On Cross-risk Vulnerability
AbstractWe introduce the notion of cross-risk vulnerability to generalize the concept of risk vulnerability introduced by Gollier and Pratt [Gollier, C., Pratt, J.W. 1996. Risk vulnerability and the tempering effect of background risk. Econometrica 64, 1109–1124]. While risk vulnerability captures the idea that the presence of an unfair financial background risk should make risk-averse individuals behave in a more risk-averse way with respect to an independent financial risk, cross-risk vulnerability extends this idea to the impact of a non-financial background risk on the financial risk. It provides an answer to the question of the impact of a background risk on the optimal coinsurance rate and on the optimal deductible level. We derive necessary and sufficient conditions for a bivariate utility function to exhibit cross-risk vulnerability both toward an actuarially neutral background risk and toward an unfair background risk. We also analyze the question of the sub-additivity of risk premia and show to what extent cross-risk vulnerability provides an answer.
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Date of creation: 01 Oct 2009
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Publication status: Published, Insurance: Mathematics and Economics, 2009, 45, 2, 224-229
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Risk aversion; Risk vulnerability; Multivariate risk; Background risk;
Other versions of this item:
- NEP-ALL-2010-10-02 (All new papers)
- NEP-BAN-2010-10-02 (Banking)
- NEP-RMG-2010-10-02 (Risk Management)
- NEP-UPT-2010-10-02 (Utility Models & Prospect Theory)
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