Theoretically, wealthier people should buy less insurance & should self-insure through saving instead, as insurance entails monitoring costs; differential background risk by wealth levels & differential exposure to legal risk help explain the puzzle

Wealth and Insurance Choices: Evidence from US Households. Michael Gropper, Camelia M. Kuhnen. Jul 2021. http://public.kenan-flagler.unc.edu/faculty/kuhnenc/RESEARCH/gropper_kuhnen.pdf

Abstract: Theoretically, wealthier people should buy less insurance, and should self-insure through saving instead, as insurance entails monitoring costs. Here, we use administrative data for 63,000 individuals and, contrary to theory, find that the wealthier have better life and property insurance coverage. Wealth-related differences in background risk, legal risk, liquidity constraints, financial literacy, and pricing explain only a small fraction of the positive wealth-insurance correlation. This puzzling correlation persists in individual fixed-effects models estimated using 2,500,000 person-month observations. The fact that the less wealthy have less coverage, though intuitively they benefit more from insurance, might increase financial health disparities among households.

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From a seminar by Ms Kuhnen, Jun 2021. Wealth and Insurance Choices: Evidence from US Households – Tinbergen.nl

Abstract: Most individuals purchase insurance products, yet empirically we know little about this aspect of the financial portfolios of households. Theoretically, one of the most important factors that should influence insurance purchases is wealth. Specifically, classic economic models posit that wealthier individuals will purchase less insurance compared to their less well-off peers and will prefer to self-insure instead, as it is cheaper to do so given that insurance products come with monitoring and other costs. In the context of life and property insurance, there is scarce empirical evidence as to how wealth relates to insurance choices, and existing evidence is mainly based on survey data. Here we use administrative data covering more than 60,000 individuals to examine the relation between wealth and insurance coverage. We document that the prediction of classic theories of insurance choices is contradicted in the data. Specifically, we find that wealthier individuals have more extensive coverage in terms of life insurance, homeowners insurance, and other property-related insurance. We investigate which characteristics of individuals or insurance markets lead to this empirical pattern, to assess which features need to be accounted for by future theoretical models of households' insurance choices. Differential background risk by wealth levels, as well as differential exposure to legal risk help account for the puzzling relation we document between wealth and insurance coverage.