchase optional collision coverage: out of 45 respondents who did not have loans on their vehicles, 90% of those with vehicles worth more than $1000 carried collision coverage, while less than 30% of those with lower‐valued vehicles did.     

Household Life Cycle Protection: Life Insurance Holdings, Financial Vulnerability, and Portfolio Implications

Using the Survey of Consumer Finances, we examine the life cycle demand for different types of life insurance. Specifically, we test for the consumer's aversion to income volatility resulting from the death of a household's wage‐earner through the purchase of life insurance. We first develop a financial vulnerability index to control for the risk to the household. We then examine the life cycle demand for life insurance using several definitions of life insurance. We find, in contrast to previous research, that there is a relationship between financial vulnerability and the amount of term life or total life insurance purchased. In addition, we find older consumers use less life insurance to protect a certain level of financial vulnerability than younger consumers. Secondly, our study provides evidence that life insurance demand is jointly determined as part of a household's portfolio. Finally, we consider the impact of family members' nonmonetary contribution on the household's life cycle protection decision. Our results provide some evidence that households take into account the value of nonmonetary contribution in their insurance purchase.     

The Impact of Insurance Prices on Decision Making Biases: An Experimental Analysis

This article tests whether the use of endogenous risk categorization by insurers enables consumers to make better‐informed decisions even if they do not choose to purchase insurance. We do so by adding a simple insurance market to an experimental test of optimal (Bayesian) updating. In some sessions, no insurance is offered. In others, actuarially fair insurance prices are posted, and a subset of subjects is allowed to purchase this insurance. We find significant differences in the decision rules used depending on whether one observes insurance prices. Although the majority of choices correspond to Bayesian updating, the incidence of optimal decisions is higher in sessions with an insurance option. Most subjects given the option to purchase actuarially fair insurance choose to do so. However, fewer subjects purchase insurance when the probability of a loss is higher.     

国内居民个人寿险产品购买行为的规范分析

今天,个人寿险产品的购买成为越来越普及的一种消费活动,按着消费者购买行为规范分析的框架,分析发现:个人寿险产品兼有选购品和非渴求商品的特征;其消费者的购买决策行为属于一种“高介入度-理性”的活动;收入、教育水平、年龄、家庭生命周期、职业、产品提供的利益、消费态度和顾客品牌忠诚度等成为影响消费者对其进行购买的主要因素。     

An Empirical Investigation of the Demand for Bank‐Owned Life Insurance

Key employee life insurance in the banking industry is called bank‐owned life insurance (BOLI). Banks use BOLI to provide financial support to help reduce disruptions due to the death of a key executive and as a part of the executive compensation package. We investigate the characteristics of banks related to the amount of BOLI purchased. We find that BOLI purchases are positively related to bank size and leverage and negatively related to tax rates and employee salaries. We also find that BOLI purchases are related to bank ownership structure and profitability.     

Regret in health insurance post‐purchase behavior

Unlike other forms of insurance, individuals with health insurance generally expect to make claims through the policy period. Selecting an appropriate level of cost‐sharing is difficult and individuals may, ex‐post, regret the choice of a less‐than‐suitable coverage amount. Using a national health insurance survey of private market consumers from 2013 to 2017, we evaluate the potential for post‐purchase regret in the health plan purchasing decision. We employ an ordered logistic model and find that consumers whose plan choices were likely financially dominated by a foregone alternative are significantly more likely to express regret through reporting significantly lower likelihood of renewal, even when controlling for confounding considerations including affordability, self‐assessed risk, and satisfaction with the plan.     

Wealth, Income, and Optimal Insurance

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.     

Life Insurance Lapse Behavior

Life insurance policy lapses are detrimental to issuing insurers when lapses substantially deviate from insurer expectations. The extant literature has proposed and tested, using macroeconomic data, several hypotheses regarding lapse determinants. While macroeconomic data are useful in providing a general test of lapse determinants, the use of aggregate data precludes an analysis of microeconomic factors that may drive the lapse decision. We develop and test a microeconomic model of voluntary life insurance lapse behavior and provide some of the first evidence regarding household factors related to life insurance lapses. Our findings support and extend the prior evidence regarding lapse determinants. Consistent with the emergency fund hypothesis we find that voluntary lapses are related to large income shocks, and consistent with the policy replacement hypothesis we find that the decision to lapse a life insurance policy is directly related to the purchase of a different life insurance policy. We also find that age is an important moderating factor in the lapse decision. Changes in income appear to more directly affect the decision to lapse for younger households, while they are generally unrelated to the lapse decision for older households.     

