The Effect of Nonmonetary Factors on the Demand for Insurance and Self-Insurance

Abstract

The article considers the impact of nonmonetary factors (health) on insurance and self-insurance (against material damage) decisions. Using a two-argument utility function, we prove that the health deterioration leads to increased demand for insurance if the decision-maker is cross-prudent in health and if wealth and health are complements. Those conditions are equivalent to positivity of second and third order degree cross-derivatives of the utility function. Second part of the article considers analogous effect of health deterioration on self-insurance. In this case the result depends additionally on effectivity of self-insurance as a function of the state of the world.