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Title: Financing Insurance

Author(s): Adriano A. Rampini and S. Viswanathan

Publication Date: April 2018

Keyword(s): Collateral, Financial constraints, household finance, Insurance and Risk management

Programme Area(s): Development Economics, Financial Economics and Macroeconomics and Growth

Abstract: Insurance has an intertemporal aspect as insurance premia have to be paid up front. We argue that the financing of insurance is key to understanding basic insurance patterns and insurers' balance sheets. Limited enforcement implies that insurance is globally monotone increasing in household net worth and income, incomplete, and precautionary. These results hold in economies with income risk, durable goods and collateral constraints, and durable goods price risk, under quite general conditions. In equilibrium, insurers are financial intermediaries with collateralized loans as assets and diversified portfolios of insurance claims as liabilities. Collateral scarcity lowers the interest rate, reduces insurance, and increases inequality.

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Bibliographic Reference

Rampini, A and Viswanathan, S. 2018. 'Financing Insurance'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=12855