EconPapers    
Economics at your fingertips  
 

Equity Risk, Conversion Risk, and the Demand for Insurance

Rodney Garratt () and John M. Marshall

Journal of Risk & Insurance, 2003, vol. 70, issue 3, 439-460

Abstract: Existing insurance theory fails when applied to real property because it does not account for variations in the economic environment. The article studies optimal property insurance in the presence of two sources of variation: equity risk and conversion risk. Equity risk is randomness of the value of a property. It tends to raise demand for conventional insurance. In contrast, conversion risk is randomness in the value the property would have if, after severe damage, it were converted to the highest‐valued use. It is distinct from equity risk because the highest‐valued use is typically not the current one. Under independent conversion risk, the optimum upper limit is a compromise among underlying conversion thresholds. Absent independence, the optimum can be quite different. Conversion risk can raise or lower the demand for property insurance. Insurance contracts that fail to address conversion tend to undermine the orderly disposition of obligations and reduce the gains from reallocation of risks through insurance.

Date: 2003
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
https://doi.org/10.1111/1539-6975.t01-1-00059

Related works:
Working Paper: Equity Risk, Conversion Risk, and the Demand for Insurance (1999) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:jrinsu:v:70:y:2003:i:3:p:439-460

Ordering information: This journal article can be ordered from
http://www.wiley.com/bw/subs.asp?ref=0022-4367

Access Statistics for this article

Journal of Risk & Insurance is currently edited by Keith Crocker

More articles in Journal of Risk & Insurance from The American Risk and Insurance Association Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().

 
Page updated 2020-05-01
Handle: RePEc:bla:jrinsu:v:70:y:2003:i:3:p:439-460