Divorce Insurance: Mitigating the Adjudication Period Financial Crisis

Abstract

Divorce can subject both parties in a troubled marriage to one of the most emotionally and financially trying periods they will experience in their life. Much attention has been given toward life after divorce—either the decisions such as custody of children that will influence this, or the changed circumstances that both parties will find themselves facing. Yet the period from filing to final grant of a divorce poses additional challenges on top of the emotional uncertainties suffered during this period. Total household expenses might double or triple as a result of spouses seeking separate residences, legal bills, added travel, and other expenses forced by a divorce. At the same time, disruptions in one's personal life due to a divorce can disrupt job performance, and in certain situations, even make it difficult or impossible to work; household income can drop accordingly. This article proposes a workable insurance solution to alleviate this second lesser known challenge that a changed financial situation imposes on couples during the divorce adjudication period.

Keywords:

• demographics of divorce
• divorce
• insurance
• risk

Notes

¹Note that, even though the VaR criterion is required by most regulation, VaR is not a coherent risk measure, because it violates the subadditivity property—that is, it violates VaR(X + Y) ≤ VaR(X) + VaR(Y). In the current context, the risk of losses exceeding reserves in two consecutive periods (or alternatively, for multiple policies) could exceed the sum of the risks in each period (or policies). Surprises such as this lay at the root of many of the underwriting missteps in the financial crash of 2008. TVaR_w (X) calculation is slightly more complicated, and can be stated as a function of VaR_w (X) in the distributions considered here:

For the normal distribution: where is the quantile function.

For the Pareto Type II distribution: .

²Programs in the R statistical language that implement these algorithms are available by request from the author.