Pareto-Optimal Insurance Contracts With Premium Budget and Minimum Charge Constraints

22 Pages Posted: 13 Jan 2020

See all articles by Alexandru Vali Asimit

Alexandru Vali Asimit

Cass Business School, City, University of London

Ka Chun Cheung

The University of Hong Kong

Wing Fung Chong

University of Illinois at Urbana-Champaign - Department of Mathematics; University of Illinois at Urbana-Champaign - Department of Statistics

Junlei Hu

University of Essex

Date Written: December 23, 2019

Abstract

In view of the fact that minimum charge and premium budget constraints are natural economic considerations in any risk-transfer between the insurance buyer and seller, this paper revisits the optimal insurance contract design problem in terms of Pareto optimality with imposing these practical constraints. Pareto optimal insurance contracts, with indemnity schedule and premium payment, are solved in the cases when the risk preferences of the buyer and seller are given by Value-at-Risk or Tail Value-at-Risk. The effect of our constraints and the relative bargaining powers of the buyer and seller on the Pareto optimal insurance contracts are highlighted. Numerical experiments are employed to further examine these effects for some given risk preferences.

Keywords: Bargaining power, Minimum charge, Optimal insurance contract design, Pareto optimality, Premium budget, Proportional Hazard Transformation, Tail Value-at-Risk, Value-at-Risk

JEL Classification: C6, C7, G22

Suggested Citation

Asimit, Alexandru Vali and Cheung, Ka Chun and Chong, Wing Fung and Hu, Junlei, Pareto-Optimal Insurance Contracts With Premium Budget and Minimum Charge Constraints (December 23, 2019). Available at SSRN: https://ssrn.com/abstract=3508838 or http://dx.doi.org/10.2139/ssrn.3508838

Alexandru Vali Asimit

Cass Business School, City, University of London ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Ka Chun Cheung

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

Wing Fung Chong (Contact Author)

University of Illinois at Urbana-Champaign - Department of Mathematics ( email )

1409 W. Green Street
Urbana, IL 61801
United States

University of Illinois at Urbana-Champaign - Department of Statistics ( email )

725 S Wright
Champaign, IL 61820
United States

Junlei Hu

University of Essex ( email )

Wivenhoe Park
Colchester, Essex CO4 3SQ
United Kingdom

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