Economics at your fingertips  

Loss Modification Incentives for Insurers Under Expected Utility and Loss Aversion

Adriaan Soetevent () and Liting Zhou ()

De Economist, 2016, vol. 164, issue 1, 41-67

Abstract: We investigate whether a profit-maximizing insurer with the opportunity to modify the loss probability will engage in loss prevention or instead spend effort to increase the loss probability. First we study this question within a traditional expected utility framework; then we apply Kőszegi and Rabin’s ( 2006 , 2007 ) loss aversion model to account for reference-dependence in consumer preferences. Largely independent of the adopted framework, we find that the profit-maximizing loss probability for many commonly used parameterizations is close to 1/2. So in cases where the initial loss probability is low, insurers will have an incentive to increase it. This qualifies appeals to grant insurers market power to incentivize them to engage in loss prevention. Copyright The Author(s) 2016

Keywords: Expected utility; Reference-dependent preferences; Risk; Insurance market; D03; D11; D81; L1 (search for similar items in EconPapers)
Date: 2016
References: Add references at CitEc
Citations: Track citations by RSS feed

Downloads: (external link) (text/html)
Access to full text is restricted to subscribers.

Related works:
Journal Article: Loss Modification Incentives for Insurers Under Expected Utility and Loss Aversion (2016) Downloads
Working Paper: Loss modification incentives for insurers under expected utility and loss aversion (2014) Downloads
Working Paper: Loss Modification Incentives for Insurers under Expected Utility and Loss Aversion (2014) Downloads
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:

Ordering information: This journal article can be ordered from
http://www.springer. ... cs/journal/10645/PS2

Access Statistics for this article

De Economist is currently edited by Rob Alessie, Bas ter Weel, Casper van Ewijk, Jan C. van Ours and Frank de Jong

More articles in De Economist from Springer
Bibliographic data for series maintained by Sonal Shukla ().

Page updated 2019-01-31
Handle: RePEc:kap:decono:v:164:y:2016:i:1:p:41-67