# 1 Can an Optimal Insurance Contract Violate the Principle of Indemnity? Rachel J. Huang Larry Y. Tzeng Chau-Chang Wang.

## Presentation on theme: "1 Can an Optimal Insurance Contract Violate the Principle of Indemnity? Rachel J. Huang Larry Y. Tzeng Chau-Chang Wang."— Presentation transcript:

1 Can an Optimal Insurance Contract Violate the Principle of Indemnity? Rachel J. Huang Larry Y. Tzeng Chau-Chang Wang

2 1. Motivation The Principle of Indemnity Retrospective Rating Insurance Heterogeneous beliefs

3 2. Literature Review (1/2) Optimal insurance Coinsurance and deductible Raviv (1979) Upper limit policy Huberman, Mayers, and Smith (1983), Garratt and Marshall (1996) Disappearing deductible Gollier (1996)

4 2. Literature Review (2/2) Other approaches rather than expected utility Doherty and Eeckhoudt (1995), Spaeter and Roger (1997) background risk Doherty and Schlesinger (1983), Mahul (2000) Transaction costs Gollier (1987), Kaplow (1994) Heterogeneous beliefs Harrison and Kreps (1978) Marshall (1990)

5 3. Our model The optimal problem

6 4. Main Results Proposition 1 The optimal coverage function is where R u is the absolute risk averse index of the insured. Proposition 2

7 5. An Example Assume the insured is a CARA, and Ru=K. f(0)=g(0), m=0 f(x) >g(x), for all 0 { "@context": "http://schema.org", "@type": "ImageObject", "contentUrl": "http://images.slideplayer.com/10/2679005/slides/slide_7.jpg", "name": "7 5. An Example Assume the insured is a CARA, and Ru=K.", "description": "f(0)=g(0), m=0 f(x) >g(x), for all 0

8 5. Some Concerned Issues Moral hazard Workers’ compensation insurance Adverse selection

9 6. Conclusions An indemnity larger than losses might be optimal when the insured and the insurer have deviant beliefs of loss distribution. A retrospective rating insurance may still be optimal where moral hazard and adverse selection problems are less sever.

Download ppt "1 Can an Optimal Insurance Contract Violate the Principle of Indemnity? Rachel J. Huang Larry Y. Tzeng Chau-Chang Wang."

Similar presentations