Patrick Eugster () (Socioeconomic Institute, University of Zurich) Peter Zweifel () (Socioeconomic Institute, University of Zurich)
Abstract
This contribution starts out by noting a conflict of interest between consumers and insurers. Consumers face positive correlation in their assets (health, wealth, wisdom, i.e. skills), causing them to demand a great deal of insurance coverage. Insurers on the other hand eschew positively correlated risks. It can be shown that insurance contributes to a reduction of their asset volatility only if unexpected deviations of payments from expected value correlate negatively across lines of insurance. Analyzing deviations from trend in aggregate insurance payments, one finds the following for the United States and Switzerland. Private U.S. but not Swiss insurance has a hedging effect for consumers, while both social insurance schemes expose consumers to excess asset volatility. In the insurance systems of both countries, the private component fails to offset deviations in the social component (and vice versa). As to the supply of insurance, cointegration analysis indicates the absence of common trends. Therefore, insurance companies could offer combined policies to the benefit of consumers, hedging their underwriting risks both domestically and internationally.
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Paper provided by University of Zurich, Socioeconomic Institute in its series Working Papers with number
0604.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Stefan Boes & Markus Lipp & Rainer Winkelmann, 2005.
"Money Illusion Under Test,"
Working Papers
0514, University of Zurich, Socioeconomic Institute.
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Other versions:
Boes, Stefan & Lipp, Markus & Winkelmann, Rainer, 2007.
"Money illusion under test,"
Economics Letters,
Elsevier, vol. 94(3), pages 332-337, March.
[Downloadable!] (restricted)