Demand For Insurance Research Articles

The impact of asymmetry of information and different ambiguity reactions on insurance demand

We extend the model of ex-ante asymmetric information in the insurance market of Stiglitz (1977) by incorporating consumers’ reactions to uncertainty. Specifically, we assume that some agents are able to assign a precise probability measure to the event of loss (Savage, 1954), whilst others are not. The behavior of the latter group complies either with proba-bilistic sophistication or ambiguity aversion as modeled by maxmin expected utility (Gilboa and Schmeidler, 1989). When the former class exhibits sufficient pessimism, these two types are virtually indistinguishable when exposed to rare hazards. Thus, pooling constitutes as an optimal solution to the problem of the monopolist.

Optimal insurance design under mean-variance preference with narrow framing

In this paper, we study an optimal insurance design problem under mean-variance criterion by considering the local gain-loss utility of the net payoff of insurance, namely, narrow framing. We extend the existing results in the literature to the case where the decision maker has mean-variance preference with a constraint on the expected utility of the net payoff of insurance, where the premium is determined by the mean-variance premium principle. We first show the existence and uniqueness of the optimal solution to the main problem studied in the paper. We find that the optimal indemnity function involves a deductible provided that the safety loading imposed on the “mean part” of the premium principle is strictly positive. Our main result shows that narrow framing indeed reduces the demand for insurance. The explicit optimal indemnity functions are derived under two special local gain-loss utility functions – the quadratic utility function and the piecewise linear utility function. As a spin-off result, the Bowley solution is also derived for a Stackelberg game between the decision maker and the insurer under the quadratic local gain-loss utility function. Several numerical examples are presented to further analyze the effects of narrow framing on the optimal indemnity function as well as the interests of both parties.

Flood insurance reforms, housing market dynamics, and adaptation to climate risks

This paper examines the impact of two nationwide reforms to the National Flood Insurance Program on both flood insurance and property markets. The 2012 and 2014 reforms aimed to phase out subsidies on flood insurance premiums. Using a difference-in-differences framework comparing treated and similar but untreated properties, we find that the reforms led to a 14.3% relative increase in the price of flood insurance, an 8.2% decrease in insurance demand, a 4.2% decrease in property prices and a 2.3% decrease in property transaction volumes. As flood risk continues to accelerate across the United States, properly pricing insurance premiums can effectively discourage households from living in risky areas, but may involve potential trade-offs such as the unintended outcome of a large drop-off in insurance coverage.

Does risk assessment and specific knowledge impact crop insurance underwriting? Evidence from Romanian farmers

Romania is one of the European countries in transition which has undertaken changes to align with the common agricultural policy after the EU adhesion. Our study examines the factors influencing the use of crop insurance as a strategy to mitigate risks by Romanian farmers. Using a sample of 721 farmers and a multinomial logit model we evaluate the impact of risk perception, risk taking, and specific knowledge, along with the farm’s characteristics and insurance perception variables, on the decision to buy crop insurance. We introduce among the classical influence factors, a novel determinant of crop insurance demand—the specific knowledge. Our empirical findings reveal that crop insurance knowledge and the assessment of risks are key factors for crop insurance buying, while the cultivated area, the trust in the insurer, and the type of culture are also significantly influencing this decision to buy crop insurance. Moreover, the chosen coverage is negatively influenced by the insurance premium adequacy and positively influenced by the farm’s revenue from crops. These findings are expected to help governments, policymakers, and insurers from transitional countries to better implement crop insurance as a risk management tool, by subsidizing the policies and raising the awareness of farmers regarding the risk exposure.

A Unified Framework for Insurance Demand and Mortality Immunization

This article explores an individual’s optimal insurance choice and an insurer’s optimal product mix consisting of whole life insurance and deferred life annuities in a market equilibrium framework. On the demand side, the insured decides an optimal insurance choice by maximizing lifetime expected utility. On the supply side, an insurer chooses an optimal product mix by minimizing the conditional value-at-risk (CVaR) in its lines of business. By varying the loading for each insurance product, we match demand and supply of these products to clear the market. Our results suggest that market equilibria may occur when life insurance loading is relatively high and annuity loading is relatively low. This calls for attention from insurance regulators and life insurers to review insurance/annuity underwriting and pricing.

