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Demand of Insurance under the Cost-of-Capital Premium Calculation Principle

Author

Listed:
  • Michael Merz

    () (Department of Business Administration, University of Hamburg, 20146 Hamburg, Germany)

  • Mario V. Wüthrich

    () (RiskLab, Department of Mathematics, ETH Zurich, 8092 Zurich, Switzerland
    Swiss Finance Institute SFI Professor, 8006 Zurich, Switzerland)

Abstract

We study the optimal insurance design problem. This is a risk sharing problem between an insured and an insurer. The main novelty in this paper is that we study this optimization problem under a risk-adjusted premium calculation principle for the insurance cover. This risk-adjusted premium calculation principle uses the cost-of-capital approach as it is suggested (and used) by the regulator and the insurance industry.

Suggested Citation

  • Michael Merz & Mario V. Wüthrich, 2014. "Demand of Insurance under the Cost-of-Capital Premium Calculation Principle," Risks, MDPI, Open Access Journal, vol. 2(2), pages 1-23, June.
  • Handle: RePEc:gam:jrisks:v:2:y:2014:i:2:p:226-248:d:37193
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    References listed on IDEAS

    as
    1. Yaari, Menahem E, 1987. "The Dual Theory of Choice under Risk," Econometrica, Econometric Society, vol. 55(1), pages 95-115, January.
    2. Christian Gollier & Harris Schlesinger, 1996. "Arrow's theorem on the optimality of deductibles: A stochastic dominance approach (*)," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 7(2), pages 359-363.
    3. Alexandru V. Asimit & Raluca Vernic & Riċardas Zitikis, 2013. "Evaluating Risk Measures and Capital Allocations Based on Multi-Losses Driven by a Heavy-Tailed Background Risk: The Multivariate Pareto-II Model," Risks, MDPI, Open Access Journal, vol. 1(1), pages 1-20, March.
    4. Raviv, Artur, 1979. "The Design of an Optimal Insurance Policy," American Economic Review, American Economic Association, vol. 69(1), pages 84-96, March.
    5. Kamien, Morton I. & Schwartz, Nancy L., 1971. "Sufficient conditions in optimal control theory," Journal of Economic Theory, Elsevier, vol. 3(2), pages 207-214, June.
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    1. repec:eee:insuma:v:77:y:2017:i:c:p:49-64 is not listed on IDEAS

    More about this item

    Keywords

    demand of insurance; optimal insurance design; risk-adjusted premium; cost-of-capital loading; deductible and risk sharing;

    JEL classification:

    • C - Mathematical and Quantitative Methods
    • G0 - Financial Economics - - General
    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance
    • M2 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics
    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting
    • K2 - Law and Economics - - Regulation and Business Law

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