Arbeitspapier

Guaranteed Renewable Life Insurance Under Demand Uncertainty

Guaranteed renewability is a prominent feature in many health and life insurance markets. It is well established in the literature that, when there is (only) risk type uncertainty, the optimal GR contract with renewal price set at the actuarially fair price for low risk types provides full insurance against reclassification risk. We develop a model that includes unpredictable (and unobservable) fluctuations in demand for life insurance as well as changes in risk type (observable) over individuals' lifetimes. The presence of demand type heterogeneity leads to the possibility that optimal GR contracts may have a renewal price that is either above or below the actuarially fair price of the lowest risk type in the population. Individuals whose type turns out to be high risk but low demand renew more of their GR insurance than is efficient due to the attractive renewal price. This results in incomplete insurance against re-classification risk. Although a first best efficient contract is not possible in the presence of demand type heterogeneity, the presence of GR contracts nonetheless improves welfare relative to an environment with only spot markets. Our results also apply to a comparison of environments with short versus long term (front loaded) insurance contracts.

Sprache
Englisch

Erschienen in
Series: CESifo Working Paper ; No. 7103

Klassifikation
Wirtschaft
Information, Knowledge, and Uncertainty: General
Economics of Contract: Theory
Insurance; Insurance Companies; Actuarial Studies
Thema
insurance
guaranteed renewability
re-classification risk
demand uncertainty

Ereignis
Geistige Schöpfung
(wer)
Hoy, Michael
Mirza, Afrasiab
Sadanand, Asha
Ereignis
Veröffentlichung
(wer)
Center for Economic Studies and ifo Institute (CESifo)
(wo)
Munich
(wann)
2018

Handle
Letzte Aktualisierung
10.03.2025, 11:42 MEZ

Datenpartner

Dieses Objekt wird bereitgestellt von:
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. Bei Fragen zum Objekt wenden Sie sich bitte an den Datenpartner.

Objekttyp

  • Arbeitspapier

Beteiligte

  • Hoy, Michael
  • Mirza, Afrasiab
  • Sadanand, Asha
  • Center for Economic Studies and ifo Institute (CESifo)

Entstanden

  • 2018

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