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Wealth, Income, and Optimal Insurance

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  • Kangoh Lee

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

  • Kangoh Lee, 2007. "Wealth, Income, and Optimal Insurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 74(1), pages 175-184, March.
    • Handle: RePEc:bla:jrinsu:v:74:y:2007:i:1:p:175-184
    DOI: 10.1111/j.1539-6975.2007.00206.x
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    Cited by:

    1. Hun Seog, S. & Hong, Jimin, 2022. "Market insurance and endogenous saving with multiple loss states," The North American Journal of Economics and Finance, Elsevier, vol. 61(C).
    2. Alhassan, Abdul Latif & Biekpe, Nicholas, 2016. "Determinants of life insurance consumption in Africa," Research in International Business and Finance, Elsevier, vol. 37(C), pages 17-27.
    3. Kangoh Lee, 2012. "Uncertain indemnity and the demand for insurance," Theory and Decision, Springer, vol. 73(2), pages 249-265, August.
    4. Lee, Kangoh, 2012. "Background risk and self-protection," Economics Letters, Elsevier, vol. 114(3), pages 262-264.
    5. Lee, Hangsuck & Ryu, Doojin & Son, Jihoon, 2022. "Insurance-adjusted valuation, decision making, and capital return," International Review of Financial Analysis, Elsevier, vol. 84(C).
    6. Trinh, Cong Tam & Nguyen, Xuan & Sgro, Pasquale & Pham, Cong S., 2020. "Culture, financial crisis and the demand for property, accident and health insurance in the OECD countries," Economic Modelling, Elsevier, vol. 93(C), pages 480-498.
    7. Cong Tam Trinh & Xuan Nguyen & Pasquale Sgro, 2021. "Culture and the demand for non‐life insurance: Empirical evidences from middle‐income and high‐income economies," Economics of Transition and Institutional Change, John Wiley & Sons, vol. 29(3), pages 431-458, July.
    8. Jimin Hong & Kyungsun Kim, 2021. "Self-insurance and saving under a two-argument utility framework," Journal of Economics, Springer, vol. 134(1), pages 73-94, September.

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