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Lapse-based insurance

Gottlieb, Daniel ORCID: 0000-0002-0555-6185 and Smetters, Kent (2021) Lapse-based insurance. American Economic Review, 111 (8). 2377 - 2416. ISSN 0002-8282

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Identification Number: 10.1257/aer.20160868

Abstract

Most individual life insurance policies lapse, with lapsers cross-subsidizing non-lapsers. We show that policies and lapse patterns predicted by standard rational expectations models are the opposite of those observed empirically. We propose two behavioral models consistent with the evidence: (i) consumers forget to pay premiums and (ii) consumers understate future liquidity needs. We conduct two surveys with a large insurer. New buyers believe that their own lapse probabilities are small compared to the insurer's actual experience. For recent lapsers, forgetfulness accounts for 37.8 percent of lapses while unexpected liquidity accounts for 15.4 percent.

Item Type: Article
Official URL: https://www.aeaweb.org/journals/aer
Additional Information: © 2021 American Economic Association
Divisions: Management
Subjects: H Social Sciences > HG Finance
JEL classification: D - Microeconomics > D9 - Intertemporal Choice and Growth > D91 - Intertemporal Consumer Choice; Life Cycle Models and Saving
G - Financial Economics > G2 - Financial Institutions and Services > G22 - Insurance; Insurance Companies
Date Deposited: 27 Apr 2021 09:33
Last Modified: 29 Nov 2021 15:45
URI: http://eprints.lse.ac.uk/id/eprint/110241

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