Insuring Non-Verifiable Losses
Review of Finance, Forthcoming
39 Pages Posted: 20 Nov 2010 Last revised: 30 Oct 2013
Date Written: November 1, 2011
Insurance contracts are often complex and difficult to verify outside the insurance relation. We show that standard one-period insurance policies with an upper limit and a deductible are the optimal incentive-compatible contracts in a competitive market with repeated interaction. Optimal group insurance policies involve a joint upper limit but individual deductibles and insurance brokers can play a role implementing such contracts for the group of clients. Our model provides new insights and predictions about the determinants of insurance.
Keywords: Deductible Insurance, Upper Limit, Implicit Insurance Contracts, Insurance Brokers
JEL Classification: D86, G22, L14
Suggested Citation: Suggested Citation