Underinsurance Caused by Uninsurable Losses in the Public Good and Personal Assets

9 Pages Posted: 13 Apr 2019

See all articles by Fan-chin Kung

Fan-chin Kung

East Carolina University

Haiyong Liu

East Carolina University - Department of Economics

Date Written: September 20, 2018

Abstract

A significant portion of flood damages were not covered by insurance, and policies are devised to promote insurance coverage. There are, however, rational reasons for why households may not purchase full insurance facing risks. We discuss optimal underinsurance when there are uninsurable losses in the public good or personal assets. In a first-best allocation, households will fully restore the damaged public good after a natural hazard and purchase full insurance. When public good restoration is not available, the Samuelson condition holds in expected utility, and households purchase insurance less than their wealth loss. Also, when there are uninsurable losses in personal assets, that optimal insurance purchase is less than the wealth loss. We provide a model based on households' choices of coverage and deductibles in insurance purchases, that can be used to estimate their risk preferences towards natural hazards.

Keywords: Underinsurance, flood insurance, public good and risk, estimating risk preferences, uninsurable loss

JEL Classification: D81, H44, G22

Suggested Citation

Kung, Fan-chin and Liu, Haiyong, Underinsurance Caused by Uninsurable Losses in the Public Good and Personal Assets (September 20, 2018). Available at SSRN: https://ssrn.com/abstract=3354790 or http://dx.doi.org/10.2139/ssrn.3354790

Fan-chin Kung (Contact Author)

East Carolina University ( email )

Brewster A438
Greenville, NC 27858
United States

HOME PAGE: http://personal.cityu.edu.hk/~kungfc/

Haiyong Liu

East Carolina University - Department of Economics ( email )

Brewster Building
Greenville, NC 27858
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
2
Abstract Views
59
PlumX Metrics