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Disappointment and the Optimal Insurance Contract

Author

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  • Rachel J Huang

    () (Graduate Institute of Finance, National Taiwan University of Science and Technology, Taipei, Taiwan.
    Risk and Insurance Research Center (RIRC), National Cheng-Chi University, Taipei, Taiwan.)

  • Pai-Ta Shih

    (Department of Finance, National Taiwan University, Taipei, Taiwan. E-mails: ptshih@management.ntu.edu.tw; tzeng@ntu.edu.tw)

  • Larry Y Tzeng

    (1] Department of Finance, National Taiwan University, Taipei, Taiwan. E-mails: ptshih@management.ntu.edu.tw; tzeng@ntu.edu.tw[2] Risk and Insurance Research Center (RIRC), National Cheng-Chi University, Taipei, Taiwan.)

Abstract

This paper studies the optimal insurance contract under disappointment theory. We show that, when the individuals anticipate disappointment, there are two types of optimal insurance contract. The first type contains a deductible and a coinsurance above the deductible. We find that zero marginal cost is just a sufficient but not a necessary condition for a zero deductible. The second type has no deductible and the optimal insurance starts with full coverage for small losses and includes a coinsurance above an upper value of the full coverage.

Suggested Citation

  • Rachel J Huang & Pai-Ta Shih & Larry Y Tzeng, 2012. "Disappointment and the Optimal Insurance Contract," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 37(2), pages 258-284, September.
  • Handle: RePEc:pal:genrir:v:37:y:2012:i:2:p:258-284
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    Cited by:

    1. Cheung, K.C. & Chong, W.F. & Yam, S.C.P., 2015. "The optimal insurance under disappointment theories," Insurance: Mathematics and Economics, Elsevier, vol. 64(C), pages 77-90.
    2. Jean-Fran├žois Outreville, 2014. "The Meaning of Risk? Insights from The Geneva Risk and Insurance Review," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 39(4), pages 768-781, October.

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