Optimal insurance contracts without the non-negativity constraint on indemnities: revisited

Michael Breuer
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Michael Breuer: Socioeconomic Institute, University of Zurich, Hottingerstr 10, 8032 Zurich, Switzerland, e-mail: mbreuer@soi.unizh.ch

The Geneva Risk and Insurance Review, 2006, vol. 31, issue 1, 5-9

Abstract: In the literature on optimal indemnity schedules, indemnities are usually restricted to be non-negative. Keeler [1974] and Gollier [1987] show that this constraint might well bind: insured could get higher expected utility if insurance contracts would allow payments from the insured to the insurer at some losses. This paper extends Collier's findings by allowing for negative indemnity payments for a broader class of insurers' cost functions and argues that the indemnity schedule derived here is more appropriate for practical applications (e.g. in health insurance). The Geneva Risk and Insurance Review (2006) 31, 5–9. doi:10.1007/s10713-006-9463-0

Date: 2006
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