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Demand for non-life insurance under habit formation

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  • Li, Wenyuan
  • Tan, Ken Seng
  • Wei, Pengyu

Abstract

This paper studies the optimal non-life insurance for an individual exhibiting internal habit formation in a life-cycle model. We show that the optimal indemnity is deductible under the expected premium principle. Under the additional assumption of exponential utility functions, we obtain the optimal strategies explicitly and find that habit formation reduces insurance coverage. Our model offers a potential explanation for global underinsurance phenomenon. Some numerical examples and sensitivity analysis are presented to highlight our theoretical results.

Suggested Citation

  • Li, Wenyuan & Tan, Ken Seng & Wei, Pengyu, 2021. "Demand for non-life insurance under habit formation," Insurance: Mathematics and Economics, Elsevier, vol. 101(PA), pages 38-54.
    • Handle: RePEc:eee:insuma:v:101:y:2021:i:pa:p:38-54
    DOI: 10.1016/j.insmatheco.2020.06.012
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    References listed on IDEAS

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    Cited by:

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    More about this item

    Keywords

    Habit formation; Optimal insurance; Consumption; Deductible; Proportional insurance;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G52 - Financial Economics - - Household Finance - - - Insurance

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