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

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Author Info
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.

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File URL: http://hdl.handle.net/10.1257/0002828042002642
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File URL: http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=94&issue=4&article=15&issue_date=September2004
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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 94 (2004)
Issue (Month): 4 (September)
Pages: 1130-1140
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Handle: RePEc:aea:aecrev:v:94:y:2004:i:4:p:1130-1140

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  1. Eeckhoudt, Louis & Meyer, Jack & Ormiston, Michael B, 1997. "The Interaction between the Demands for Insurance and Insurable Assets," Journal of Risk and Uncertainty, Springer, vol. 14(1), pages 25-39, January. [Downloadable!] (restricted)
  2. Dionne, Georges & Eeckhoudt, Louis, 1984. "Insurance and saving: some further results," Insurance: Mathematics and Economics, Elsevier, vol. 3(2), pages 101-110, April. [Downloadable!] (restricted)
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  3. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
  4. Cooper, Russell & Hayes, Beth, 1987. "Multi-period insurance contracts," International Journal of Industrial Organization, Elsevier, vol. 5(2), pages 211-231. [Downloadable!] (restricted)
  5. Olivia S. Mitchell & James M. Poterba & Mark J. Warshawsky, . "New Evidence on the Money's Worth of Individual Annuities," Pension Research Council Working Papers 97-9, Wharton School Pension Research Council, University of Pennsylvania.
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  6. David F. Bradford & Kyle Logue, 1996. "The Effects of Tax-Law Changes on Property-Casualty Insurance Prices," NBER Working Papers 5652, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Dreze, Jacques H. & Modigliani, Franco, 1972. "Consumption decisions under uncertainty," Journal of Economic Theory, Elsevier, vol. 5(3), pages 308-335, December. [Downloadable!] (restricted)
  8. Mayers, David & Smith, Clifford W, Jr, 1983. "The Interdependence of Individual Portfolio Decisions and the Demand for Insurance," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 304-11, April. [Downloadable!] (restricted)
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