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Mortgage life insurance: a rationale for a time limit in switching rights

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SSRN-id2458466.pdf (1.739Mb)
Date
2014-09
Dewey
Economie financière
Sujet
Mortgage; Life insurance; Risk classification; Regulation
JEL code
G.G2.G22; G.G2.G21; G.G1.G18
Journal issue
Mathematics and Financial Economics
Volume
8
Number
4
Publication date
09-2014
Article pages
473-487
Publisher
Springer
DOI
http://dx.doi.org/10.1007/s11579-014-0124-2
URI
https://basepub.dauphine.fr/handle/123456789/14060
Collections
  • LEDa : Publications
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Author
Villeneuve, Bertrand
163511 Laboratoire d'Economie de Dauphine [LEDa]
Type
Article accepté pour publication ou publié
Abstract (EN)
I examine competition in the sector of mortgage life insurance, in particular the periodic switching right (PSR), by which the borrower can change his insurer once every period (say, every year). The PSR is likely to have pro competitive effects (lower premium), but by the same move, to lead to excessive segmentation. The main theoretical prediction of the PSR is that, in equilibrium, everyone will pay every year a premium reflecting his current risk, meaning that the risk of future risk evolution is not covered. This destruction of insurance is appreciated negatively by consumers. The trade-off is between, on the one hand, a lower price for insurance, and on the other hand, a lower quality of insurance. I simulate the cost of the PSR and find about 5–15 % of the total insurance cost. This order of magnitude is slightly smaller than the benefit one can expect from increased competition. All in all, a switching right limited in time would bring the benefits of competition and avoid most of the cost of segmentation.

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