Optimal Saving and Insurance under Generalized Mean-Variance Preferences

We analyze the optimal insurance demand in a dynamic setup with two periods. In addition to the possibility to insure against losses, the investor is allowed to transfer wealth via savings. To economically interpret the... [ view full abstract ]

We analyze the optimal insurance demand in a dynamic setup with two periods. In addition to the possibility to insure against losses, the investor is allowed to transfer wealth via savings. To economically interpret the optimal savings and insurance decisions, we rely on a generalized mean-variance setup. This dynamic setup allows us to disentangle time and risk preferences by means of a variance decomposition. While the variance within the period where a loss can occur determines the optimal insurance level, the aversion against the variance of the expected wealth levels over time gives the optimal savings decision.