Precautionary Insurance Demand with State-Dependent Background Risk

16 Pages Posted: 10 Mar 2008

See all articles by Wenan Fei

Wenan Fei

Hartford Life Insurance Company

Harris Schlesinger

University of Alabama; CESifo (Center for Economic Studies and Ifo Institute)

Abstract

This article considers a zero-mean background risk that is uncorrelated with insurable losses, but is not necessarily statistically independent. In particular, the size of the background risk can vary in different insurable-loss states. We show how a prudent individual will buy either more insurance or less insurance than with no background risk, depending on the relative size of the background risk in the loss states vis-á-vis the no-loss states. If we consider two individuals, with one more risk averse than the other, we need to compare the intensities of their precautionary motives, in addition to their measures of risk aversion, before we can determine who buys more insurance coverage in the presence of the state dependent background risk.

Suggested Citation

Fei, Wenan and Schlesinger, Harris, Precautionary Insurance Demand with State-Dependent Background Risk. Journal of Risk & Insurance, Vol. 75, Issue 1, pp. 1-16, March 2008, Available at SSRN: https://ssrn.com/abstract=1103696 or http://dx.doi.org/10.1111/j.1539-6975.2007.00245.x

Wenan Fei

Hartford Life Insurance Company ( email )

200 Hopmeadow Street
Simsbury, CT 06089
United States

Harris Schlesinger

University of Alabama ( email )

P.O. Box 870244
200 Alston Hall, Box 870224
Tuscaloosa, AL 35487
United States
205-348-7858 (Phone)
205-348-0590 (Fax)

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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