Insurance With Heterogeneous Preferences

33 Pages Posted: 8 Oct 2020

See all articles by Tim J. Boonen

Tim J. Boonen

University of Amsterdam

Fangda Liu

University of Waterloo - Department of Statistics and Actuarial Science

Date Written: August 15, 2020

Abstract

This paper studies an optimal insurance problem with finitely many potential policyholders. A monopolistic, risk-neutral insurer offers an insurance contract, and exponential utility maximizing individuals accept the offer or not. We allow for heterogeneity in the preferences of the individuals, while the insurer cannot discriminate in the insurance premium. We show that it is optimal for the insurer to offer only a full insurance contract, and the price optimization problem is reduced to a discrete problem, where the premium is an indifference premium for one individual in the market. Moreover, if individuals can self-select their insurance coverage given the market premium rate, then we find that partial insurance is generally optimal. Since the risk aversion parameters of individuals is generally unobserved, we also present a simulation-based framework. We show its convergence, and provide numerical examples.

Keywords: insurance contract theory, multiple policyholders, heterogeneous preferences, proportional insurance.

JEL Classification: D42,G22

Suggested Citation

Boonen, Tim J. and Liu, Fangda, Insurance With Heterogeneous Preferences (August 15, 2020). Available at SSRN: https://ssrn.com/abstract=3677285 or http://dx.doi.org/10.2139/ssrn.3677285

Tim J. Boonen (Contact Author)

University of Amsterdam ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

HOME PAGE: http://www.uva.nl/profiel/b/o/t.j.boonen/t.j.boonen.html

Fangda Liu

University of Waterloo - Department of Statistics and Actuarial Science ( email )

Waterloo, Ontario N2L 3G1
Canada

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
19
Abstract Views
141
PlumX Metrics