Chris Tonetti, Stanford University

Risky Insurance: Life-cycle Insurance Portfolio Choice with Incomplete Markets


We provide survey evidence that individuals believe there is substantial nonpayment risk in annuity, life insurance, and long-term care insurance (LTCI) products. Using simple statistical analysis we show that nonpayment beliefs predict insurance ownership and that the insurance ownership rate would be much larger if people believed there was zero nonpayment risk.

To better quantify how nonpayment risk affects insurance ownership and how different features of insurance products affect consumer welfare, we develop an incomplete-markets life-cycle model of the demand for life insurance, annuities, LTCI, and a risk free bond. We incorporate features of real-world insurance products such as perceived nonpayment risk, high loads above actuarial fair prices, and quantity restrictions (e.g., age restrictions on purchases, short-selling constraints).

Both high prices and nonpayment risk substantially decrease insurance ownership. Compared to our baseline, the welfare loss from sub-optimally owning zero insurance is 1.8 percent in consumption equivalent units. If the products had no risk and were sold at actuarially fair prices, the welfare cost of zero insurance ownership is much larger at 7.3 percent

Christopher Tonetti is a macroeconomist with research in the areas of growth and household finance. His growth research focuses on how firms' investments in innovation and technology adoption contribute to aggregate growth.
His recent research is on understanding the incentives and barriers that determine the diffusion of nonrival factors of production and production technologies (data and ideas). Recently he has studied the economics of consumer-generated data with an emphasis on property rights, incorporating concerns over privacy as well as the potentially productive use of data in innovation.
He has also recently studied how changes in trade policy can alter the competitive environment and affect growth rates by altering the technology adoption patterns of firms. His household finance research focuses on the dynamics of household wealth, income, and consumption over the life cycle. His recent work studies the reasons for the saving and labor supply behavior of the elderly and their desire for insurance against late-in-life health and longevity risks.

You can read more about Chris Tonetti here

CEBI contact: Søren Leth-Petersen