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Risky Insurance: Insurance Portfolio Choice with Incomplete Markets

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  • Joseph Briggs

    (Federal Reserve Board of Governors)

  • Christopher Tonetti

    (Stanford GSB)

Abstract

We use a new survey to document significant perceived counterparty risk in annuity, life insurance, and long-term care insurance markets. We find that nonpayment risk significantly predicts insurance product ownership. In fact, annuity and long-term care insurance markets would be approximately twice as large if products were perceived as risk-free. To interpret our measures, we develop a new lifecycle model of the joint demand for these three products that allows for uninsurable counterparty risk and other dimensions of incomplete markets. We find that these risks significantly decrease insurance demand, and, as a result, welfare costs of sub-optimal insurance portfolios are small. However, the welfare costs of counterparty risk and incomplete markets – whether real or perceived – are large relative to a complete market benchmark.

Suggested Citation

  • Joseph Briggs & Christopher Tonetti, 2019. "Risky Insurance: Insurance Portfolio Choice with Incomplete Markets," 2019 Meeting Papers 1388, Society for Economic Dynamics.
    • Handle: RePEc:red:sed019:1388
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    3. de Bresser, Jochem & Knoef, Marike & van Ooijen, Raun, 2021. "Preferences for In-Kind and In-Cash Home Care Insurance," Other publications TiSEM fca83bd4-09cc-4072-81c6-0, Tilburg University, School of Economics and Management.

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