Labor Income Risk and Car Insurance in the UK

Microeconomic theory shows that only under certain conditions higher background risk increases the propensity to insure against independent marketable risks. We provide empirical evidence for the case of labor income risk and car insurance in the UK. The main result is that households with higher labor income risk spend more on insurance. This finding is consistent with microeconomic theory if the utility function is of the HARA type. Moreover, we find that households spend more on insurance if they participate in the stock market. Keywords: background risk, insurance, United Kingdom