Working Paper: NBER ID: w14210
Authors: Dwight Jaffee; Howard Kunreuther; Erwann Michel-Kerjan
Abstract: This paper proposes long-term insurance (LTI) as an alternative to the standard annual homeowners policy using lessons from the mortgage market as a benchmark. LTI has the potential to significantly increase social welfare by reducing insurers' administrative costs, lowering search costs and uncertainty for consumers and providing incentives for long-term investment in mitigation measures to protect property. A two-period model illustrates situations that would make a long-term contract attractive to both insurers and consumers under competitive market conditions.
Keywords: Long-term insurance; Catastrophe risk; Social welfare; Insurance market
JEL Codes: G1; G2; G22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| implementation of long-term insurance (LTI) (G52) | increase social welfare (D69) |
| implementation of long-term insurance (LTI) (G52) | reduce administrative costs (K23) |
| implementation of long-term insurance (LTI) (G52) | lower search costs (G14) |
| implementation of long-term insurance (LTI) (G52) | reduce uncertainty for consumers (D80) |
| implementation of long-term insurance (LTI) (G52) | increase investment in mitigation measures (E22) |
| current short-term insurance policies (G52) | increase social costs (H39) |
| lack of LTI (Y70) | reluctance to invest in protective measures (G31) |
| implementation of long-term insurance (LTI) (G52) | reduce homeowners' reluctance to invest in protective measures (G52) |