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Insuring Non-verifiable Losses and the Role of Internediaries

Author

Listed:
  • Doherty, Neil A.

    (University of PA)

  • Laux, Christian

    (Vienna University of Economics and Business)

  • Muermann, Alexander

    (Vienna University of Economics and Business)

Abstract

We analyze optimal risk sharing arrangements when losses are observable by policyholders and insurers but not verifiable. The optimal contract to insure individual losses can be implemented through a standard insurance contract with a deductible where the policyholder bears all losses lower than the deductible and an upper limit that restricts the maximum payment to the policyholder. For a group of policyholders it is optimal to choose contracts with individual deductibles and a joint upper limit. Insurance brokers can play an important role in implementing these contracts.

Suggested Citation

  • Doherty, Neil A. & Laux, Christian & Muermann, Alexander, 2010. "Insuring Non-verifiable Losses and the Role of Internediaries," Working Papers 11-31, University of Pennsylvania, Wharton School, Weiss Center.
    • Handle: RePEc:ecl:upafin:11-31
    as

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    References listed on IDEAS

    as
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    More about this item

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • 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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