Optimal Risk-Sharing and Deductables in Insurance

14 Pages Posted: 13 Jun 2008

See all articles by Knut K. Aase

Knut K. Aase

Norwegian School of Economics (NHH) - Department of Business and Management Science

Date Written: December 2006

Abstract

Risk-sharing in insurance is analyzed, with a view towards explaining the prevalence of deductibles. First we introduce, in a modern setting, the main concepts of the theory of risk-sharing in a group of agents. This theory we apply to the risk-sharing problem between an insurer and an insurance customer. We motivate the development through simple examples, illustrating some of the subtle points of this theory. In order to deduce deductibles endogenously, not explained in the neoclassical model, we separately introduce (i) the insurable asset as a decision variable, (ii) administrative costs, and (iii) moral hazard, and illustrate by examples.

Keywords: Reinsurance Exchange, Equilibrium, Pareto Optimality, Representative Agent, Core Solution, Individual Rationality, Deductibles, Costs, Moral Hazard

Suggested Citation

Aase, Knut K., Optimal Risk-Sharing and Deductables in Insurance (December 2006). NHH Dept. of Finance & Management Science Discussion Paper No. 2006/24. Available at SSRN: https://ssrn.com/abstract=1145198 or http://dx.doi.org/10.2139/ssrn.1145198

Knut K. Aase (Contact Author)

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

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