Optimal Insurance Coverage with Default Risk

Liang Hong, Zhiqiang Yan and Boyi Zhuang

Journal of Insurance Issues, 2021, vol. 44, issue 2, 31-44

Abstract: This article re-examines a standard result on the demand for insurance (“full coverage with a fair premium and partial coverage with a loaded premium”) in the presence of a default risk. It is established that the optimal insurance coverage is always partial coverage if the default is total, irrespective of whether the premium is fair or loaded. For partial default, it is demonstrated in both the fair premium case and the loaded premium case that the optimal insurance coverage might be either full coverage or partial coverage for coinsurance, deductible insurance, and upper-limit insurance.

Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:wri:journl:v:44:y:2021:i:2:p:31-44

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