TY - JOUR
T1 - On the use of intertemporal models to analyse how post-loss and post no-loss insurance demands differ
AU - Mumo, Richard
AU - Njagarah, John Boscoh H.
AU - Kiremu, Mercy K.
AU - Watt, Richard
N1 - Funding Information:
R. K. Mumo acknowledges the financial support from BIUST under grant number Botswana International University of Science and Technology. ID: R00132.
Publisher Copyright:
© 2022 The Author(s). This open access article is distributed under a Creative Commons Attribution (CC-BY) 4.0 license.
PY - 2022
Y1 - 2022
N2 - A general problem in insurance economics is to establish how insurance demand is affected by the size of the loss suffered in the previous period. This problem lays out the underlying objective of this study, which examines how insurance demand changes post-catastrophes, and how it can be theoretically modelled. We present a basic theoretic model to examine how post-accident insurance demand differs from post no-accident insurance demand. Our study first explores post-loss insurance demand from a two-period perspective and then examines how utility curvature parameters affect insurance demand across two periods. In our simulation results, it is observed that the optimal insurance demand with or without intertemporal consideration is the same in the absence of consumption smoothing mechanism. In addition, the experience of having an accident increases insurance purchases in the next period compared to when there was no accident in the previous period. In view of our findings, insurance stakeholders can develop strategies designed to improve post-loss outcomes for insurance consumers that include adequate coverage both after a loss and following a no-loss event by better understanding how insurance demand changes post-loss. We note that our proposition is limiting, but this limitation offers an interesting area of exploration. More studies are thus encouraged to model explicitly the utility derived from the wealth in the second period. In addition, further research is needed into the effects of consumption decisions and how to solve the bivariate optimisation problem that results.
AB - A general problem in insurance economics is to establish how insurance demand is affected by the size of the loss suffered in the previous period. This problem lays out the underlying objective of this study, which examines how insurance demand changes post-catastrophes, and how it can be theoretically modelled. We present a basic theoretic model to examine how post-accident insurance demand differs from post no-accident insurance demand. Our study first explores post-loss insurance demand from a two-period perspective and then examines how utility curvature parameters affect insurance demand across two periods. In our simulation results, it is observed that the optimal insurance demand with or without intertemporal consideration is the same in the absence of consumption smoothing mechanism. In addition, the experience of having an accident increases insurance purchases in the next period compared to when there was no accident in the previous period. In view of our findings, insurance stakeholders can develop strategies designed to improve post-loss outcomes for insurance consumers that include adequate coverage both after a loss and following a no-loss event by better understanding how insurance demand changes post-loss. We note that our proposition is limiting, but this limitation offers an interesting area of exploration. More studies are thus encouraged to model explicitly the utility derived from the wealth in the second period. In addition, further research is needed into the effects of consumption decisions and how to solve the bivariate optimisation problem that results.
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U2 - 10.1080/23322039.2022.2035493
DO - 10.1080/23322039.2022.2035493
M3 - Article
AN - SCOPUS:85125693434
SN - 2332-2039
VL - 10
JO - Cogent Economics and Finance
JF - Cogent Economics and Finance
IS - 1
M1 - 2035493
ER -