Summary
The analysis of the demand for insurance has been significantly affected by the failure to recognize the composite commodity theorem. This fact is demonstrated when the composite commodity theorem is used to modify the existing model so that insurance demand is more appropriately calculated. Comparative static properties of the modified model are derived and more reasonable comparative static results are obtained. Most importantly, in the modified model increases in wealth need not lead to a reduction in the quantity of insurance demanded even for decreasing absolute risk averse decision makers.