Financial literacy has been measured systematically in the USA for more than two decades, beginning with the development of the Big Three financial literacy questions on compound interest, inflation, and risk diversification. This article reviews what this long-standing body of research has established about financial and risk literacy and presents updated evidence from the 2024 National Financial Capability Study. Across surveys, countries, and time, one finding has remained especially persistent: Risk diversification is the concept respondents understand least well. Risk knowledge also varies substantially by age, gender, education, race and ethnicity, and household income. We further examine its relationship with financial fragility, a measure developed following the 2008 financial crisis to assess households’ ability to withstand an unexpected expense. Respondents who understand risk diversification are substantially less likely to be financially fragile, and this finding remains significant after accounting for demographic and financial characteristics. These latest results reinforce a broad body of evidence showing that financial knowledge, and risk comprehension in particular, is closely related to household financial resilience. We conclude by discussing the implications of this research for financial education, teaching, and policy.
This paper studies how parental hospitalization affects children’s commercial health insurance participation in China. We develop a household insurance decision model in which parental hospitalization raises desired coverage through risk awareness and wealth-induced risk aversion, but can reduce realized coverage by tightening liquidity constraints. Using China Family Panel Studies data (2010–2022) and two-way fixed effects models, we find that parental hospitalization significantly reduces children’s insurance participation on the extensive margin. We provide suggestive evidence that parental hospitalization increases household financial fragility, and that this liquidity-constraint channel dominates the heightened risk-awareness channel. The results imply that parental health shocks can weaken children’s supplementary health protection, and that policies reducing liquidity pressure after parental illness may help preserve intergenerational insurance coverage.
We study the impact of the first wave of the Covid-19 pandemic on the demand for risk life insurance in Finland. Using individual data, we predict new purchases of term life insurances by indicators of pandemic risks. Results show that a 1
This paper develops a competitive model of annuity and life insurance markets with private information about survival probabilities and public annuitization through Social Security. Households value retirement consumption and bequests, can save through a risk-free technology, and trade nonexclusive insurance contracts, so insurers cannot condition on households’ full portfolios. The paper has three main contributions. First, it establishes existence of competitive equilibrium in this environment. Second, it characterizes equilibrium market structure: at most one private mortality-contingent market is active, and greater public annuitization shifts the economy from annuities toward life insurance. Third, it derives the ex ante efficient allocation and the tax-transfer policy that implements it. A numerical illustration shows how higher Social Security benefits shrink annuity participation, worsen selection in the annuity pool, and raise annuity prices before private life insurance becomes the active market. The analysis links adverse selection, nonexclusive contracting, and public insurance to the endogenous structure of private insurance markets.
We examine how risk interdependence—characterized by interdependent network security and spillover losses—affects investment in prevention of a risk averse and insured firm under three conditions: (1) the firm has private information about its level of preventive investment; (2) the insurer can observe this investment only by incurring a monitoring cost; and (3) the firm may be held liable for spillover losses. In equilibrium, firms will underinvest in prevention compared to when risks are independent. When spillovers are unobservable and highly likely, network externalities exacerbate the underinvestment problem. In contrast, when spillovers are observable or unlikely, network externalities do not materially affect the investment in prevention. The introduction of liability for spillover losses can mitigate the underinvestment problem when the spillover risk is substantial. We apply this framework to the case of cyber risk.
