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Risky Insurance: Insurance Portfolio Choice with Incomplete Markets
General Information
Title
Risky Insurance: Insurance Portfolio Choice with Incomplete Markets
Author
Joseph Briggs and Christopher Tonetti
Publication Type
Conference paper
Outlet
Society for Economic Dynamics
Year
2019
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.