Working Paper: NBER ID: w18601
Authors: Daniel Gottlieb; Kent Smetters
Abstract: Life insurance is a large yet poorly understood industry. A final death benefit is not paid for a majority of policies. Insurers make money on customers that lapse their policies and lose money on customers that keep their coverage. Policy loads are inverted relative to the dynamic pattern consistent with reclassification risk insurance. As an industry, insurers lobby to ban secondary markets despite the liquidity provided. These (and other) stylized facts cannot easily be explained by information problems alone. We demonstrate that a simple model of narrow framing, where consumers do not fully account for their need for future liquidity when purchasing insurance, offers a simple and unified explanation.
Keywords: Narrow Framing; Life Insurance; Consumer Behavior; Behavioral Economics
JEL Codes: D03; G22; G02
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Inadequate Consideration of Background Risks (J17) | Lapsation (G33) |
| Lapsation (G33) | Insurers' Profitability (G52) |
| Policy Design (G52) | Insurers' Profitability (G52) |
| Narrow framing (F12) | Inadequate Consideration of Background Risks (J17) |
| Narrow framing (F12) | Policy Design (G52) |
| Insurers' opposition to secondary markets (G52) | Profitability from lapsing policies (G22) |