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The optimal pricing strategy for an insurer when risk preferences are stochastically distributed

Listed author(s):
  • Hofmann, Annette
  • Nell, Martin
  • Pohl, Philipp
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    The present paper analyzes the demand for insurance when the insurer has incomplete information about types of potential customers. We assume that customers´ risk preferences cannot be distinguished by the insurer. Therefore, the standard result in insurance economics that the insurer discriminates perfectly in prices cannot be applied. Instead, the present article examines the optimal pricing rule for an insurer faced with stochastic distribution of risk preferences. Within this general model framework, we show that an optimal strategy always exists. Both fixed and proportionate premium loadings (relative to expected loss) are considered.

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    Paper provided by University of Hamburg, Institute for Risk and Insurance in its series Working Papers on Risk and Insurance with number 20.

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    Date of creation: 2007
    Handle: RePEc:zbw:hzvwps:20
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    1. Joseph E. Stiglitz, 1977. "Monopoly, Non-linear Pricing and Imperfect Information: The Insurance Market," Review of Economic Studies, Oxford University Press, vol. 44(3), pages 407-430.
    2. Kliger, Doron & Levikson, Benny, 1998. "Pricing insurance contracts -- an economic viewpoint," Insurance: Mathematics and Economics, Elsevier, vol. 22(3), pages 243-249, July.
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