De Finetti on insuring uncertainty

Alberto Feduzzi (), Jochen Runde () and Carlo Zappia

Department of Economic Policy, Finance and Development (DEPFID) University of Siena from Department of Economic Policy, Finance and Development (DEPFID), University of Siena

Abstract: In the insurance literature it is often argued that private markets can provide insurance against ‘risk’ but not against ‘uncertainties’ in the sense of Knight (1921) or Keynes (1921). This claim is at odds with the standard economic model of risk exchange which, in assuming that decision-makers are always guided by precise point-valued subjective probabilities, predicts that all uncertainties can, in theory, be insured. Supporters of the standard model argue that the insuring of highly idiosyncratic risks by Lloyd’s of London proves that this is so even in practice. The purpose of this paper is to show that Bruno de Finetti, widely regarded as one of the three founding fathers of the subjective approach to probability assumed by the standard model, actually made a theoretical case for uncertainty within the subjectivist approach. We draw on empirical evidence from the practice of underwriters to show how this case may help explain the reluctance of insurers to cover highly uncertain contingencies.

Keywords: uncertainty; insurance; probability; de Finetti. (search for similar items in EconPapers)
JEL-codes: B23 D80 G22 (search for similar items in EconPapers)
Date: 2010-01
New Economics Papers: this item is included in nep-hpe, nep-ias and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:usi:depfid:0310

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