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A Note on Insurance Coverage in Incomplete Markets

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  • Arthur Hau

Abstract

In this paper, “full insurance coverage on average” is defined as the coinsurance rate that eliminates all insurable risk when the uninsurable risk is evaluated at its mean. The regressibility assumption is used to derive the conditions on the correlation between background and insurable risks and the actuarial unfairness of insurance under which full, over‐, or underinsurance on average is optimal. These conditions are compared to those for the case of default risk. Together, they explain intuitively the different results under the cases of background risk and default risk obtained in the literature.

Suggested Citation

  • Arthur Hau, 1999. "A Note on Insurance Coverage in Incomplete Markets," Southern Economic Journal, John Wiley & Sons, vol. 66(2), pages 433-441, October.
    • Handle: RePEc:wly:soecon:v:66:y:1999:i:2:p:433-441
    DOI: 10.1002/j.2325-8012.1999.tb00258.x
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    References listed on IDEAS

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    1. Doherty, Neil A & Schlesinger, Harris, 1983. "Optimal Insurance in Incomplete Markets," Journal of Political Economy, University of Chicago Press, vol. 91(6), pages 1045-1054, December.
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    3. Neil A. Doherty & Harris Schlesinger, 1990. "Rational Insurance Purchasing: Consideration of Contract Nonperformance," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(1), pages 243-253.
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    5. Doherty, Neil A & Schlesinger, Harris, 1983. "The Optimal Deductible for an Insurance Policy When Initial Wealth Is Random," The Journal of Business, University of Chicago Press, vol. 56(4), pages 555-565, October.
    6. MOSSIN, Jan, 1968. "Aspects of rational insurance purchasing," LIDAM Reprints CORE 23, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    7. Hayne E. Leland, 1968. "Saving and Uncertainty: The Precautionary Demand for Saving," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 82(3), pages 465-473.
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