Optimal insurance under maxmin expected utility

Corina Birghila (), Tim J. Boonen () and Mario Ghossoub ()
Additional contact information
Corina Birghila: Otto-von-Guericke University Magdeburg
Tim J. Boonen: University of Amsterdam
Mario Ghossoub: University of Waterloo

Finance and Stochastics, 2023, vol. 27, issue 2, No 6, 467-501

Abstract: Abstract We examine a problem of demand for insurance indemnification, when the insured is sensitive to ambiguity and behaves according to the maxmin expected utility model of Gilboa and Schmeidler (J. Math. Econ. 18:141–153, 1989), whereas the insurer is a (risk-averse or risk-neutral) expected-utility maximiser. We characterise optimal indemnity functions both with and without the customary ex ante no-sabotage requirement on feasible indemnities, and for both concave and linear utility functions for the two agents. This allows us to provide a unifying framework in which we examine the effects of the no-sabotage condition, of marginal utility of wealth, of belief heterogeneity, as well as of ambiguity (multiplicity of priors) on the structure of optimal indemnity functions. In particular, we show how a singularity in beliefs leads to an optimal indemnity function that involves full insurance on an event to which the insurer assigns zero probability, while the decision maker assigns a positive probability. We examine several illustrative examples, and we provide numerical studies for the case of a Wasserstein and a Rényi ambiguity set.

Keywords: Optimal insurance; Ambiguity; Multiple priors; Maxmin expected utility; Heterogeneous beliefs; 90B50; 90C17; 91B06; 91G99 (search for similar items in EconPapers)
JEL-codes: C02 C61 D86 G22 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
http://link.springer.com/10.1007/s00780-023-00497-y Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:finsto:v:27:y:2023:i:2:d:10.1007_s00780-023-00497-y

Ordering information: This journal article can be ordered from
http://www.springer. ... ance/journal/780/PS2

DOI: 10.1007/s00780-023-00497-y

Access Statistics for this article

Finance and Stochastics is currently edited by M. Schweizer

More articles in Finance and Stochastics from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().