Quantifying search and switching costs in the US auto insurance industry

I estimate demand for auto insurance in the presence of two types of market frictions: search and switching costs. I develop an integrated utility‐maximizing model in which consumers decide over which and how many companies to search and from which company to purchase. My modelling approach rationalizes observed consideration sets as being the outcomes of consumers' search processes. I find search costs to range from $35 to $170 and average switching costs of $40. Search costs are the most important driver of customer retention and their elimination is the main lever to increase consumer welfare in the auto insurance industry.     

A life-cycle model of unemployment and disability insurance

A general equilibrium life-cycle model is developed, in which individuals choose a sequence of saving and labor supply faced with search frictions and uncertainty in longevity, health status and medical expenditures. Unemployed individuals decide whether to apply for disability insurance (DI) benefits if eligible. We investigate the effects of cash transfer and in-kind Medicare component of the DI system on the life-cycle employment. Without Medicare benefits, DI coverage could fall significantly. We also study how DI interacts with reforms of Social Security and Medicare and find that DI enrollment amplifies the effects of reforms.     

Strategic Demand for Insurance

We focus on the corporate demand for insurance under duopoly. We consider the case in which firms purchase insurance in order to enhance their competitiveness. We show that a higher level of corporate insurance makes a firm more aggressive and its competitor less aggressive in the output market (strategic effect). The optimal coverage of insurance is determined by comparing the strategic effect of insurance and the cost of insurance. The optimal coverage is positive if the strategic effect is greater than the cost of insurance. An interesting implication is that a risk‐neutral firm may purchase actuarially unfair insurance. The main strategic effect of insurance comes from the fact that firms purchase insurance before they produce outputs. Insurance makes firms more aggressive due to the limited risk costs of firms.     

What Makes a Better Annuity?

Given costly and limited annuity products, we investigate how annuity market innovation could improve participation and increase individual welfare. We find that participation gains are most likely with new annuity products that concentrate on late‐life payouts. Our welfare analysis suggests that annuity innovation should focus on adding survival contingencies to assets commonly held by individuals. Finally, in a complete market setting, we find demand only for those annuity contracts with a significant time gap between purchase and payout (a rarity in current contracts). Overall, our analysis indicates ample opportunity for innovation to spur annuity demand and improve individual welfare.     

乐观预期、保障能力与商业保险购买——来自中国家庭的微观证据

本文基于中国家庭微观调查数据,在考虑商业保险“保障”和“投资”双重属性的前提下,实证研究了乐观预期对家庭商业保险购买的影响。结果发现,乐观预期对家庭商业保险购买存在显著的积极影响,即户主乐观预期程度越高,家庭购买商业保险的意愿越强。进一步区分保障型商业保险和投资型商业保险,发现乐观预期对商业保险购买的积极影响主要来自对投资型商业保险的需求,对保障型商业保险购买的影响则不显著。更重要地,不同风险保障能力下乐观预期对商业保险购买存在异质性影响,家庭储蓄较多、社会保障覆盖较好以及社会资本水平较高的家庭,乐观预期对商业保险购买的积极影响更大。本研究不仅有助于从预期视角理解商业保险市场的“有限参与”之谜,也为提升家庭风险保障和财富增值能力提供了借鉴。     

社会资本与中国农村养老保险——基于CHIPS数据的实证研究

党的十八大以来,习近平总书记多次发表重要论述,阐明自己的"民生观",指出中国养老问题的重要性。改革开放以来,中国经济、社会、政治都发生了巨大变化。福利一词也越来越多为人所谈论。本文以农村养老保险为切入口,研究社会资本、党员身份与农村养老保险的参与程度、知情程度、未来参与意愿之间的关系,从一个侧面反映中国农村的福利情况。通过文献综述,提出了六个假设。根据中国家庭收入调查(CHIPS)数据,建立Logistic回归模型,发现社会资本对是否参加农村养老保险、是否知道个人账户有多少钱、将来是否加入农村养老保险都有积极作用;党员身份与是否参加农村养老保险、是否知道自己的个人账户有多少钱、将来是否可能参加无关。结果表明,提高村民的社会资本,加强他们的社会交往有助于他们获取信息,改善福利,所以可以提高村民小组活动和村民大会的频率以增加农民的社会资本。     

