Whoops! It Happened Again. Demand for Insurance that Covers Multiple Risks

25 Pages Posted: 18 Apr 2016 Last revised: 22 Sep 2020

See all articles by Liang Hong

Liang Hong

The University of Texas at Dallas

Harris Schlesinger

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

Boyi Zhuang

The University of Alabama - ACIIR

Date Written: September 21, 2020

Abstract

This article studies insurance demand in a two-period framework in which an individual faces risks in both current and future periods. Models for insurance with and without the presence of endogenous saving are both discussed. In contrast to what most literature suggests, when decisions on insurance and saving are made separately, insurance alone does not always unambiguously reduce risk, and decision-makers might demand more insurance when there is a positive loading on the premium than when the insurance price is actuarially fair. We compare the demand for insurance in our framework with that in a two-period model where risk is concentrated in the second period, and derive the conditions under which these demands would differ. We examine the effects of risk-aversion and derive the conditions under which a more risk-averse individual demands more or less insurance.

Keywords: Two-period Model; Insurance; Multiple Risks; Riskiness.

JEL Classification: D81, D91

Suggested Citation

Hong, Liang and Schlesinger, Harris and Zhuang, Boyi, Whoops! It Happened Again. Demand for Insurance that Covers Multiple Risks (September 21, 2020). Available at SSRN: https://ssrn.com/abstract=2765962 or http://dx.doi.org/10.2139/ssrn.2765962

Liang Hong

The University of Texas at Dallas ( email )

2601 North Floyd Road
Richardson, TX 75083
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

Boyi Zhuang (Contact Author)

The University of Alabama - ACIIR ( email )

1500 Greensboro Ave Suite 2
Box 870397
Tuscaloosa, AL Alabama 35401
United States

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