Long-Term Disability Claims Rates and the Consumption-to-Wealth Ratio

Summary

---

This article launches an empirical investigation into the relationship between group long-term disability (LTD) insurance claims rates and the economy using the consumption-to-wealth ratio. The consumption-to-wealth ratio for the typical individual varies over the business cycle and incorporates a significant amount of information, especially as it relates to economic conditions and expected future wealth. A high consumption-to-wealth ratio represents strong consumption relative to current wealth and is interpreted to reflect lower risk aversion on the part of individuals or expectations of higher future wealth. A low consumption-to-wealth ratio occurs when consumption is weak relative to current wealth. It reflects a more risk-averse attitude or lower expectations about future wealth. If individuals optimize their current and expected consumption/savings plans, then the consumption-to-wealth ratio summarizes the vast, economy-wide information set used to make their economic decisions. The connection between LTD claims rates and the consumption-to-wealth ratio becomes clear when it is understood that LTD insurance is designed to hedge the risks associated with a significant drop in consumption due to the possibility of a future disabling event.

See the full content of this document

Extract

---

Long-Term Disability Claims Rates and the Consumption-to-Wealth Ratio

INTRODUCTION

This article launches an empirical investigation into the relationship between group long-term disability (LTD) insurance claims rates and the economy using the consumption-to-wealth ratio. The consumption-to-wealth ratio for the typical individual varies over the business cycle and incorporates a significant amount of information, especially as it relates to economic conditions and expected future wealth. A high consumption-to-wealth ratio represents strong consumption relative to current wealth and is interpreted to reflect lower risk aversion on the part of individuals or expectations of higher future wealth.1 A low consumption-to-wealth ratio occurs when consumption is weak relative to current wealth. It reflects a more risk-averse attitude or lower expectations about future wealth. If individuals optimize their current and expected consumption/savings plans, then the consumption-to-wealth ratio summarizes the vast, economy-wide information set used to make their economic decisions.

The connection between LTD claims rates and the consumption-to-wealth ratio becomes clear when it is understood that LTD insurance is designed to hedge the risks associated with a significant drop in consumption due to the possibility of a future disabling event. It is well known in the financial economics literature (see, e.g., Abel, 1990; Campbell, Lo, and MacKinlay, 1997; Campbell and Cochrane, 1999; Cochra...

See the full content of this document

---