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Insurance, Consumption, and Saving: A Dynamic Analysis in Continuous Time

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  • R.A. Somerville

Abstract

This paper shows how the demand for non-life insurance interacts with consumption and saving. The analysis is set in continuous time, using the maximum principle. When insurance is actuarially fair, the insurance and consumption decisions are separable. With loaded premiums, and alternatively without insurance, optimal consumption is dynamically related to the growth rate of the loss probability, and a growing loss probability generates precautionary saving. With loaded premiums, less than full insurance is demanded at each instant, and optimal cover varies over time, whether or not the loss probability is constant.

Suggested Citation

  • R.A. Somerville, 2004. "Insurance, Consumption, and Saving: A Dynamic Analysis in Continuous Time," American Economic Review, American Economic Association, vol. 94(4), pages 1130-1140, September.
    • Handle: RePEc:aea:aecrev:v:94:y:2004:i:4:p:1130-1140
    Note: DOI: 10.1257/0002828042002642
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    References listed on IDEAS

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    Cited by:

    1. Frédéric Gannon & Vincent Touzé, 2006. "Insurance and Optimal Growth," Post-Print halshs-00085181, HAL.
    2. repec:spo:wpecon:info:hdl:2441/4422 is not listed on IDEAS
    3. repec:hal:spmain:info:hdl:2441/4422 is not listed on IDEAS
    4. repec:hal:wpspec:info:hdl:2441/4422 is not listed on IDEAS
    5. Fwu-Ranq Chang, 2008. "Property Insurance, Portfolio Selection and their Interdependence," CESifo Working Paper Series 2260, CESifo.
    6. José S. Penalva, 2003. "A Study of the Interaction of Insurance and Financial Markets: Efficiency and Full Insurance Coverage," Working Papers 286, Barcelona School of Economics.

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