Trust and Insurance Markets

Authors


Luigi Guiso, Axa Professor of Household Finance, Einaudi Institute for Economics and Finance, Via Sallustiana 62 - 00187 Rome - Italy. Email: luigi.guiso@eief.it; guiso@tin.it

Abstract

Trust is a key determinants of any financial transaction. Exchanges in insurance markets are a particular type of financial transaction where a current payment – the premium – is exchanged for a promise of a future, contingent payment – the indemnity due when the casualty occurs. We argue that trust is key in fostering these type of exchanges. Trust enters two ways: it affects the willingness of the company to supply insurance when the insured can cheat by claiming indemnities that are not due; it discourages people from purchasing insurance if they do not trust the company promise of readily paying the indemnity when due. We prove theoretically and empirically the relevance of trust in insurance exchanges and discuss policies to foster it.

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