Optimal Insurance Coverage With Default Risk
15 Pages Posted: 1 May 2019 Last revised: 21 Aug 2020
Date Written: March 31, 2019
This articles re-examines a standard result on the demand for insurance ("full coverage with a fair premium and partial coverage with a loaded premium"') in the presence of a default risk. It is established that the optimal insurance coverage is always partial coverage if the default is total, irrespective of whether the premium is fair or loaded. For partial default, it is demonstrated in both the fair premium case and the loaded premium case that the optimal insurance coverage might be either full coverage or partial coverage for coinsurance, deductible insurance and upper-limit insurance.
Keywords: Mossin's Theorem; total default; partial default; coinsurance; deductible insurance; upper-limit insurance
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