Download This PaperIndividual Property Risk Management
20 Pages Posted: 18 Mar 2010 Last revised: 11 Apr 2010
Date Written: January 10, 2010
Abstract
This paper reviews household property risk management and estimates normatively optimal choice under theoretical assumptions. Although risk retention limits are common in the financial planning industry, estimates of optimal risk retention that include both financial and human wealth far exceed limits commonly recommended. Households appear to frame property losses differently from other wealth losses, leading to wealth-reducing excess risk transfer. Possible theoretical explanations for excess sensitivity to loss are reviewed. Differences between observed and optimal risk management imply a large potential gain from improved choice.
Keywords: household risk, prospect theory, optimal risk retention
JEL Classification: D11, D81, G22
Suggested Citation: Suggested Citation
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