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Finding Pareto Optimal Insurance Contracts

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  • Y.M. Ermoliev
  • S.D. Flam

Abstract

This note deals with on-line computation or learning of Pareto optimal insurance contracts. We account for the fact that the loss distribution often is unknown, unavailable, or intractable. Alternatively, the contracting parties could be inexperienced. In both cases loses must be simulated or observed, one at a time, these causing iterated revision of the premium. The mechanical nature of probability calculus thus yields to more tentative procedure, possibly closer to how humans operate or reason in face of risk. Emphasized here is the remarkable simplicity and stability of the resulting procedures. Special attention goes to catastrophic risks and subsidized insurance.

Suggested Citation

  • Y.M. Ermoliev & S.D. Flam, 2000. "Finding Pareto Optimal Insurance Contracts," Working Papers ir00033, International Institute for Applied Systems Analysis.
    • Handle: RePEc:wop:iasawp:ir00033
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    References listed on IDEAS

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    1. Doherty, Neil A & Schlesinger, Harris, 1983. "Optimal Insurance in Incomplete Markets," Journal of Political Economy, University of Chicago Press, vol. 91(6), pages 1045-1054, December.
    2. Ermoliev, Yuri M. & Norkin, Vladimir I., 1997. "On nonsmooth and discontinuous problems of stochastic systems optimization," European Journal of Operational Research, Elsevier, vol. 101(2), pages 230-244, September.
    3. Kenneth A. Froot, 1999. "The Financing of Catastrophe Risk," NBER Books, National Bureau of Economic Research, Inc, number froo99-1, March.
    4. Froot, Kenneth A. (ed.), 1999. "The Financing of Catastrophe Risk," National Bureau of Economic Research Books, University of Chicago Press, number 9780226266237, December.
    5. MOSSIN, Jan, 1968. "Aspects of rational insurance purchasing," LIDAM Reprints CORE 23, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    6. Raviv, Artur, 1979. "The Design of an Optimal Insurance Policy," American Economic Review, American Economic Association, vol. 69(1), pages 84-96, March.
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    Cited by:

    1. Ching-Ping Wang & Hung-Hsi Huang, 2012. "Optimal insurance contract and coverage levels under loss aversion utility preference," Quantitative Finance, Taylor & Francis Journals, vol. 12(10), pages 1615-1628, October.
    2. Pincheira, Pablo & Zeuli, Kimberly A., 2005. "Cooperative and Area Yield Insurance: A Theoretical Analysis," 2005 Annual Meeting, November 8-9 31822, NCERA-194 Research on Cooperatives.

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    More about this item

    JEL classification:

    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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