Insurable Interest, Options to Convert, and Demand for Upper Limits in Optimum Property Insurance

J. OF RISK AND INSURANCE, Vol. 63 No. 2, June 1996

Posted: 28 Apr 1998

See all articles by Rod Garratt

Rod Garratt

University of California, Santa Barbara (UCSB) - Department of Economics

John M. Marshall

University of California, Santa Barbara (UCSB) - Department of Economics

Abstract

Upper limits in property insurance contracts can result directly from the consumer's demand for them. They are demanded because the consumer has options to convert or move out of damaged property rather than merely to restore it to its previous condition and occupy it. In the absence of transactions costs, finding the optimum upper limit is equivalent to finding the insurable interest. When real estate transactions are costly, binding upper limits are demanded, but they may be higher than the upper limits that an insurer should impose to ensure incentive compatibility and mitigate moral hazard. Moreover, the concept of insurable interest divides to become two distinct concepts: the upper limit of legitimate demand, and the upper limit that the prudent insurer would use.

JEL Classification: G22, D8

Suggested Citation

Garratt, Rod and Marshall, John Mullen, Insurable Interest, Options to Convert, and Demand for Upper Limits in Optimum Property Insurance. J. OF RISK AND INSURANCE, Vol. 63 No. 2, June 1996. Available at SSRN: https://ssrn.com/abstract=7593

Rod Garratt

University of California, Santa Barbara (UCSB) - Department of Economics ( email )

2127 North Hall
Santa Barbara, CA 93106
United States

John Mullen Marshall (Contact Author)

University of California, Santa Barbara (UCSB) - Department of Economics ( email )

2127 North Hall
Santa Barbara, CA 93106
United States
805-893-3670 (Phone)
805-893-8830 (Fax)

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