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Long‐Term Disability Claims Rates and the Consumption‐to‐Wealth Ratio
Author(s) -
Smoluk H. J.
Publication year - 2009
Publication title -
journal of risk and insurance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.055
H-Index - 63
eISSN - 1539-6975
pISSN - 0022-4367
DOI - 10.1111/j.1539-6975.2009.01291.x
Subject(s) - consumption (sociology) , economics , cointegration , consumption function , term (time) , stochastic game , monetary economics , national wealth , financial economics , microeconomics , econometrics , production (economics) , finance , social science , physics , quantum mechanics , sociology
A framework for linking long‐term disability (LTD) claims rates to the macro‐economy using the consumption‐to‐wealth ratio is developed from financial economic and option theories. Financial economic theory suggests that the consumption‐to‐wealth ratio reflects consumption smoothing and reveals expectations about future wealth. For individuals contemplating submitting an LTD claim, the expected payoff to exercising this insurance option is a function of their expectations about their future wealth. The lower (higher) their expectations about future wealth, the higher (lower) the expected payoff, and the higher (lower) claims rates are likely to be. Using cointegration analysis, we find that LTD claims rates and the consumption‐to‐wealth ratio are linked in a long‐run equilibrium. When the consumption‐to‐wealth ratio is high (low), LTD claims rates are low (high).