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Optimal Risk-Sharing and Deductables in Insurance

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  • Aase, Knut K.

    ()
    (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

Abstract

Risk-sharing in insurance is analyzed, with a view towards explaining the prevalence of deductibles. First we introduce, in a modern setting, the main concepts of the theory of risk-sharing in a group of agents. This theory we apply to the risk-sharing problem between an insurer and an insurance customer. We motivate the development through simple examples, illustrating some of the subtle points of this theory. In order to deduce deductibles endogenously, not explained in the neoclassical model, we separately introduce (i) the insurable asset as a decision variable, (ii) administrative costs, and (iii) moral hazard, and illustrate by examples.

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Bibliographic Info

Paper provided by Department of Business and Management Science, Norwegian School of Economics in its series Discussion Papers with number 2006/24.

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Length: 13 pages
Date of creation: 29 Dec 2006
Date of revision:
Handle: RePEc:hhs:nhhfms:2006_024

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Postal: NHH, Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway
Phone: +47 55 95 92 93
Fax: +47 55 95 96 50
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Web page: http://www.nhh.no/en/research-faculty/department-of-business-and-management-science.aspx
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Related research

Keywords: Reinsurance Exchange; Equilibrium; Pareto Optimality; Representative Agent; Core Solution; Individual Rationality; Deductibles; Costs; Moral Hazard;

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  1. Mas-Colell, Andreu, 1986. "The Price Equilibrium Existence Problem in Topological Vector Lattice s," Econometrica, Econometric Society, vol. 54(5), pages 1039-53, September.
  2. Jewitt, Ian, 1988. "Justifying the First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 56(5), pages 1177-90, September.
  3. Bewley, Truman F., 1972. "Existence of equilibria in economies with infinitely many commodities," Journal of Economic Theory, Elsevier, vol. 4(3), pages 514-540, June.
  4. Raviv, Artur, 1979. "The Design of an Optimal Insurance Policy," American Economic Review, American Economic Association, vol. 69(1), pages 84-96, March.
  5. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
  6. Aase, Knut K., 2007. "Wealth Effects on Demand for Insurance," Discussion Papers 2007/6, Department of Business and Management Science, Norwegian School of Economics.
  7. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
  8. Knut K. Aase, 1992. "Dynamic Equilibrium and the Structure of Premiums in a Reinsurance Market," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 17(2), pages 93-136, December.
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