IDEAS home Printed from https://ideas.repec.org/p/cor/louvco/2009008.html
   My bibliography  Save this paper

Adding independent risks in an insurance portfolio: which shape for the insurers’ preferences?

Author

Listed:
  • DENUIT, Michel M.

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Sciences Actuarielles & Institut de Statistique)

  • EECKHOUDT, Louis

    (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE))

  • MENEGATTI, Mario

Abstract

Many papers in the litterature have adopted the expected utility paradigm to analyze insurance decisions. Insurance companies manage policies by growing, by adding independent risks. Even if adding risks generally ultimately decreases the probability of insolvency, the impact on the insurer's expected utility is less clear. Indeed, it is not true that the risk aversion toward the additional loss generated by a new policy included in an insurance portfolio is a decreasing function of the number of contracts already underwritten (i.e. the "fallacy of large numbers"). In this paper, it is shown that most commonly used utility functions do not necessarily positively value the aggregation of independent risks so that they are not éligible for insurers. This casts some doubt about the conclusions drawn in the papers postulating such completely monotonic utilities for guiding insurers' choices. Finally, it is shown that the sufficient conditions for adding risks that can be found in the litterature need to be refined by restricting the domain of definition of the insurer's utility function.

Suggested Citation

  • DENUIT, Michel M. & EECKHOUDT, Louis & MENEGATTI, Mario, 2009. "Adding independent risks in an insurance portfolio: which shape for the insurers’ preferences?," LIDAM Discussion Papers CORE 2009008, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvco:2009008
    as

    Download full text from publisher

    File URL: https://sites.uclouvain.be/core/publications/coredp/coredp2009.html
    Download Restriction: no
    ---><---

    Other versions of this item:

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cor:louvco:2009008. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Alain GILLIS (email available below). General contact details of provider: https://edirc.repec.org/data/coreebe.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.