A Study of the Interaction of Insurance and Financial Markets: Efficiency and Full Insurance Coverage Articles uri icon

publication date

  • June 2008

start page

  • 313

end page

  • 342


  • 2


  • 75

International Standard Serial Number (ISSN)

  • 0022-4367

Electronic International Standard Serial Number (EISSN)

  • 1539-6975


  • The first contribution of this article is to provide a framework, a model together with a corresponding equilibrium notion, suitable for the study of the interaction between insurance and dynamic financial markets. Our central result is that in equilibrium risk-averse agents purchase full insurance coverage, despite unfair insurance prices. We identify three conditions that explain this result: (1) insurance contracts are priced competitively, (2) financial prices include a risk premium only for undiversifiable risk, and (3) financial markets are effectively complete. An implication is that in this model disasters can be insured by fully assessable stock insurance companies.