Ambiguity on the insurer’s side: The demand for insurance

Massimiliano Amarante, Mario Ghossoub and Edmund Phelps

Journal of Mathematical Economics, 2015, vol. 58, issue C, 61-78

Abstract: Empirical evidence suggests that ambiguity is prevalent in insurance pricing and underwriting, and that often insurers tend to exhibit more ambiguity than the insured individuals (e.g., Hogarth and Kunreuther, 1989). Motivated by these findings, we consider a problem of demand for insurance indemnity schedules, where the insurer has ambiguous beliefs about the realizations of the insurable loss, whereas the insured is an expected-utility maximizer. We show that if the ambiguous beliefs of the insurer satisfy a property of compatibility with the non-ambiguous beliefs of the insured, then optimal indemnity schedules exist and are monotonic. By virtue of monotonicity, no ex-post moral hazard issues arise at our solutions (e.g., Huberman et al., 1983). In addition, in the case where the insurer is either ambiguity-seeking or ambiguity-averse, we show that the problem of determining the optimal indemnity schedule reduces to that of solving an auxiliary problem that is simpler than the original one in that it does not involve ambiguity. Finally, under additional assumptions, we give an explicit characterization of the optimal indemnity schedule for the insured, and we show how our results naturally extend the classical result of Arrow (1971) on the optimality of the deductible indemnity schedule.

Keywords: Optimal insurance; Deductible; Ambiguity; Choquet integral; Distorted probabilities (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304406815000336
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Ambiguity on the insurer's side: the demand for insurance (2015)
Working Paper: Ambiguity on the Insurer’s Side: The Demand for Insurance (2015)
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:mateco:v:58:y:2015:i:c:p:61-78

DOI: 10.1016/j.jmateco.2015.03.008

Access Statistics for this article

Journal of Mathematical Economics is currently edited by Atsushi (A.) Kajii

More articles in Journal of Mathematical Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().