Optimal Insurance Under Random Auditing

Marie-Cecile Fagart and Pierre Picard

The Geneva Risk and Insurance Review, 1999, vol. 24, issue 1, 29-54

Abstract: We provide a characterization of an optimal insurance contract (coverage schedule and audit policy) when the monitoring procedure is random. When the policyholder exhibits constant absolute risk aversion, the optimal contract involves a positive indemnity payment with a deductible when the magnitude of damages exceeds a threshold. In such a case, marginal damages are fully covered if the claim is verified. Otherwise, there is an additional deductible that disappears when the damages become infinitely large. Under decreasing absolute risk aversion, providing a positive indemnity payment for small claims with a nonmonotonic coverage schedule may be optimal. The Geneva Papers on Risk and Insurance Theory (1999) 24, 29–54. doi:10.1023/A:1008781131861

Date: 1999
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Related works:
Working Paper: Optimal Insurance Under Random Auditing (1998)
Working Paper: Optimal insurance under random auditing (1998)
Working Paper: Optimal Insurance Under Random Auditing (1998)
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