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Optimal Insurance Under Random Auditing

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  • Marie-Cécile Fagart

    () (University of Rouen, THEMA and LEI.)

  • Pierre Picard

    () (THEMA (University of Paris X—Nanterre) and CEPREMAP.)

Abstract

We provide a characterization of an optimal insurance contract (coverage schedule and audit policy) when the monitoring procedure is random. When the policyholder exhibits constant absolute risk aversion, the optimal contract involves a positive indemnity payment with a deductible when the magnitude of damages exceeds a threshold. In such a case, marginal damages are fully covered if the claim is verified. Otherwise, there is an additional deductible that disappears when the damages become infinitely large. Under decreasing absolute risk aversion, providing a positive indemnity payment for small claims with a nonmonotonic coverage schedule may be optimal. The Geneva Papers on Risk and Insurance Theory (1999) 24, 29–54. doi:10.1023/A:1008781131861

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal The Geneva Papers on Risk and Insurance Theory.

Volume (Year): 24 (1999)
Issue (Month): 1 (June)
Pages: 29-54

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Handle: RePEc:pal:genrir:v:24:y:1999:i:1:p:29-54

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Cited by:
  1. Daniel J. Clarke, 2011. "Reinsuring the Poor: Group Microinsurance Design and Costly State Verification," Economics Series Working Papers 573, University of Oxford, Department of Economics.
  2. Joerg Schiller, 2003. "The Impact of Insurance Fraud Detection Systems," Microeconomics 0309003, EconWPA, revised 02 Oct 2003.
  3. P. Picard, 1998. "Insurance fraud : theory," THEMA Working Papers 98-26, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  4. Bénédicte Coestier & Nathalie Fombaron, 2003. "L'audit en assurance," THEMA Working Papers 2003-41, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  5. Alary, David & Besfamille, Martin, . "Do insurance defrauders want to be punished ?," Open Access publications from Université Paris-Dauphine urn:hdl:123456789/6456, Université Paris-Dauphine.
  6. Hau, Arthur, 2008. "Optimal insurance under costly falsification and costly, inexact verification," Journal of Economic Dynamics and Control, Elsevier, vol. 32(5), pages 1680-1700, May.
  7. Kai Sülzle & Achim Wambach, 2002. "Insurance in a Market for Credence Goods," CESifo Working Paper Series 677, CESifo Group Munich.
  8. Nell, Martin & Schiller, Jörg, 2002. "Erklärungsansätze für vertragswidriges Verhalten von Versicherungsnehmern aus Sicht der ökonomischen Theorie," Working Papers on Risk and Insurance 7, University of Hamburg, Institute for Risk and Insurance.
  9. Richard Watt, 2003. "Curtailing Ex-Post Fraud in Risk Sharing Arrangements," European Journal of Law and Economics, Springer, vol. 16(2), pages 247-263, September.

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