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Reinstatement or insurance payment in corporate fire insurance

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  • J.M. Bourgeon
  • P. Picard

Abstract

This article characterizes the optimal corporate fire insurance contract when the insured firm has private information about the economic value of the damaged assets. It is shown that the indemnity should be lower when the firm receives insurance money than in case of reinstatement, but there should be partial coverage even when reinstatement is chosen. When a risk of arson exists, the insurer may only reimburse reinstatement costs. Finally, the optimal contractual arrangement specifies that, in order to discriminate among firms, the insurer may use a (randomly exercised) reinstatement option as a screening device.
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Suggested Citation

  • J.M. Bourgeon & P. Picard, 1999. "Reinstatement or insurance payment in corporate fire insurance," THEMA Working Papers 99-46, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    • Handle: RePEc:ema:worpap:99-46
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    File URL: http://www.u-cergy.fr/IMG/documents//99-46Picard.pdf
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    References listed on IDEAS

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    1. Picard, Pierre, 1996. "Auditing claims in the insurance market with fraud: The credibility issue," Journal of Public Economics, Elsevier, vol. 63(1), pages 27-56, December.
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    Cited by:

    1. Koehl, Pierre-Francois & Villeneuve, Bertrand, 2002. "Compensation for What? An Analysis of Insurance Strategies for Repairable Assets," Journal of Risk and Uncertainty, Springer, vol. 25(1), pages 47-64, July.
    2. Luccioni, Enrique, 2015. "Self-inflicted injury as a rational decision process: The cae of Citrus harvesters in Argentina," 2015 Conference, August 9-14, 2015, Milan, Italy 212212, International Association of Agricultural Economists.
    3. Rod Garratt & John M. Marshall, 2003. "Equity Risk, Conversion Risk, and the Demand for Insurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 70(3), pages 439-460, September.
    4. Pierre Picard, 2012. "Economic Analysis of Insurance Fraud," Working Papers hal-00725561, HAL.

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