Impact of Preferences on Optimal Insurance in the Presence of Multiple Policyholders

27 Pages Posted: 12 Nov 2018

See all articles by Carole Bernard

Carole Bernard

Grenoble Ecole de Management; Vrije Universiteit Brussel (VUB)

Fangda Liu

Central University of Finance and Economics (CUFE) - China Institute for Actuarial Science

Steven Vanduffel

Vrije Universiteit Brussel (VUB)

Date Written: October 20, 2018

Abstract

In the optimal insurance literature one typically studies optimal risk sharing between one insurer (or reinsurer) and one policyholder. However, the insurance business is based on diversification benefits that arise when pooling many insurance policies. In this paper, we first show that results on optimal insurance that are valid in the case of a single policyholder extend to the case of multiple policyholders, provided their insurance claims are independent. However, due to natural catastrophes, increasing life expectancy and terrorism events, insurance claims show tendency to be correlated. Interestingly, in the case of interdependent insurance policies, it may become optimal for the insurer to refuse selling insurance to some prospects, based on their attitude towards risk or due to their risk exposure characteristics. This finding calls for government policies to ensure that insurance stays available and affordable to everyone.

Keywords: Multiple policyholders, systematic risk, coinsurance, indifference price, insurance supply, public policy

Suggested Citation

Bernard, Carole and Liu, Fangda and Vanduffel, Steven, Impact of Preferences on Optimal Insurance in the Presence of Multiple Policyholders (October 20, 2018). Available at SSRN: https://ssrn.com/abstract=3270247 or http://dx.doi.org/10.2139/ssrn.3270247

Carole Bernard

Grenoble Ecole de Management ( email )

12, rue Pierre Sémard
Grenoble Cedex, 38003
France

Vrije Universiteit Brussel (VUB) ( email )

Pleinlaan 2
http://www.vub.ac.be/
Brussels, 1050
Belgium

Fangda Liu (Contact Author)

Central University of Finance and Economics (CUFE) - China Institute for Actuarial Science ( email )

39 South College Road, Haidian
Beijing, 100081
China

Steven Vanduffel

Vrije Universiteit Brussel (VUB) ( email )

Pleinlaan 2
Brussels, Brabant 1050
Belgium

HOME PAGE: http://www.stevenvanduffel.com

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