Discussion paper

DP12855 Financing Insurance

Insurance has an intertemporal aspect as insurance premia have to be paid up front. We argue that the financing of insurance is key to understanding basic insurance patterns and insurers' balance sheets. Limited enforcement implies that insurance is globally monotone increasing in household net worth and income, incomplete, and precautionary. These results hold in economies with income risk, durable goods and collateral constraints, and durable goods price risk, under quite general conditions. In equilibrium, insurers are financial intermediaries with collateralized loans as assets and diversified portfolios of insurance claims as liabilities. Collateral scarcity lowers the interest rate, reduces insurance, and increases inequality.

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Citation

Rampini, A and S Viswanathan (eds) (2018), “DP12855 Financing Insurance”, CEPR Press Discussion Paper No. 12855. https://new.cepr.org/publications/dp12855