TY  - UNPD
A1  - Kubitza, Christian
A1  - Hofmann, Annette
A1  - Steinorth, Petra
T1  - Financial literacy and precautionary insurance
N2  - This paper studies insurance demand for individuals with limited financial literacy. We propose uncertainty about insurance payouts, resulting from contract complexity, as a novel channel that affects decision-making of financially illiterate individuals. Then, a trade-off between second-order (risk aversion) and third-order (prudence) risk preferences drives insurance demand. Sufficiently prudent individuals raise insurance demand upon an increase in contract complexity, while the effect is reversed for less prudent individuals. We characterize competitive market equilibria that feature complex contracts since firms face costs to reduce complexity. Based on the equilibrium  analysis, we propose a monetary measure for the welfare cost of financial illiteracy and show that it is mainly driven by individuals’ risk aversion. Finally, we discuss implications for regulation and consumer protection.
T3  - ICIR Working Paper Series - No. 34/19 
KW  - financial literacy
KW  - insurance demand
KW  - prudence
KW  - precautionary insurance
Y1  - 2019
UR  - http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/77251
UR  - https://nbn-resolving.org/urn:nbn:de:hebis:30:3-772511
VL  - This version: April 2019
PB  - International Center for Insurance Regulation
CY  - Frankfurt am Main
ER  -