Insurance demand in the presence of loss‐dependent background risk

We analyze insurance demand when insurable losses come with an uninsurable zero-mean background risk that increases in the loss size. If individual is vulnerable, loss-dependent triggers a precautionary motive and optimal demand. Prudence alone sufficient for to increase two cases: case of fair where smallest possible exceeds certain threshold value (referred as large case). derive conditions under which or decreases initial wealth. In case, prudence determines whether changes lead more generalize this result arbitrary distributions find based on decreasing third-degree Ross aversion, Arrow–Pratt temperance.