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Optimal insurance to maximize RDEU under a distortion-deviation premium principle

Author

Listed:
  • Liang, Xiaoqing
  • Wang, Ruodu
  • Young, Virginia R.

Abstract

In this paper, we study an optimal insurance problem for a risk-averse individual who seeks to maximize the rank-dependent expected utility (RDEU) of her terminal wealth, and insurance is priced via a general distortion-deviation premium principle. We prove necessary and sufficient conditions satisfied by the optimal solution and consider three orders between the distortion functions for the buyer and the seller to further determine the optimal indemnity. Finally, we analyze examples under three distortion-deviation premium principles to explore the specific conditions under which no insurance or deductible insurance is optimal.

Suggested Citation

  • Liang, Xiaoqing & Wang, Ruodu & Young, Virginia R., 2022. "Optimal insurance to maximize RDEU under a distortion-deviation premium principle," Insurance: Mathematics and Economics, Elsevier, vol. 104(C), pages 35-59.
    • Handle: RePEc:eee:insuma:v:104:y:2022:i:c:p:35-59
    DOI: 10.1016/j.insmatheco.2022.01.007
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    Cited by:

    1. Boonen, Tim J. & Jiang, Wenjun, 2022. "Bilateral risk sharing in a comonotone market with rank-dependent utilities," Insurance: Mathematics and Economics, Elsevier, vol. 107(C), pages 361-378.

    More about this item

    Keywords

    Optimal insurance design; Distortion-deviation premium principle; Rank-dependent expected utility; Deductible insurance;
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General

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