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Multiple Losses, EX ANTE Moral Hazard, and the Implications for Umbrella Policies

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  • Michael Breuer

Abstract

Under certain cost conditions the optimal insurance policy offers full coverage above a deductible, as Arrow and others have shown. However, many insurance policies currently provide coverage against several losses although the possibilities for the insured to affect the loss probabilities by several prevention activities (multiple moral hazard) are substantially different. This article shows that optimal contracts under multiple moral hazard generally call for complex reimbursement schedules. It also examines the conditions under which different types of risks can optimally be covered by a single insurance policy and argues that the case for umbrella policies under multiple moral hazard is limited in practice.

Suggested Citation

  • 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, December.
    • Handle: RePEc:bla:jrinsu:v:72:y:2005:i:4:p:525-538
    DOI: 10.1111/j.1539-6975.2005.00136.x
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    References listed on IDEAS

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    1. Picard, Pierre, 2000. "On the Design of Optimal Insurance Policies under Manipulation of Audit Cost," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(4), pages 1049-1071, November.
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    5. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring.
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    7. repec:bla:scandj:v:97:y:1995:i:1:p:123-35 is not listed on IDEAS
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    1. van Kleef, R.C. & van de Ven, W.P.M.M. & van Vliet, R.C.J.A., 2009. "Shifted deductibles for high risks: More effective in reducing moral hazard than traditional deductibles," Journal of Health Economics, Elsevier, vol. 28(1), pages 198-209, January.
    2. Tim Lohse & Julio R. Robledo & Ulrich Schmidt, 2012. "Self‐Insurance and Self‐Protection as Public Goods," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 79(1), pages 57-76, March.
    3. Sylvia Klosin & Adam Solomon, 2026. "Unpriced Diversification in US Crop Insurance," NBER Chapters, in: Risk and Risk Management in the Agricultural Economy, National Bureau of Economic Research, Inc.
    4. Laux, Christian, 2008. "Corporate insurance design with multiple risks and moral hazard," CFS Working Paper Series 2008/54, Center for Financial Studies (CFS).
    5. Carole Bernard & Shaolin Ji & Weidong Tian, 2013. "An optimal insurance design problem under Knightian uncertainty," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 36(2), pages 99-124, November.
    6. Sverre Grepperud, 2015. "Optimal safety standards when accident prevention depends upon both firm and worker effort," European Journal of Law and Economics, Springer, vol. 39(3), pages 505-521, June.
    7. Hangsuck Lee & Minha Lee & Jimin Hong, 2024. "Optimal insurance for repetitive natural disasters under moral hazard," Journal of Economics, Springer, vol. 143(3), pages 247-277, December.

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