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Health shock risk, critical illness insurance, and housing services

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  • Hambel, Christoph

Abstract

This paper studies a consumption–investment problem involving health shock risk, perishable consumption, and consumption of housing services. Additionally to a risk-free asset and a stock index, the agent can invest in real estate. I analyze the impact of health shocks on the optimal consumption and investment decisions in model specifications with and without the possibility to buy critical illness insurance. I discuss the influence of critical illness insurance on the optimal strategy and analyze the drivers of the optimal critical illness insurance demand. The results indicate that health shock risk has potentially devastating consequences, especially for young agents. It turns out that critical illness insurance is an excellent instrument for hedging health shock risk and for consumption smoothing across different health states. Optimal critical illness insurance demand is decreasing in financial wealth and increasing in human wealth. Real estate prices have a minor influence on optimal critical illness insurance demand.

Suggested Citation

  • Hambel, Christoph, 2020. "Health shock risk, critical illness insurance, and housing services," Insurance: Mathematics and Economics, Elsevier, vol. 91(C), pages 111-128.
    • Handle: RePEc:eee:insuma:v:91:y:2020:i:c:p:111-128
    DOI: 10.1016/j.insmatheco.2020.01.008
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    Cited by:

    1. Peng Yang & Zhiping Chen, 2023. "Optimal Private Health Insurance Contract towards the Joint Interests of a Policyholder and an Insurer," Mathematics, MDPI, vol. 11(10), pages 1-28, May.

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    More about this item

    Keywords

    Health shock risk; Critical illness insurance; Portfolio choice; Housing investments;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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