Risky Insurance: Insurance Portfolio Choice with Incomplete Markets

Joseph Briggs and Christopher Tonetti
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Joseph Briggs: Federal Reserve Board of Governors

No 1388, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: We use a new survey to document significant perceived counterparty risk in annuity, life insurance, and long-term care insurance markets. We find that nonpayment risk significantly predicts insurance product ownership. In fact, annuity and long-term care insurance markets would be approximately twice as large if products were perceived as risk-free. To interpret our measures, we develop a new lifecycle model of the joint demand for these three products that allows for uninsurable counterparty risk and other dimensions of incomplete markets. We find that these risks significantly decrease insurance demand, and, as a result, welfare costs of sub-optimal insurance portfolios are small. However, the welfare costs of counterparty risk and incomplete markets – whether real or perceived – are large relative to a complete market benchmark.

Date: 2019
New Economics Papers: this item is included in nep-dge and nep-ias
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:1388

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