Property Insurance with Conversion Options: Upper Limits and Deductibles

The paper compares models of insurance of real property when owners may convert damaged property to another use instead of restoring it to the pre-damage use. First it describes the optimum insurance. The main result is that the deductible and the upper limit are connected by the equation: upper limit plus deductible equals conversion point. An alternative to the full optimum is a policy having a variable upper limit and a fixed deductible. It is interesting for theoretical reasons and for descriptive reality. The comparative statics of the full optimum and the fixed-deductible alternative are essentially the same. In the fixed-deductible model, the response of the upper limit to changes in parameters is always in the same direction but of lesser magnitude than in the full optimum.