Optimal insurance in the presence of multiple policyholders

Carole Bernard, Fangda Liu and Steven Vanduffel ()

Journal of Economic Behavior & Organization, 2020, vol. 180, issue C, 638-656

Abstract: The literature on optimal insurance typically considers optimal risk sharing between one insurer (or reinsurer) and one insurance prospect. However, the insurance business is based on diversification benefits that arise when pooling many insurance policies. In this paper, we first show that the classical results on optimal insurance in the case of a single insurance prospect remain valid when there are multiple prospects, provided their insurance claims are independent. Specifically, all prospects receive coverage. However, due to phenomena such as medical progress, longevity risk, and natural or man-made disasters, insurance claims tend to be correlated. We show that in the case of interdependent insurance policies, it may become optimal for the insurer to refuse to sell insurance to some prospects, and this decision is driven by the prospects’ attitudes towards risk and their risk exposure characteristics. This finding calls for government policies to ensure that insurance remains available and affordable to everyone.

Keywords: Multiple policyholders; Systematic risk; Coinsurance; Indifference price; Insurance supply; Public policy (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:180:y:2020:i:c:p:638-656

DOI: 10.1016/j.jebo.2020.02.012

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