Changes in Background Risk and the Demand for Insurance March , 1997

The demand for insurance against loss from a particular risky asset is likely to depend on other risks the decision maker faces. For independently distributed other risks, referred to as background risk, Eeckhoudt and Kimball [1992] determine the effect on insurance demand of introducing background risk. Recently, Eeckhoudt, Gollier and Schlesinger [1996] determine conditions on preferences such that first and second degree stochastic deteriorations in background risk lead to a decrease in the decision maker’s willingness to accept other risks. These results, although formulated in a general decision model, also apply to insurance demand. This paper continues analysis of this question by determining the effect on insurance demand of several other general changes in background risk.