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To Insure or Not to Insure?: An Insurance Puzzle

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  • Christian Gollier

    (University of Toulouse (LEERNA and IDEI), F-31042 Toulouse Cedex, France, e-mail: gollier@cict.fr)

Abstract

The selection of a deductible level in insurance is governed by the willingness to limit the risk borne by risk-averse agents at an acceptable cost, given the deadweight insurance loading. We examine the demand for insurance in a simple lifecycle model with a liquidity constraint and no serial correlation in the insurable risk. This allows for consumers to follow a time-diversification (self-insurance) strategy by accumulating buffer stock wealth. We conclude that insurance would only be demanded for catastrophic risks, or by people that are currently liquidity constrained. The added value of the insurance sector is thus surprisingly low in such an economy. The Geneva Papers on Risk and Insurance Theory (2003) 28, 5–24. doi:10.1023/A:1022112430242

Suggested Citation

  • Christian Gollier, 2003. "To Insure or Not to Insure?: An Insurance Puzzle," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 28(1), pages 5-24, June.
  • Handle: RePEc:pal:genrir:v:28:y:2003:i:1:p:5-24
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    Citations

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    Cited by:

    1. Ghesquiere, Francis & Mahul, Olivier, 2007. "Sovereign natural disaster insurance for developing countries : a paradigm shift in catastrophe risk financing," Policy Research Working Paper Series 4345, The World Bank.
    2. Flores, Gabriela & O’Donnell, Owen, 2016. "Catastrophic medical expenditure risk," Journal of Health Economics, Elsevier, vol. 46(C), pages 1-15.
    3. Chen Hua & Mahani Reza S., 2012. "Optimal Demand for Insurance with Consumption Commitments," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 6(2), pages 1-26, June.
    4. Christian Gollier, 2005. "Some Aspects of the Economics of Catastrophe Risk Insurance," CESifo Working Paper Series 1409, CESifo Group Munich.
    5. Clarke, Daniel J. & Hill, Ruth Vargas, 2013. "Cost-benefit analysis of the african risk capacity facility:," IFPRI discussion papers 1292, International Food Policy Research Institute (IFPRI).
    6. Ellis, Randall P. & Jiang, Shenyi & Manning, Willard G., 2015. "Optimal health insurance for multiple goods and time periods," Journal of Health Economics, Elsevier, vol. 41(C), pages 89-106.
    7. Moore, Kristen S. & Young, Virginia R., 2006. "Optimal insurance in a continuous-time model," Insurance: Mathematics and Economics, Elsevier, vol. 39(1), pages 47-68, August.
    8. Marielle Brunette & Stephane Couture & Eric Langlais, 2007. "Hedging Strategies in Forest Management," Working Papers - Cahiers du LEF 2007-07, Laboratoire d'Economie Forestiere, AgroParisTech-INRA.
    9. Hudson, Paul & Botzen, W.J. Wouter & Feyen, Luc & Aerts, Jeroen C.J.H., 2016. "Incentivising flood risk adaptation through risk based insurance premiums: Trade-offs between affordability and risk reduction," Ecological Economics, Elsevier, vol. 125(C), pages 1-13.
    10. Daniel Clarke & Sefan Dercon, 2009. "Insurance, Credit and Safety Nets for the Poor in a World of Risk," Working Papers 81, United Nations, Department of Economics and Social Affairs.

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