Optimal Insurance Design Under a Value-at-Risk Framework

Ching-Ping Wang, David Shyu and Hung-Hsi Huang
Additional contact information
Ching-Ping Wang: Department of Finance, I-Shou University, No. 1, Section 1, Hsueh-Cheng Rd., Ta-Hsu Hsiang, Kaohsiung County, Taiwan, e-mail: cpwang@isu.edu.tw
David Shyu: Department of Finance, National Sun Yat-Sen University, No. 70, Lien-Hai Rd., Kaohsiung, Taiwan, e-mail: dshyu@cm.nsysu.edu.tw
Hung-Hsi Huang: Department of Business Administration, Southern Taiwan University of Technology, No. 1, Nan-Tai Street, Yung-Kang, Taiwan, e-mail: d86723002@ntu.edu.tw

The Geneva Risk and Insurance Review, 2005, vol. 30, issue 2, 179 pages

Abstract: This study designs an optimal insurance policy form endogenously, assuming the objective of the insured is to maximize expected final wealth under the Value-at-Risk (VaR) constraint. The optimal insurance policy can be replicated using three options, including a long call option with a small strike price, a short call option with a large strike price, and a short cash-or-nothing call option. Additionally, this study also calculates the optimal insurance levels for these models when we restrict the indemnity to be one of three common forms: a deductible policy, an upper-limit policy, or a policy with proportional coinsurance. The Geneva Risk and Insurance Review (2005) 30, 161–179. doi:10.1007/s10713-005-4677-0

Date: 2005
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