Narrow Framing and Life Insurance

38 Pages Posted: 7 Dec 2012

See all articles by Daniel Gottlieb

Daniel Gottlieb

University of Pennsylvania - Business & Public Policy Department

Kent A. Smetters

University of Pennsylvania - Business & Public Policy Department; National Bureau of Economic Research (NBER)

Date Written: December 2012

Abstract

Life insurance is a large yet poorly understood industry. A final death benefit is not paid for a majority of policies. Insurers make money on customers that lapse their policies and lose money on customers that keep their coverage. Policy loads are inverted relative to the dynamic pattern consistent with reclassification risk insurance. As an industry, insurers lobby to ban secondary markets despite the liquidity provided. These (and other) stylized facts cannot easily be explained by information problems alone. We demonstrate that a simple model of narrow framing, where consumers do not fully account for their need for future liquidity when purchasing insurance, offers a simple and unified explanation.

Suggested Citation

Gottlieb, Daniel and Smetters, Kent, Narrow Framing and Life Insurance (December 2012). NBER Working Paper No. w18601, Available at SSRN: https://ssrn.com/abstract=2186329

Daniel Gottlieb (Contact Author)

University of Pennsylvania - Business & Public Policy Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6372
United States

Kent Smetters

University of Pennsylvania - Business & Public Policy Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6372
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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