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Implications of Incomplete Performance for Optimal Insurance

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  • Olivier Mahul
  • Brian D. Wright

Abstract

We investigate the demand for insurance when contracts are subject, with positive probability, to two distinct types of incomplete performance. When partial performance means payment of some fraction of the indemnity under full performance, the latter exhibits a disappearing deductible. When partial performance is due to insufficient financial capacity, optimal insurance contracts, for any given level of financial capacity, offer full marginal coverage above a deductible. For either type of non-performance, the optimal deductible under full performance is positive when insurance is offered at an actuarially fair price. Copyright (c) The London School of Economics and Political Science 2004.

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Bibliographic Info

Article provided by London School of Economics and Political Science in its journal Economica.

Volume (Year): 71 (2004)
Issue (Month): 284 (November)
Pages: 661-670

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Handle: RePEc:bla:econom:v:71:y:2004:i:284:p:661-670

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Cited by:
  1. Daniel McFadden & Carlos Noton & Pau Olivella, 2013. "Remedies for Sick Insurance," Documentos de Trabajo 302, Centro de Economía Aplicada, Universidad de Chile.
  2. Burren, Daniel, 2013. "Insurance demand and welfare-maximizing risk capital—Some hints for the regulator in the case of exponential preferences and exponential claims," Insurance: Mathematics and Economics, Elsevier, vol. 53(3), pages 551-568.
  3. Mahul, Olivier & Wright, Brian D., 2007. "Optimal coverage for incompletely reliable insurance," Economics Letters, Elsevier, vol. 95(3), pages 456-461, June.
  4. Eric LANGLAIS, 2008. "On Insurance Contract Design For Low Probability Events," Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 3(2(4)_Summ).
  5. Laux, Christian & Muermann, Alexander, 2010. "Financing risk transfer under governance problems: Mutual versus stock insurers," Journal of Financial Intermediation, Elsevier, vol. 19(3), pages 333-354, July.
  6. Howard C. Kunreuther & Erwann O. Michel-Kerjan, 2007. "Evaluating The Effectiveness of Terrorism Risk Financing Solutions," NBER Working Papers 13359, National Bureau of Economic Research, Inc.

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