Optimal Gradual Annuitization: Quantifying the Costs of Switching to Annuities

We compute the optimal dynamic annuitization and asset allocation policy for a retiree with Epstein–Zin preferences, uncertain investment horizon, potential bequest motives, and pre‐existing pension income. In our setting the retiree can decide each year how much he consumes and how much he invests in stocks, bonds, and life annuities, while the prior literature mostly considered restricted so‐called deterministic or stochastic switching strategies. We show that postponing the annuity purchase is no longer optimal in the gradual annuitization (GA) case since investors are able to attain the optimal mix between liquid assets (stocks and bonds) and illiquid life annuities each year. In order to assess potential utility losses, we benchmark various restricted annuitization strategies against the unrestricted GA strategy.     

Why Are Managed Care Plans Less Expensive: Risk Selection,Utilization, or Reimbursement?

This article develops a new method of decomposing the cost difference between HMO and non‐HMO plans into observed risk selection, unobserved risk selection, utilization differences, and differences in provider reimbursement rates. We implement this method using a large national sample of employer‐sponsored health insurance enrollees from the Community Tracking Study Household Survey. We find no evidence that HMO plans attract a disproportionate share of low‐risk enrollees; the US$188 difference between HMO and non‐HMO medical expenditures per enrollee can be explained by the relatively low provider reimbursement rates paid by HMO plans. This indicates there may be little need for employers to risk adjust insurance premiums or otherwise restrict employee choice of plan types.     

Reserves and cash flows under stochastic retirement

Uncertain time of retirement and uncertain structure of retirement benefits are risk factors for life insurance companies. Nevertheless, classical life insurance models assume these are deterministic. In this paper, we include the risk from stochastic time of retirement and stochastic benefit structure in a classical finite-state Markov model for a life insurance contract. We include discontinuities in the distribution of the retirement time. First, we derive formulas for appropriate scaling of the benefits according to the time of retirement and discuss the link between the scaling and the guarantees provided. Stochastic retirement creates a need to rethink the construction of disability products for high ages and ways to handle this are discussed. We show how to calculate market reserves and how to use modified transition probabilities to calculate expected cash flows without significantly more complexity than in the traditional model. At last, we demonstrate the impact of stochastic retirement on market reserves and expected cash flow in numerical examples.     

Social security, life insurance and annuities for families

In this paper we ask whether an aspect of social security, namely its role as a provider of insurance against uncertain life spans, is welfare enhancing. To this end we use an OLG model where agents have a bequest motive and differ in sex and marital status and where families are formed and destroyed and their characteristics evolve (exogenously) according to U.S. demographic patterns of marriage, divorce, fertility and mortality. We compare the implications of social security under a variety of market structures that differ in the extent to which life insurance and annuities are available. We find that social security is a bad idea. In economies where the private sector provides annuities and life insurance, it is a bad idea for the standard reason that it distorts the intertemporal margin by lowering the capital stock. In the absence of such securities social security is still a very bad idea, only marginally less so compared with economies with annuities and life insurance. We also explore these issues in a world where people live longer and we find no differences in our answers. As a by-product of our analysis we find that the existence of life insurance opportunities for people is important in welfare terms while that of annuities is not.     

Household Response to Government Debt: Evidence from Life Insurance Holdings

We use state‐level panel data on life insurance in force in the United States and find that a $1 increase in government debt, at either the state or federal level is associated with a $0.96 increase in the face value of the average life insurance holdings per capita for a household in the average state. This increase represents an intention to save that would almost completely offset the government debt in specific states of the world (i.e., if the insured dies). Because this state of the world is rare, the immediate increase in actual savings is only about $0.03, the cost of the additional insurance. We find, in addition, that this response occurs mainly on the intensive margin, meaning that the size of the average life insurance policy increases when government debt increases. Along the extensive margin, we find the number of policies in force falls slightly with federal debt, and rises slightly with state debt increases. The results show altruistic planning in response to changes in government debt that are consistent with Ricardian Equivalence and the long‐run neutrality of government debt.