Excluded losses and the demand for insurance |
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Authors: | Donald J. Meyer Jack Meyer |
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Affiliation: | (1) Department of Economics, Western Michigan University, Kalamazoo, MI 49008, USA;(2) Department of Economics, Michigan State University, East Lansing, MI 48824, USA |
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Abstract: | The demand for insurance is examined when the insured asset can incur losses that are excluded from insurance coverage. These losses are negatively correlated with covered losses and hence cannot be treated as background risk. Excluded losses have strikingly different effects on the demand for insurance than does background risk and lead to a modification of many standard insurance demand results. A number of new theorems concerning the effects of excluded losses are also presented. Risk-averse and prudent decision makers reduce their demand for insurance when excluded losses increase in size or riskiness. Excluded losses are a possible explanation for why many decision makers fail to take up insurance when it is offered. |
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