Insurance demand in the presence of loss‐dependent background risk

AbstractWe analyze insurance demand when insurable losses come with an uninsurable zero‐mean background risk that increases in the loss size. If the individual is risk vulnerable, loss‐dependent background risk triggers a precautionary insurance motive and increases optimal insurance demand. Prudence alone is sufficient for insurance demand to increase in two cases: the case of fair insurance and the case where the smallest possible loss exceeds a certain threshold value (referred to as the large loss case). We derive conditions under which insurance demand increases or decreases in initial wealth. In the large loss case, prudence determines whether changes in the background risk lead to more insurance demand. We generalize this result to arbitrary loss distributions and find conditions based on decreasing third‐degree Ross risk aversion, Arrow–Pratt risk aversion, and Arrow–Pratt temperance.

A Cointegration Study of Life Insurance Demand in Malaysia

The expansion of the insurance sector has a profound effect on a country's economy. Insurance companies experienced a slowdown in premiums during the COVID-19 pandemic, particularly in the life sector. Due to consumers' discretionary decision to spend less on life insurance policies, premium volumes decreased globally. One way to provide income protection for dependents or beneficiaries upon the death of an insured person, total permanent disability, or policy contract maturity is through life insurance. This study, therefore, this study considers recent events as it examines the factors that influence the demand for life insurance in Malaysia. The ordinary least square (OLS) method is employed using 34 years of data spanning from 1988 until 2021. The result of VECM showed that Income positively affects demand in the long run, while the other two variables, savings, and unemployment negatively affect demand in the long run. The empirical findings are expected to enrich the existing literature and to create awareness of the benefits that life insurance may offer in potential risks transferred to the insurer. Furthermore, the research findings could also help policymakers create preventative measures to protect life insurance companies from the consequences of diminished market confidence in the slowdown of the business cycle.

Does childhood traumatic experience affect household life insurance demand in middle and older ages? Evidence from the 1959-1961 Great Chinese Famine

ABSTRACT Childhood unexpected trauma casts a lifelong shadow on subsequent financial behaviours. The existing literature has mainly investigated stock or bond market participation, and few scholars focus on insurance decisions. Our paper enriches previous studies by testing the impact of childhood famine exposure on household life insurance demand in middle and older age groups. Using CHARLS, we discover that householders exposed to the 1959–1961 Great Chinese Famine as children were more inclined to own life insurance policies and pay higher premiums. Specifically, respondents who experienced the famine between 0–2 or 7–17 years old highly promoted their life insurance demand, whereas no statistically significant effects were observed for preschool famine experience. Additionally, women and people with three or more children were more likely to be influenced by the famine. Finally, risk and time preference were effective mediation factors, both channelling around 5% of the relationship.

Why banks insure structured commodity trade finance risk: evidence from a worldwide survey

We identify major drivers of the demand for credit insurance, using a worldwide survey among banking executives in the structured commodity trade finance business. Our results show that a bank’s propensity to purchase insurance increases in its experience and expertise with the product, the impact of insurance coverage on its balance sheet, the risk of the underlying transaction, as well as the intensity of broker relationships. Other factors, such as the size of the commodity trade finance portfolio, the competitiveness of the insurance price, and the risks arising from commodity price volatility, seem to be of lesser relevance.

Whoops! It Happened Again: Demand for Insurance That Covers Multiple Risks

This article studies insurance demand in a two-period framework in which an individual faces risks in both current and future periods. Models for insurance with and without the presence of endogenous saving are both discussed. In contrast to what most literature suggests, when decisions on insurance and saving are made separately, insurance alone does not always unambiguously reduce risk, and decision makers might demand more insurance when there is a positive loading on the premium than when the insurance price is actuarially fair. We compare the demand for insurance in our framework with that in a two-period model where risk is concentrated in the second period and derive the conditions under which these demands differ. We examine the effects of risk aversion and derive the conditions under which a more risk-averse individual demands more or less insurance.

Insuring longevity risk and long-term care: Bequest, housing and liquidity

We study the impact of housing wealth and individual preferences on demand for annuities and long-term care insurance (LTCI). We build a multi-state lifecycle model that includes longevity risk and health shocks. The preference is represented by a recursive utility function that separates risk aversion and elasticity of intertemporal substitution (EIS). When health shocks are considered, a higher level of risk aversion lowers the annuity demand, while a lower level of the EIS has the opposite effect. The impact diminishes with a weaker bequest motive, more liquid wealth, or access to LTCI, all of which increase the demand for annuities. The presence of home equity can enhance annuity demand, but the enhancement is marginal when LTCI is available. The presence of home equity has a crowding-out effect on LTCI demand, and the effect is strengthened by a lack of bequest motives or a lower degree of risk aversion. The cash poor but asset rich may demand more LTCI coverage than their renter counterparts to preserve bequests. When both life annuities and LTCI are available, we find that the product demand is robust to changes in risk aversion and the EIS, providing insights into product designs that bundle annuities and LTCI.

