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Mortgage life insurance: a rationale for a time limit in switching rights

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  • Bertrand Villeneuve

    (LEDa - Laboratoire d'Economie de Dauphine - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres)

Abstract

I examine competition in the sector of mortgage life insurance, in particular the periodic switching right (PSR), by which the borrower can change his insurer once every period (say, every year). The PSR is likely to have pro competitive effects (lower premium), but by the same move, to lead to excessive segmentation. The main theoretical prediction of the PSR is that, in equilibrium, everyone will pay every year a premium reflecting his current risk, meaning that the risk of future risk evolution is not covered. This destruction of insurance is appreciated negatively by consumers. The trade-off is between, on the one hand, a lower price for insurance, and on the other hand, a lower quality of insurance. I simulate the cost of the PSR and find about 5–15 % of the total insurance cost. This order of magnitude is slightly smaller than the benefit one can expect from increased competition. All in all, a switching right limited in time would bring the benefits of competition and avoid most of the cost of segmentation.

Suggested Citation

  • Bertrand Villeneuve, 2014. "Mortgage life insurance: a rationale for a time limit in switching rights," Post-Print hal-01685921, HAL.
  • Handle: RePEc:hal:journl:hal-01685921
    DOI: 10.1007/s11579-014-0124-2
    Note: View the original document on HAL open archive server: https://hal.science/hal-01685921
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    References listed on IDEAS

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    Cited by:

    1. Maj-Britt Nordfang & Mogens Steffensen, 2017. "Portfolio Optimization and Mortgage Choice," JRFM, MDPI, vol. 10(1), pages 1-21, January.
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    3. Ruo Jia & Zenan Wu, 2019. "Insurer commitment and dynamic pricing pattern," The Geneva Papers on Risk and Insurance Theory, Springer;International Association for the Study of Insurance Economics (The Geneva Association), vol. 44(1), pages 87-135, March.

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