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Insuring Nonverifiable Losses

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  • Neil A. Doherty
  • Christian Laux
  • Alexander Muermann

Abstract

Insurance contracts are often complex and difficult to verify outside the insurance relation. We show that standard one-period insurance policies with an upper limit and a deductible are the optimal incentive-compatible contracts in a competitive market with repeated interaction. Optimal group insurance policies involve a joint upper limit and individual deductibles; insurance brokers can play a role implementing such contracts for their clients. Our model provides new insights and predictions about the determinants of insurance.

Suggested Citation

  • Neil A. Doherty & Christian Laux & Alexander Muermann, 2015. "Insuring Nonverifiable Losses," Review of Finance, European Finance Association, vol. 19(1), pages 283-316.
    • Handle: RePEc:oup:revfin:v:19:y:2015:i:1:p:283-316.
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    3. Yichun Chi & Xun Yu Zhou & Sheng Chao Zhuang, 2020. "Variance Contracts," Papers 2008.07103, arXiv.org.

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    JEL classification:

    • D6 - Microeconomics - - Welfare Economics
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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