Market insurance and endogenous saving with multiple loss states |
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| Affiliation: | 1. Seoul National University Business School, 1 Gwanak Ro, Gwanak Gu, Seoul 08826, Korea;2. Department of Statistics and Actuarial Science, Soongsil University, 369 Sangdo-Ro, Dongjak-Gu, Seoul 06978, Korea;1. College of Business Administration, Hunan University, Changsha 410082, China;2. Business School, Ningbo University, Ningbo 315211, China;1. Zhejiang Normal University, China;2. Deakin University, Australia;3. Guangdong University of Foreign Studies, China;1. Department of Economics, Rochester Institute of Technology, 92 Lomb Memorial Drive, Rochester, NY 14623-5604, USA;2. Department of Climate and Environmental Studies, Sookmyung Women’s University, 100 Cheongpa-ro 47-gil, Yongsan-gu, Seoul, Republic of Korea;1. Department of Business Administration, Ono Academic College, Zahal 104 Street, Kiryat Ono Zip Code: 5545173, Israel;2. College of Business, Zayed University, Abu Dhabi, United Arab Emirates;3. Institute of Business Research, University of Economics Ho Chi Minh City, Viet Nam;4. School of Economics, Finance and Banking, Universiti Utara Malaysia, Malaysia;5. Institute of Business Research and CFVG, University of Economics Ho Chi Minh City, Viet Nam |
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| Abstract: | The standard one-period model for insurance demand does not consider the interaction between the present and the future. Reflecting this observation, we analyze intertemporal insurance demand and saving in a two-period model with multiple loss states. When an individual has no access to a capital market, we first find that an actuarially fair premium does not guarantee full insurance in general, unlike in the standard approach. Income stream and discount factors are also important in determining insurance demand. Second, insurance is neither an inferior good nor a Giffen good. Third, an increase in concavity of the utility function does not always lead to an increase in insurance demand. The current income level and changes in downside risk aversion affect insurance demand. When the individual has access to a capital market, we further have the following observations. Fourth, an actuarially fair premium leads to full insurance. Fifth, insurance is an inferior good and can be a Giffen good under decreasing absolute risk aversion (DARA). An increase in the interest rate leads to a lower insurance demand and a higher saving when the relative risk aversion is less than unity. Lastly, an increase in concavity of the utility function leads to an increase in insurance demand and a decrease in saving. In conjunction, our findings point to the fact that the standard results are not obtainable if insurance demand is considered in isolation from the capital market. |
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| Keywords: | Risk Two-period model Insurance demand Saving Capital market Risk aversion D61 D81 |
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