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Corporate insurance design with multiple risks and moral hazard

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  • Laux, Christian
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    Abstract

    The paper provides novel insights on the effect of a firm's risk management objective on the optimal design of risk transfer instruments. I analyze the interrelation between the structure of the optimal insurance contract and the firm's objective to minimize the required equity it has to hold to accommodate losses in the presence of multiple risks and moral hazard. In contrast to the case of risk aversion and moral hazard, the optimal insurance contract involves a joint deductible on aggregate losses in the present setting. --

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    File URL: http://econstor.eu/bitstream/10419/43208/1/606208402.pdf
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    Bibliographic Info

    Paper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2008/54.

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    Date of creation: 2008
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    Handle: RePEc:zbw:cfswop:200854

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    Related research

    Keywords: Multiline Insurance; Umbrella Policies; Integrated Risk Management; Deductible Insurance;

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    1. Gorton, Gary & Pennacchi, George, 1990. " Financial Intermediaries and Liquidity Creation," Journal of Finance, American Finance Association, vol. 45(1), pages 49-71, March.
    2. Antonio Nicolo’ & Loriana Pelizzon, 2006. "Credit Derivatives, Capital Requirements and Opaque OTC Markets," Working Papers 2006_58, Department of Economics, University of Venice "Ca' Foscari".
    3. Peter M. DeMarzo, 2005. "The Pooling and Tranching of Securities: A Model of Informed Intermediation," Review of Financial Studies, Society for Financial Studies, vol. 18(1), pages 1-35.
    4. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
    5. Scott E. Harrington & Greg Niehaus & Kenneth J. Risko, 2002. "Enterprise Risk Management: The Case Of United Grain Growers," Journal of Applied Corporate Finance, Morgan Stanley, vol. 14(4), pages 71-81.
    6. Raviv, Artur, 1979. "The Design of an Optimal Insurance Policy," American Economic Review, American Economic Association, vol. 69(1), pages 84-96, March.
    7. Kenneth A. Froot & David S. Scharfstein & Jeremy C. Stein, 1992. "Risk Management: Coordinating Corporate Investment and Financing Policies," NBER Working Papers 4084, National Bureau of Economic Research, Inc.
    8. Gollier, Christian & Schlesinger, Harris, 1995. " Second-Best Insurance Contract Design in an Incomplete Market," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(1), pages 123-35, March.
    9. Michael Breuer, 2005. "Multiple Losses, "EX ANTE" Moral Hazard, and the Implications for Umbrella Policies," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 72(4), pages 525-538.
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