The Insurance of Low Probability Events
AbstractWe consider a model in which the agent faces two independant risks of losswith different probabilities of occurence and (possibly) different levels of potential loss. We show that it is optimal to select a deductable for the low probability event that is not larger than the optimal deductable for the other risk. This result holds for any preference functional that satisfies the second-order stochastic dominance property. When the expected loss is the same for the two risks, i.e. when the low probability event is also "catastrophic", it is never optimal not to insure the catastrophic risk when some insurance is purchased for the other risk. We also obtain some additional properties of the optimal insurance strategy in the case of expected utility, or in the case of Yaari's dual theory.
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Bibliographic InfoPaper provided by Toulouse - GREMAQ in its series Papers with number 976.423.
Length: 9 pages
Date of creation: 1996
Date of revision:
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INFORMATION ; INSURANCE;
Find related papers by JEL classification:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
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- Eric Langlais, 2008.
"On insurance contract design for low probability events,"
EconomiX Working Papers
2008-33, University of Paris West - Nanterre la Défense, EconomiX.
- 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).
- Christian Gollier, 2005. "Some Aspects of the Economics of Catastrophe Risk Insurance," CESifo Working Paper Series 1409, CESifo Group Munich.
- Howard Kunreuther & Erwann Michel-Kerjan & Beverly Porter, 2003. "Assessing, Managing, and Financing Extreme Events: Dealing with Terrorism," NBER Working Papers 10179, National Bureau of Economic Research, Inc.
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