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The Demand for Insurance With an Upper Limit on Coverage

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  • J. David Cummins
  • Olivier Mahul

Abstract

The demand for insurance is examined when the indemnity schedule is subject to an upper limit. The optimal contract is shown to display full insurance above a deductible up to the cap. Some results derived in the standard model with no upper limit on coverage turn out to be invalid; the optimal deductible of an actuarially fair policy is positive and insurance may be a normal good under decreasing absolute risk aversion. An increase in the upper limit would induce the policyholder with constant absolute risk aversion to reduce his or her optimal deductible and therefore this would increase the demand for insurance against small losses.

Suggested Citation

  • J. David Cummins & Olivier Mahul, 2004. "The Demand for Insurance With an Upper Limit on Coverage," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 71(2), pages 253-264, June.
    • Handle: RePEc:bla:jrinsu:v:71:y:2004:i:2:p:253-264
    DOI: 10.1111/j.0022-4367.2004.00088.x
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    References listed on IDEAS

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