Optimal Insurance for Prudent Risk Averters and Risk Lovers

36 Pages Posted: 8 Jan 2020

See all articles by Eric André

Eric André

EMLYON Business School

Olivier Le Courtois

EM Lyon (Ecole de Management de Lyon) - Department of Economics, Finance, Control

Xiaoshan Su

Beihang University (BUAA)

Date Written: December 12, 2019

Abstract

This paper examines the structure of optimal insurance contracts for a broad class of insureds that includes both risk averters and risk lovers and by assuming that the insureds are prudent. We specify the difference in optimal contract form between risk averters and risk lovers. Treating these decision-makers as a unique group, we show that the optimal insurance form is dual limited stop-loss insurance with an upper limit, which implies that including risk lovers in the group of decision-makers changes the contract in the small loss part. We also consider the situation of contracts with a concave payoff, where the optimal contract form becomes limited change-loss insurance or limited dual change-loss insurance depending on the coefficient of variation of the retained loss. Finally, we derive the form of optimal contracts in the presence of a background risk.

Keywords: Third degree risk, Risk lovers, Dual limited stop-loss insurance, Limited change-loss insurance, Limited dual change-loss insurance, Limited stop-loss insurance, Background risk

JEL Classification: G22

Suggested Citation

André, Eric and Le Courtois, Olivier Arnaud and Su, Xiaoshan, Optimal Insurance for Prudent Risk Averters and Risk Lovers (December 12, 2019). Available at SSRN: https://ssrn.com/abstract=3505396 or http://dx.doi.org/10.2139/ssrn.3505396

Eric André

EMLYON Business School ( email )

23 Avenue Guy de Collongue
Ecully, 69132
France

Olivier Arnaud Le Courtois

EM Lyon (Ecole de Management de Lyon) - Department of Economics, Finance, Control ( email )

23, av. Guy de Collongue
69134 Ecully Cedex
France

Xiaoshan Su (Contact Author)

Beihang University (BUAA) ( email )

37 Xue Yuan Road
Beijing 100083
China

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