Wealth, Income, and Optimal Insurance

10 Pages Posted: 4 Mar 2007

See all articles by Kangoh Lee

Kangoh Lee

San Diego State University - Department of Economics

Abstract

This article considers the decision to purchase insurance against possible losses of a property or wealth. The decision involves a standard economic trade-off between the benefit of protection against loss and the cost of insurance premium. The premium is paid out of the income and decreases the consumption of other goods and services, rather than out of wealth and decreases the property or wealth. The demand for insurance depends mainly on the income and preferences. As a result, unlike in the standard model, a fair premium is neither necessary nor sufficient for the optimality of full coverage insurance. Rather, the individuals with higher incomes purchase full coverage insurance even at unfair prices of insurance while the individuals with lower income purchase partial coverage insurance at a fair price.

Suggested Citation

Lee, Kangoh, Wealth, Income, and Optimal Insurance. Journal of Risk & Insurance, Vol. 74, No. 1, pp. 175-184, March 2007. Available at SSRN: https://ssrn.com/abstract=967843 or http://dx.doi.org/10.1111/j.1539-6975.2007.00206.x

Kangoh Lee (Contact Author)

San Diego State University - Department of Economics ( email )

5500 Campanile Drive
San Diego, CA 92182
United States

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