Working Paper: CEPR ID: DP12855
Authors: Adriano A. Rampini; S. Viswanathan
Abstract: 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.
Keywords: household finance; collateral; insurance; risk management; financial constraints
JEL Codes: D91; E21; G22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| household net worth (D14) | insurance coverage (G52) |
| income (E25) | insurance coverage (G52) |
| limited enforcement (K19) | incomplete insurance (G52) |
| household net worth (D14) | insurance participation (G52) |
| collateral scarcity (D16) | interest rates (E43) |
| collateral scarcity (D16) | insurance availability (G52) |
| collateral scarcity (D16) | wealth inequality (D31) |
| increased uncertainty (D89) | higher state-contingent savings (D14) |