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Utility Function and Insurance Policy Customer Choices

Author

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  • John Davies Odhiambo

    (Kenya)

  • Christine Kanana Murori

    (Kenya)

Abstract

This research examines the influence of utility functions on consumer decisions regarding insurance plans, emphasizing the importance of expected utility theory in making choices amidst uncertainty. Originated by Daniel Bernoulli, this concept plays a crucial role in contemporary economics by guiding individuals towards options that maximize their anticipated satisfaction. Through an examination of deductible options—percentage and straight—this study demonstrates how these decisions impact both the profitability of insurers and the behavior of customers. Utilizing a literature review methodology, the research scrutinizes previous studies to clarify the relationship between utility theory and insurance choices. The results highlight that utility functions offer a numerical structure for assessing personal preferences and tolerance for risk, assisting in the creation of policies that harmonize customer requirements with insurer goals. This holistic approach to comprehending insurance decisions underscores the pivotal function of utility theory in economic evaluations, providing valuable insights into the financial security and welfare of individuals in an unpredictable environment.

Suggested Citation

  • John Davies Odhiambo & Christine Kanana Murori, 2024. "Utility Function and Insurance Policy Customer Choices," East African Finance Journal, East African Finance Journal, vol. 3(2).
    • Handle: RePEc:cwk:eafjke:2024-12
    DOI: 10.59413/eafj/v3.i2.6
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