Optimal Insurance With Costly Internal Capital
Dwight Jaffee and
Johan Walden
Risk Management and Insurance Review, 2014, vol. 17, issue 2, 137-161
Abstract:
We introduce costly internal capital into a standard insurance model, in which a risk‐averse policyholder buys insurance from a risk‐neutral insurer with limited liability. The unique optimal contract and internal capital lead to a strictly positive probability for insurer default. Some risks are uninsurable in that the insurer chooses not to provide insurance against such risks. An increase in the cost of capital may lead to a higher optimal amount of internal capital. The results extend to multiple policyholders in a symmetric setting. Our extension of the classical model to include costly internal capital provides a fruitful approach to many real world insurance markets.
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)
Downloads: (external link)
https://doi.org/10.1111/rmir.12022
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:bla:rmgtin:v:17:y:2014:i:2:p:137-161
Access Statistics for this article
Risk Management and Insurance Review is currently edited by Mary A. Weiss
More articles in Risk Management and Insurance Review from American Risk and Insurance Association
Bibliographic data for series maintained by Wiley Content Delivery ().