Long Term Insurance (LTI) for Addressing Catastrophe Risk

Dwight Jaffee; Howard Kunreuther; Erwann Michel-Kerjan

doi:10.3386/w14210

Long Term Insurance (LTI) for Addressing Catastrophe Risk

Dwight Jaffee, Howard Kunreuther & Erwann Michel-Kerjan

Working Paper 14210

DOI 10.3386/w14210

Issue Date August 2008

This paper proposes long-term insurance (LTI) as an alternative to the standard annual homeowners policy using lessons from the mortgage market as a benchmark. LTI has the potential to significantly increase social welfare by reducing insurers' administrative costs, lowering search costs and uncertainty for consumers and providing incentives for long-term investment in mitigation measures to protect property. A two-period model illustrates situations that would make a long-term contract attractive to both insurers and consumers under competitive market conditions.

This paper benefited from helpful comments and discussions with Omar Besbes, Brian Cheyne, Patricia Grossi, Paul Kleindorfer, Trevor Maynard, Franklin Nutter, Paul Raschky, Robert Shiller and Richard Thomas on the concept of long-term insurance. An earlier draft of this paper was presented at the May 2008 Insurance Project Workshop of the National Bureau of Economic Research (NBER) where we received useful suggestions from the workshop participants. Partial support for this paper was provided from the Managing and Financing Extreme Events Project of the Wharton Risk Management and Decision Processes Center. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Copy Citation

Dwight Jaffee, Howard Kunreuther, and Erwann Michel-Kerjan, "Long Term Insurance (LTI) for Addressing Catastrophe Risk ," NBER Working Paper 14210 (2008), https://doi.org/10.3386/w14210.

Long Term Insurance (LTI) for Addressing Catastrophe Risk

Related

Topics

Programs

More from the NBER