The design of an optimal insurance contract for irreplaceable commodities
AbstractThis paper discusses optimal insurance contract for irreplaceable commodities. To describe the dual impacts on individuals when a loss occurs to the insured irreplaceable commodities, we use a state-dependent and bivariate utility function, which includes both the monetary wealth and sentimental value as two arguments. We show that over (full, partial) insurance is optimal when a decrease in sentimental value will increase (not change, decrease, respectively) the marginal utility of monetary wealth. Moreover, a non-zero deductible exists even without administration costs. Furthermore, we demonstrate that a positive fixed reimbursement is optimal if (1) the premium is actuarially fair, (2) the monetary loss is a constant, and (3) the utility function is additively separable and the marginal utility of money is higher in the loss state than in the no-loss state. We also characterize comparative statics of fixed-reimbursement insurance under an additively separable preference assumption. Copyright Springer Science + Business Media, LLC 2006
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Bibliographic InfoArticle provided by Springer in its journal THE GENEVA RISK AND INSURANCE REVIEW.
Volume (Year): 31 (2006)
Issue (Month): 1 (July)
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Web page: http://www.springerlink.com/link.asp?id=102897
Deductible; Optimal insurance contract; Fixed-reimbursement insurance; Irreplaceable commodities;
Other versions of this item:
- Rachel J. Huang & Larry Y. Tzeng, 2006. "The design of an optimal insurance contract for irreplaceable commodities," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 31(1), pages 11-21, July.
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