Health shock risk, critical illness insurance, and housing services

Christoph Hambel

Insurance: Mathematics and Economics, 2020, vol. 91, issue C, 111-128

Abstract: This paper studies a consumption–investment problem involving health shock risk, perishable consumption, and consumption of housing services. Additionally to a risk-free asset and a stock index, the agent can invest in real estate. I analyze the impact of health shocks on the optimal consumption and investment decisions in model specifications with and without the possibility to buy critical illness insurance. I discuss the influence of critical illness insurance on the optimal strategy and analyze the drivers of the optimal critical illness insurance demand. The results indicate that health shock risk has potentially devastating consequences, especially for young agents. It turns out that critical illness insurance is an excellent instrument for hedging health shock risk and for consumption smoothing across different health states. Optimal critical illness insurance demand is decreasing in financial wealth and increasing in human wealth. Real estate prices have a minor influence on optimal critical illness insurance demand.

Keywords: Health shock risk; Critical illness insurance; Portfolio choice; Housing investments (search for similar items in EconPapers)
JEL-codes: D14 D91 G11 G22 R21 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:91:y:2020:i:c:p:111-128

DOI: 10.1016/j.insmatheco.2020.01.008

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