The value of fixed reimbursement insurance against cancer related losses: simulations to investigate state dependent utility Online publication date: Tue, 29-Jul-2014
by Christopher J. Longo; Michel Grignon
Global Business and Economics Review (GBER), Vol. 14, No. 4, 2012
Abstract: Insurance literature discusses the theoretical role of state dependent utility (SDU), but empirical evidence is scant. Critical illness insurance (CII) is a fixed-reimbursement scheme where individuals buy a policy in case of an illness, and which provides an opportunity to empirically assess SDU motives. We investigate the potential role of SDU in CII purchasing behaviour, and propose consumers purchase CII depending on three competing factors: illness expenditures not fully covered through public and private mechanisms, forgone income due to absence or job loss, and finally desire for income transfer when sick. We run simulations using Canadian datasets of individual earnings, industry-based information on purchased CII policy reimbursement amounts, and original data on cancer expenditures. We use the residual between what is purchased through CII (face amount) and what should be purchased to cover personal health expenditures and forgone income as our estimate of an SDU-based motivation for buying CII.
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