A continuous-time model of self-protection

This paper deals with an optimal linear insurance demand model, where the protection buyer can also exert a time-dynamic costly prevention effort to reduce her risk exposure. This is expressed as a stochastic control problem that consists in maximising an exponential utility of a terminal wealth. We assume that the effort reduces the intensity of the jump arrival process and interpret this as dynamic self-protection. We solve the problem by using a dynamic programming approach, and we provide a representation of the certainty equivalent of the buyer as the solution to a backward stochastic differential equation (BSDE). Using this representation, we prove that an exponential utility maximiser has an incentive to modify her effort dynamically only in the presence of a terminal reimbursement in the contract. Otherwise, the dynamic effort is actually constant, for a class of compound Poisson loss processes. If there is no terminal reimbursement, we solve the problem explicitly and identify the dynamic certainty equivalent of the protection buyer. This shows in particular that the Lévy property of the loss process is preserved under exponential utility maximisation. We also characterise the constant effort as the unique minimiser of an explicit Hamiltonian, from which we can determine the optimal effort in particular cases. Finally, after studying the dependence of the BSDE associated to the insurance buyer on the linear insurance contract parameter, we prove the existence of an optimal linear cover that is not necessarily zero or full insurance.

The threshold effect of climate risk and the non-linear role of climate policy uncertainty on insurance demand: Evidence from OECD countries

This paper investigates whether climate risk and climate policy uncertainty (CPU) have traditional linear or complicated non-linear impacts on insurance demand. We find evidence that both phenomena exist. Linear model shows positive effect of climate risk and negative effect of CPU on insurance demand. However, climate risk and CPU are interdependent, non-linear analysis demonstrates that CPU acts as a threshold. In particular, climate risk has a U-shaped relationship with life insurance demand and an inverse S-shaped relationship with non-life insurance demand, which provides insurance companies with a better understanding of how insurance demand fluctuates under climate risk.

Confucianism and D&O insurance demand of Chinese listed companies

This study explores the relationship between Confucianism and business ethics and explains the reasons for the low coverage of directors' and officers' (D&O) insurance in emerging markets from the perspective of informal institutions. Using a sample of Chinese listed companies that issued A-shares from 2004 to 2020 and the index of jinshi degree holder density as the proxy variable for Confucianism, we empirically tested the impact of Confucianism on corporate D&O insurance demand. Our results demonstrated that ethical values such as integrity, honesty, and wisdom in Confucianism restrain the D&O insurance market. This result is robust to instrumental variables, propensity score matching, the Heckman two-step regression, and other methods. Our mechanism analysis revealed that corporate risk-taking is an important channel through which Confucianism inhibits the D&O insurance demand of listed companies. Further analysis showed that the external regulatory, legal, and natural environments are important factors affecting the negative correlation between them. The influence of Confucianism on D&O insurance demand is more significant if the corporate executive team lacks foreign experience or exhibits high decision-making myopia. Confucianism has a more significant inhibitory effect on D&O insurance in state-owned enterprises, non-foreign holding companies, and firms with small holdings by institutional investors. Litigation risk significantly enhances the inhibitory effect of Confucianism on D&O insurance.

Analysis of Demand for Long-Term Care Insurance in Wenzhou

In the context of the accelerated aging of Chinese society and the requirements of the Central Economic Work Conference to prevent major risks, this paper explores the long-term care insurance system of Wenzhou based on the data of the seventh census of Wenzhou in 2020, and analyzes the scale of the disabled elderly in Wenzhou, and thus derives the future demand for long-term care, and designs the corresponding contribution scheme while predicting the future cost of long-term care.

Study on the Dynamic Relationship between Chinese Residents’ Individual Characteristics and Commercial Health Insurance Demand

Based on the time series data of age characteristics, household registration characteristics, gender characteristics, education characteristics, marriage characteristics and commercial health insurance density of Chinese residents from 1997 to 2020, this paper aims to explore the dynamic relationship between the individual characteristics of Chinese residents and the demand for commercial health insurance by means of impulse response and variance decomposition analysis using an SVAR model. The results show that the age characteristics, household registration characteristics, gender characteristics, education characteristics and marriage characteristics of Chinese residents have a significant impact on the demand for commercial health insurance, but there is a time lag. There is a long-term equilibrium relationship between them: In terms of age characteristics and gender characteristics, the former has a positive effect in the short term and a significant inhibition on commercial health insurance demand in the long term, while the latter has the opposite. In terms of household registration characteristics, education characteristics and marriage characteristics, there are positive effects on the whole and negative effects in a particular period.

