Financial Health Insurance

Health Insurance and Investment Risk

Getting sick creates risk over two dimensions. First, you risk getting sick which of course decreases your utility. Second, getting sick impacts you financially as (i) medical procedures are often expensive and (ii) if you can’t work due to your illness your income may fall. With respect to financial risk, health insurance may provide a financial buffer which allows more risk seeking financial decisions. A paper by Li et al. (2021):

…we find that enrolling in a health insurance scheme with better policies is associated with a higher probability of owning risky assets. This positive effect is stronger for households with lower risk aversion. Our findings suggest that risk attitudes could indirectly influence portfolio outcomes through affecting households’ responsiveness to changes in medical expenditure risk.

These data come from the China Household Finance Survey (CHFS). The result is intuitive. If you are at high risk for a financial shock due to an illness, you would put more money into a savings account; if you have health insurance, however, the riskless asset buffer would be lower and you could move more money into equities. Nevertheless, it is interesting to see this result appears empirically.


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