The optimal trading partner for reciprocal insurance treaties

Richard Watt

Scandinavian Actuarial Journal, 1997, vol. 1997, issue 2, 97-112

Abstract: This paper assumes a situation in which two risk averse individuals each facing an independent lottery use a traditional bargaining model to arrive at a Pareto superior wealth distribution via a mutual insurance contract. The traditional Borch (1960a) solution is considered, and it is shown that under this type of contract for a general utility function, the characteristics of the optimal trading partner are indeterminate. A second set of possible trades is considered under which some uninsurable group risk is eliminated from the contract and it is shown that, in the new setting, the characteristics of the optimal trading partner can be established. Finally, it is shown that the optimal solution under the new contract is not necessarily Pareto dominated by the traditional (Borch) solution.

Date: 1997
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DOI: 10.1080/03461238.1997.10413981

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