IZA Discussion Paper No. 240

This Discussion Paper is issued within the framework of IZA's research area 7KH)XWXUH RI :RUN Any opinions expressed here are those of the author(s) and not those of the institute. Research disseminated by IZA may include views on policy, but the institute itself takes no institutional policy positions. The Institute for the Study of Labor (IZA) in Bonn is a local and virtual international research center and a place of communication between science, politics and business. IZA is an independent, nonprofit limited liability company (Gesellschaft mit beschränkter Haftung) supported by the Deutsche Post AG. The center is associated with the University of Bonn and offers a stimulating research environment through its research networks, research support, and visitors and doctoral programs. IZA engages in (i) original and internationally competitive research in all fields of labor economics, (ii) development of policy concepts, and (iii) dissemination of research results and concepts to the interested public. The current research program deals with (1) mobility and flexibility of labor markets, (2) internationalization of labor markets and European integration, (3) the welfare state and labor markets, (4) labor markets in transition, (5) the future of work, (6) project evaluation and (7) general labor economics. IZA Discussion Papers often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character. * Microeconomic theory predicts that under certain regularity conditions higher idiosyncratic risk increases the propensity to insure against independent marketable risks. We apply these predictions to the specific case of labor income risk and car insurance using data from the UK. The main empirical results are: • higher labor income risk induces a higher demand for car insurance. • the effects of increases in labor income risk after 1979 seem to be more than offset by a more liberal financial market. • the effects seem to be important on the macro level in the 70s whereas they become negligible in the 80s and 90s. Weber and seminar participants at the EUI and IZA for very helpful comments, Royal & SunAlliance Insurance and Karen Dennison from the Data Archive for providing most useful information. The Family Expenditure Survey (FES) and National Travel Survey (NTS) were used by permission of the ONS and supplied by the Data Archive at the University of Essex. Financial support by the DAAD is gratefully acknowledged.