Optimal Insurance Design of Ambiguous Risks PDF Download

Author: Christian Gollier
Publisher:
ISBN:
Category :
Languages : en
Pages : 29

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Author: Richard Peter
Publisher:
ISBN:
Category :
Languages : en
Pages : 32

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We study optimal insurance demand for a risk- and ambiguity-averse consumer under ambiguity about contract nonperformance. Ambiguity aversion lowers optimal insurance demand and the consumer's degree of ambiguity aversion is negatively associated with the optimal level of coverage. A more pessimistic belief and greater ambiguity may increase or decrease the optimal demand for insurance, and we determine sufficient conditions for a negative effect. We also discuss wealth effects and evaluate the robustness of our results by considering several alternative models of ambiguity aversion. Our findings show how ambiguity about contract nonperformance can undermine the functioning of insurance markets, making it a concern for regulators. Caution is required though because demand reactions are only imperfectly informative about the welfare effects of ambiguity about contract nonperformance.

Author: Kostas Koufopoulos
Publisher:
ISBN:
Category :
Languages : en
Pages : 25

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We consider a model of competitive insurance markets under asymmetric information with ambiguity-averse agents who maximize their maxmin expected utility. The interaction between asymmetric information and ambiguity aversion gives rise to some interesting results. First, for some parameter values, there exists a unique pooling equilibrium where both types of insurees buy full insurance. Second, in separating equilibria where the low risks are underinsured their equilibrium contract involves more coverage than under standard expected utility. Due to the endogeneity of commitment to the contracts offered by insurers, our model has always an equilibrium which is unique and interim incentive efficient (second-best).

Author: A. Bensoussan
Publisher: IOS Press
ISBN: 161499238X
Category : Business & Economics
Languages : en
Pages : 296

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Financial engineering has become the focus of widespread media attention as a result of the worldwide financial crisis of recent years. This book is the second in a series dealing with financial engineering from Ajou University in Korea. The main objective of the series is to disseminate recent developments and important issues in financial engineering to graduate students and researchers, and to provide surveys or pedagogical exposition of important published papers in a broad perspective, as well as analyses of important financial news concerning financial engineering research, practices or regulations. Real Options, Ambiguity, Risk and Insurance, comprises 12 chapters and is divided into three parts. In Part I, five chapters deal with real options analysis, which addresses the issue of investment decisions in complex, innovative or risky projects. Part II presents three chapters on ambiguity. The notion of ambiguity is one of the major breakthroughs in the expected utility theory; ambiguity arises as uncertainties cannot be precisely described in the probability space. Part III consists of four chapters devoted to risk and insurance, and covers mutual insurance for non-traded risks, downside risk management, and credit risk in fixed income markets. This volume will be useful to both graduate students and researchers in understanding relatively new areas in economics and finance, as well as challenging aspects of mathematics.

Author: Mario Ghossoub
Publisher:
ISBN:
Category :
Languages : en
Pages : 39

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In Arrow's (1971) classical problem of optimal insurance design, a linear deductible schedule is optimal for an Expected-Utility (EU) maximizing decision maker (DM), if the premium depends on the indemnity's actuarial value, if the DM and the insurer share the same probabilistic beliefs about the realizations of the random loss, and under the classical constraints that, in each state of the world, the indemnity is nonnegative and does not exceed the value of the loss. Raviv (1979) re-examined Arrow's problem and concluded that the presence of a deductible is due to both the nonnegativity constraint on the indemnity and the variability in the cost of insurance. In an effort to test this statement, Gollier (1987) relaxes the nonnegativity constraint and argues that the existence of a deductible is only due to the variability in the cost of insurance. In this paper, we test whether the intuition behind Gollier's result still holds under more general preferences for the DM and the insurer. We consider a setting of ambiguity (one-sided and then two-sided) and a setting of belief heterogeneity. We drop the nonnegativity constraint and assume no cost (or a fixed cost) to the insurer, and we derive closed-form analytical solutions to the problems that we formulate. In particular, we show that an optimal indemnity (resp., retention) no longer includes a deductible provision (resp., is not equal to the realized loss). Moreover, the optimal indemnity (resp., retention) can be negative (resp., higher than the realized loss) for small values of the loss, or in case of no loss. This is in line with the intuition behind Gollier's finding in the case of belief homogeneity and no ambiguity.

Author: Georges Dionne
Publisher: Springer Science & Business Media
ISBN: 1461401550
Category : Business & Economics
Languages : en
Pages : 1133

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This new edition of the Handbook of Insurance reviews the last forty years of research developments in insurance and its related fields. A single reference source for professors, researchers, graduate students, regulators, consultants and practitioners, the book starts with the history and foundations of risk and insurance theory, followed by a review of prevention and precaution, asymmetric information, risk management, insurance pricing, new financial innovations, reinsurance, corporate governance, capital allocation, securitization, systemic risk, insurance regulation, the industrial organization of insurance markets and other insurance market applications. It ends with health insurance, longevity risk, long-term care insurance, life insurance financial products and social insurance. This second version of the Handbook contains 15 new chapters. Each of the 37 chapters has been written by leading authorities in risk and insurance research, all contributions have been peer reviewed, and each chapter can be read independently of the others.

Author: R. M. Hogarth
Publisher:
ISBN:
Category :
Languages : en
Pages : 47

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The analysis of insurance decision making has traditionally been based on the expected utility model. However, whereas this model ignores the precision with which probabilities can be estimated, there is considerable evidence that uncertainty about uncertainties does affect choice behavior. This paper examines the effects of such ambiguity on insurance decision making by both firms and consumers. After providing examples of the possible effects of ambiguity on the market for insurance, insurance decision making is analyzed theoretically with the aid of the ambiguity model developed by Einhorn and Hogarth (1984). The implications of this model are then tested in a series of four experiments using economically sophisticated subjects. The experimental results accord closely with the theoretical predictions, e.g.: firm's minimum selling prices are more sensitive to ambiguity than consumers' maximum buying prices; for firms, the most profitable market segment per dollar coverage occurs for small probability of loss events where consumers are ambiguous but firms are not; conditions exist where people seek rather than avoid ambiguity.

Author: Eric Briys
Publisher:
ISBN:
Category :
Languages : fr
Pages : 12

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Author: Johannes Spinnewijn
Publisher:
ISBN:
Category :
Languages : en
Pages : 166

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(cont.) Heterogeneity in beliefs strengthens the case for government intervention in insurance markets and can explain the negative correlation between risk occurrence and insurance coverage found in empirical studies.

Author: Suzanne Treadwell Quinlan
Publisher:
ISBN:
Category : Insurance policies
Languages : en
Pages : 456

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