Narrow Framing and Life Insurance

Daniel Gottlieb () and Kent Smetters ()

No 18601, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Life insurance is a large yet poorly understood industry. A final death benefit is not paid for a majority of policies. Insurers make money on customers that lapse their policies and lose money on customers that keep their coverage. Policy loads are inverted relative to the dynamic pattern consistent with reclassification risk insurance. As an industry, insurers lobby to ban secondary markets despite the liquidity provided. These (and other) stylized facts cannot easily be explained by information problems alone. We demonstrate that a simple model of narrow framing, where consumers do not fully account for their need for future liquidity when purchasing insurance, offers a simple and unified explanation.

JEL-codes: D03 G02 G22 (search for similar items in EconPapers)
Date: 2012-12
New Economics Papers: this item is included in nep-ias
Note: AG IO
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Citations: View citations in EconPapers (9)

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