Sometimes more, sometimes less: Prudence and the diversification of risky insurance coverage

Lukas Reichel, Hato Schmeiser and Florian Schreiber

European Journal of Operational Research, 2021, vol. 292, issue 2, 770-783

Abstract: We analyze the optimal coverage level for an unreliable insurance contract if a utility-maximizing policyholder can transfer the intrinsic nonperformance risk to several co-insurers. Our discussion starts with an insurance demand model under default risk and the introduction of a multiple risk-sharing instrument called co-insurance policy. Subsequently, we examine the interrelation between the recovery rate and the optimal coverage level, the utility of the policyholder, and the optimal coverage level in the limit. We then consider the monotonicity of the optimal coverage level for a changing number of co-insurers and an increasing default correlation. Our proposed criteria indicate that the policyholders’ preferences for more or less coverage are primarily determined by their degree of prudence. We conclude that more prudent policyholders are more likely to accept the costs for any risk management measure intended to provide a hedge against default rik in insurance contracts.

Keywords: Risk management; Insurance demand; Risk sharing; Default risk; Prudence, (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0377221720309371
Full text for ScienceDirect subscribers only

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:eee:ejores:v:292:y:2021:i:2:p:770-783

DOI: 10.1016/j.ejor.2020.10.046

Access Statistics for this article

European Journal of Operational Research is currently edited by Roman Slowinski, Jesus Artalejo, Jean-Charles. Billaut, Robert Dyson and Lorenzo Peccati

More articles in European Journal of Operational Research from Elsevier
Bibliographic data for series maintained by Catherine Liu ().