Whoops! It Happened Again. Demand for Insurance that Covers Multiple Risks
25 Pages Posted: 18 Apr 2016 Last revised: 22 Sep 2020
Date Written: September 21, 2020
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: Suggested Citation