Differentiation of expenditure on health and life insurance in households in 2006–2020

Along with the growing wealth of society, the demand for insurance, including health insurance, increases. In recent years, there has been significant interest in insurance products which guarantee access to private healthcare facilities. The waiting time for an appointment with a specialist is shorter than in public institutions, and such insurance offers quick diagnostics and high-quality services.
 The study aimed to determine the level and differentiation of health insurance expenditure in various types of households and its share in total insurance expenses. From 2006 to 2020, as shown by statistics, the highest expenditure on health insurance was recorded in the households of non-manual workers (PLN 19.72 per person per year on average) and the lowest — in farmers’ families (8.85 per person per year on average). The indicator of the diversification of insurance expenditure structures for the surveyed households calculated for 2020 showed that farmers’ households had a significantly different (various) structure of expenditure on insurance than that observed in other types of households (total vpq = 0.96).

Risk Behavior of Small and Marginal Farmers in Cauvery Delta Zone, Tamil Nadu

Farmers’ risk preferences play an important role in agricultural production decisions, risk takers means the farmers who are willing to take risky decisions in farming, risk aversion means an attitude of reluctance to take risky decisions in farming. Climatic change effects all regions across the globe and causes substantial agitations that can be expected to be natural systems that have foreseeable influences on the economic systems of upland regions through both direct and indirect means. Risk preferences reflect the farmers’ personal experiences and beliefs, these preferences explain how the decision-maker assesses and react to risks. This study characterizes risk behaviour among marginal and small farmers in Cauvery Delta Zone and determines how these risk preferences affects the farmers. The study was conducted in Cauvery Delta zone of Thanjavur, Thiruvarur and Nagapattinam districts with a Sample size of 366 farmers which consists of 183 marginal and 183 small farmers was selected randomly based on proportionate random sampling method. The risk behavior was measured by the measure of risk attitude and two lottery methods viz., Eckel-Grossman and Holt-Laury based lottery method. Measure of risk attitude results shows that, 27.60 per cent of farmers were moderate risk taker followed by 24.30 per cent were risk averser and 15.00 per cent of farmers were risk taker. The Eckel and Grossman lottery method result shows CRRA (Constant Relative Risk Aversion) value was 0.38 to 0.67, which shows that marginal farmers were risk aversers and small farmers were moderate risk takers. The CRRA adapted from Holt and Laury [1] range for the maximum was 1.37 and minimum -1.71 for their choices. The majority of marginal farmers were risk aversers, the socio-economic characteristics of the farmers decides the risk preference. The risk-averse farmer this may imply risk-taking behavior that is reduced by risk aversion (resulting in on-farm risk management strategies) and a reduced demand of insurance.

The Long-term Impact of Covid-19 on Insurance Industry: Evidence from Time Series Model

The worldwide COVID-19 pandemic had a significant influence on the global financial market. As one of the most important compositions of the market, insurance industry, inevitably, was also influenced severely by such pandemic both in China and abroad. To study the impact of COIVD-19 on the profit of business insurance, the source of data and the methods utilized to estimate it, including Unit Root Test, VAR Model, and ARMA-GARCH Model were introduced in this paper. The analysis pointed out that two influences COVID-19 brought to the insurance field were opposite. First, the growing demand for business insurance benefited the insurance company. Nevertheless, the capital escaped from the financial market due to its tendency of avoiding risks, which led to the drastic diving of the market. In the short term, the disadvantage of the pandemic to the insurance industry overwhelmed the advantage. Nonetheless, the market will recover and return to normal in the long run.

생명보험 수요요인들의 인과성 변화

This paper examined the Granger causality and changes in its intensity for Korea life insurance demand, focusing on the financial market and insurance provider factors. The significant causality ratio (SCR) in Kwon (2018), which can measure the intensity as well as the change in the significance of Granger causality, was applied. The intensity of the Granger causality of the three-year treasury bond rate, three-year AA corporate bond rate, KOSPI200 index, and number of planners was examined for each life insurance demand from January 1997 to May 2022. The change in the intensity of Granger causality for life insuance demand were visualized through the time plot of SCR by demand factor and life insurance type which are endowment, pure-endowment insurances and insurance against death, respectively. As a result, it was confirmed that the existence and intensity of Granger causality of each demand factor for each insurance type changed, and the pattern of change varies by factor and life insurance type. The factor with higher Granger causality than other periods in the global financial crisis is the interest rate and the Granger causality of the number of planners showed the opposite pattern. The Granger causality of the stock index for insurance against death was lower than that of other insurances.