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On Correlation Aversion and Insurance Demand

Author

Listed:
  • Christos I. Giannikos

    (Baruch College and Graduate Center, City University of New York, 365 5th Ave, New York, NY 10016, USA)

  • Andreas Kakolyris

    (College of Business and Public Management, Kean University, 1000 Morris Avenue, Union, NJ 07083, USA)

  • Tin Shan (Michael) Suen

    (College of Business and Public Management, Kean University, 1000 Morris Avenue, Union, NJ 07083, USA)

Abstract

This is a study of decision problems under two-dimensional risk. We use an existing index of absolute correlation aversion to conveniently classify bivariate preferences, with respect to attitudes toward this risk. This classification seems to be more important than whether decision makers are correlation-averse or correlation-seeking for the study of insurance demand when a loss has a multidimensional impact. On this note, we also re-examine Mossin’s theorem under bivariate preferences, where full insurance is preferred with a fair premium, while less than full coverage is preferred with a proportional premium loading. Furthermore, based on the comparative statics of this two-dimensional insurance model for changes in correlation aversion, we derive testable implications about the classification of bivariate utility functions. For the particular case when the two-dimensional risk can be interpreted as risk on income and health, we identify the form of separable utility functions depending on health status and income that is consistent with household disability insurance decisions.

Suggested Citation

  • Christos I. Giannikos & Andreas Kakolyris & Tin Shan (Michael) Suen, 2024. "On Correlation Aversion and Insurance Demand," JRFM, MDPI, vol. 17(4), pages 1-9, March.
    • Handle: RePEc:gam:jjrfmx:v:17:y:2024:i:4:p:136-:d:1362378
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    References listed on IDEAS

    as
    1. Attema, Arthur E. & l’Haridon, Olivier & van de Kuilen, Gijs, 2019. "Measuring multivariate risk preferences in the health domain," Journal of Health Economics, Elsevier, vol. 64(C), pages 15-24.
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