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Background Uuncertainty and the Demand for Insurance against Insurable Risks

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Abstract

Theory suggests that people facing higher uninsurable background risk buy more insurance against other risks that are insurable. This proposition is supported by Italian cross-sectional data. It is shown that the probability of purchasing casualty insurance increases with earnings uncertainty. This finding is consistent with consumer preferences being characterised by decreasing absolute prudence

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Bibliographic Info

Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 02.

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Date of creation: 01 Apr 1998
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Publication status: Published in The Geneva Papers on Risk and Insurance Theory, May 1998, vol. 23, pages 7-27
Handle: RePEc:sef:csefwp:02

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Keywords: Insurance; background risk; prudence;

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  1. Elmendorf, Douglas W & Kimball, Miles S, 2000. "Taxation of Labor Income and the Demand for Risky Assets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(3), pages 801-33, August.
  2. Miles S. Kimball, 1989. "Precautionary Saving in the Small and in the Large," NBER Working Papers 2848, National Bureau of Economic Research, Inc.
  3. Eeckhoudt, Louis & Gollier, Christian & Schlesinger, Harris, 1996. "Changes in Background Risk and Risk-Taking Behavior," Econometrica, Econometric Society, vol. 64(3), pages 683-89, May.
  4. Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1992. "Earnings Uncertainty and Precautionary Saving," CEPR Discussion Papers 699, C.E.P.R. Discussion Papers.
  5. Miles S. Kimball, 1991. "Standard Risk Aversion," NBER Technical Working Papers 0099, National Bureau of Economic Research, Inc.
  6. Miles S. Kimball, 1991. "Precautionary Motives for Holding Assets," NBER Working Papers 3586, National Bureau of Economic Research, Inc.
  7. Marti G. Subrahmanyam & Günter Franke & Richard C. Stapleton, 1998. "The Size of Background Risk and the Theory of Risk Bearing," New York University, Leonard N. Stern School Finance Department Working Paper Seires 98-066, New York University, Leonard N. Stern School of Business-.
  8. Georges Dionne & Christian Gollier, 1992. "Comparative Statics Under Multiple Sources of Risk with Applications to Insurance Demand," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 17(1), pages 21-33, June.
  9. 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.
  10. Jeff Dominitz & Charles F. Manski, 1994. "Using Expectations Data to Study Subjective Income Expectations," NBER Working Papers 4937, National Bureau of Economic Research, Inc.
  11. Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1996. "Income Risk, Borrowing Constraints, and Portfolio Choice," American Economic Review, American Economic Association, vol. 86(1), pages 158-72, March.
  12. Doherty, Neil A & Schlesinger, Harris, 1983. "Optimal Insurance in Incomplete Markets," Journal of Political Economy, University of Chicago Press, vol. 91(6), pages 1045-54, December.
  13. Darrell Duffie & Thaleia Zariphopoulou, 1993. "Optimal Investment With Undiversifiable Income Risk," Mathematical Finance, Wiley Blackwell, vol. 3(2), pages 135-148.
  14. Gruber, Jonathan & Poterba, James, 1994. "Tax Incentives and the Decision to Purchase Health Insurance: Evidence from the Self-Employed," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 701-33, August.
  15. Lewis, Frank D, 1989. "Dependents and the Demand for Life Insurance," American Economic Review, American Economic Association, vol. 79(3), pages 452-67, June.
  16. Skinner, Jonathan, 1988. "Risky income, life cycle consumption, and precautionary savings," Journal of Monetary Economics, Elsevier, vol. 22(2), pages 237-255, September.
  17. Pratt, John W & Zeckhauser, Richard J, 1987. "Proper Risk Aversion," Econometrica, Econometric Society, vol. 55(1), pages 143-54, January.
  18. Anne Gron & Deborah J. Lucas, 1998. "External Financing and Insurance Cycles," NBER Chapters, in: The Economics of Property-Casualty Insurance, pages 5-28 National Bureau of Economic Research, Inc.
  19. Gollier, Christian & Pratt, John W, 1996. "Risk Vulnerability and the Tempering Effect of Background Risk," Econometrica, Econometric Society, vol. 64(5), pages 1109-23, September.
  20. Doherty, Neil A & Schlesinger, Harris, 1983. "The Optimal Deductible for an Insurance Policy When Initial Wealth Is Random," The Journal of Business, University of Chicago Press, vol. 56(4), pages 555-65, October.
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Cited by:
  1. Thomas Eichner & Andreas Wagener, 2002. "Increases in Risk and the Welfare State," CESifo Working Paper Series 685, CESifo Group Munich.
  2. Grande, Giuseppe & Ventura, Luigi, 2002. "Labor income and risky assets under market incompleteness: Evidence from Italian data," Journal of Banking & Finance, Elsevier, vol. 26(2-3), pages 597-620, March.
  3. Guiso, Luigi & Sodini, Paolo, 2012. "Household Finance: An Emerging Field," CEPR Discussion Papers 8934, C.E.P.R. Discussion Papers.
  4. Giovanni Millo & Gaetano Carmeci, 2011. "Non-life insurance consumption in Italy: a sub-regional panel data analysis," Journal of Geographical Systems, Springer, vol. 13(3), pages 273-298, September.
  5. Luigi Guiso & Monica Paiella, 2007. "Risk Aversion, Wealth, and Background Risk," Economics Working Papers ECO2007/47, European University Institute.
  6. Luc Arrondel & André Masson, 2002. "Stockholding in France," DELTA Working Papers 2002-09, DELTA (Ecole normale supérieure).
  7. Marc-Andre Letendre & Gregor Smith, 2000. "Precautionary saving and portfolio allocation: DP by GMM," Working Papers 1247, Queen's University, Department of Economics.
  8. Elisa Cavatorta, 2010. "A competing risk model for health and food insecurity in the West Bank," Birkbeck Working Papers in Economics and Finance 1013, Birkbeck, Department of Economics, Mathematics & Statistics.
  9. Cavatorta, Elisa & Pieroni, Luca, 2010. "A Competing Risk Model for Health and Food Insecurity in the West Bank," MPRA Paper 25555, University Library of Munich, Germany.
  10. Luc Arrondel & Hector Calvo-Pardo, 2002. "Portfolio Choice with a Correlated Background Risk : Theory and Evidence," DELTA Working Papers 2002-16, DELTA (Ecole normale supérieure).
  11. Landry, Craig E. & Jahan-Parvar, Mohammad R., 2008. "Flood Insurance Coverage in the Coastal Zone," MPRA Paper 15498, University Library of Munich, Germany.
  12. Koeniger, Winfried, 2001. "Labor and Financial Market Interactions: The Case of Labor Income Risk and Car Insurance in the UK 1969-95," IZA Discussion Papers 240, Institute for the Study of Labor (IZA).

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