liangfeng

Skip - I agree w/ you. You are saying volitility of human capital and insurance demand are positively correlated.

However that is wrong. human capital volitility is NEGATIVELY correlated with demand for life insurance.

My new thinking is:
1) assume everyone gets life insurance. life insurance substitutes for human capital.
2) High volitility human capital is discounted at higher rates. high rates make PV lower.
3) Low volitility human capital is discounted at lower rates. low rates make PV higher.
4) then just compare the PVs. If PV is lower, i need less of a substitute (insurance), and vice versa.

That's how they look at it to arrive at the negative correlation.



Edited 1 time(s). Last edit at Wednesday, January 12, 2011 at 05:10PM by june2009.