Insurance makes wealth grow faster
Ole Peters, Alexander Adamou

TL;DR
This paper proposes that viewing insurance contracts through the lens of time-average wealth growth, rather than expectation value, resolves classical puzzles about their existence without requiring utility functions or asymmetric information.
Contribution
It introduces a novel approach to understanding insurance by focusing on time-average growth rates, eliminating the need for utility-based or information asymmetry assumptions.
Findings
Insurance contracts increase time-average wealth growth for both parties.
The classical puzzle is resolved by considering non-ergodic wealth dynamics.
Business success correlates with both parties experiencing faster growth.
Abstract
Voluntary insurance contracts constitute a puzzle because they increase the expectation value of one party's wealth, whereas both parties must sign for such contracts to exist. Classically, the puzzle is resolved by introducing non-linear utility functions, which encode asymmetric risk preferences; or by assuming the parties have asymmetric information. Here we show the puzzle goes away if contracts are evaluated by their effect on the time-average growth rate of wealth. Our solution assumes only knowledge of wealth dynamics. Time averages and expectation values differ because wealth changes are non-ergodic. Our reasoning is generalisable: business happens when both parties grow faster.
Peer Reviews
No public reviews on file for this paper yet. If you reviewed it on a platform where reviews are public (OpenReview, ICLR, NeurIPS, ICML), you can paste yours below so the community can read it here.
Videos
No videos yet. Explain this paper in a talk, walkthrough, or lecture? Add one.
Taxonomy
TopicsEconomic theories and models · Complex Systems and Time Series Analysis · Insurance, Mortality, Demography, Risk Management
