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Optimal Insurance to Maximize RDEU Under a Distortion-Deviation Premium Principle

Author

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  • Xiaoqing Liang
  • Ruodu Wang
  • Virginia Young

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 ambiguity orders 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

  • Xiaoqing Liang & Ruodu Wang & Virginia Young, 2021. "Optimal Insurance to Maximize RDEU Under a Distortion-Deviation Premium Principle," Papers 2107.02656, arXiv.org, revised Feb 2022.
    • Handle: RePEc:arx:papers:2107.02656
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    References listed on IDEAS

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    Cited by:

    1. Liang, Xiaoqing & Jiang, Wenjun & Zhang, Yiying, 2023. "Optimal insurance design under mean-variance preference with narrow framing," Insurance: Mathematics and Economics, Elsevier, vol. 112(C), pages 59-79.
    2. 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.
    3. Xuehua Yin & Narayanaswamy Balakrishnan & Chuancun Yin, 2023. "Bounds for Gini’s mean difference based on first four moments, with some applications," Statistical Papers, Springer, vol. 64(6), pages 2081-2100, December.
    4. Boonen, Tim J. & Han, Xia, 2024. "Optimal insurance with mean-deviation measures," Insurance: Mathematics and Economics, Elsevier, vol. 118(C), pages 1-24.
    5. Jingyi Cao & Dongchen Li & Virginia R. Young & Bin Zou, 2024. "Optimal Insurance to Maximize Exponential Utility when Premium is Computed by a Convex Functional," Papers 2401.08094, arXiv.org.
    6. Tim J. Boonen & Xia Han, 2023. "Optimal insurance with mean-deviation measures," Papers 2312.01813, arXiv.org.

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