Optimal insurance design under narrow framing

Jiakun Zheng

Journal of Economic Behavior & Organization, 2020, vol. 180, issue C, 596-607

Abstract: In this paper, we study insurance decisions when the policyholder evaluates insurance with narrow framing. We show that due to aversion to risk on the net insurance payoff, i.e., insurance indemnity minus insurance premium, narrow framing reduces insurance demand. This helps explaining the observed low insurance demand in many insurance markets. We also show that the optimal insurance contract involves a deductible and the coinsurance of losses above the deductible when transaction costs depend on the actuarial value of the policy. Moreover, when the policyholder is loss averse over the net insurance payoff, a fixed indemnity equal to insurance premium should be paid for a range of intermediate losses.

Keywords: Deductible; Hedging; Risk sharing; Narrow framing; Loss aversion (search for similar items in EconPapers)
JEL-codes: D03 D81 G22 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:180:y:2020:i:c:p:596-607

DOI: 10.1016/j.jebo.2020.05.020

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