Optimal Insurance Policy Indemnity Schedules with Policyholders' Limited Liability and Background Risk

Journal of Risk and Insurance, Forthcoming

16 Pages Posted: 22 Feb 2018

See all articles by Annette Hofmann

Annette Hofmann

St. John's University - Peter J. Tobin College of Business

Ole Von Haefen

University of Hamburg

Martin Nell

University of Hamburg

Date Written: January 31, 2018

Abstract

This paper makes two contributions to the insurance literature by studying optimal insurance policy indemnity schedules with policyholders' limited liability and background risk. First, generalizing a prominent approach by Huberman, Mayers, and Smith (1983), it is shown that a welfare subsidy in the case of a ruinous loss may make the insurance premium "overly fair" for non-bankrupting losses and full insurance for this event becomes optimal. Second, introducing correlated background risk into this limited liability framework relativizes or even turns results by Doherty and Schlesinger (1983) as to the impact of background risk on optimal coverage into its opposite.

Keywords: insurance demand, limited liability, overinsurance

JEL Classification: D02, G22

Suggested Citation

Hofmann, Annette and Von Haefen, Ole and Nell, Martin, Optimal Insurance Policy Indemnity Schedules with Policyholders' Limited Liability and Background Risk (January 31, 2018). Journal of Risk and Insurance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3122116

Annette Hofmann (Contact Author)

St. John's University - Peter J. Tobin College of Business ( email )

New York, NY
United States

Ole Von Haefen

University of Hamburg ( email )

Allende-Platz 1
Hamburg, 20146
Germany

Martin Nell

University of Hamburg ( email )

Von-Melle-Park 5
20146 Hamburg
Germany
+49 40 42838 4014 (Phone)
+49 40 42838 5505 (Fax)

HOME PAGE: http://www.rrz.uni-hamburg.de/IfVBL/nelle.htm

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