Optimal insurance contract under a value-at-risk constraint

Hung-Hsi Huang
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Hung-Hsi Huang: Department of Business Administration, Southern Taiwan University of Technology, No. 1, Nan-Tai Street, Yung-Kang, Taiwan, e-mail: d86723002@ntu.edu.tw

The Geneva Risk and Insurance Review, 2006, vol. 31, issue 2, 110 pages

Abstract: This study develops an optimal insurance contract endogenously under a value-at-risk (VaR) constraint. Although Wang et al. [2005] had examined this problem, their assumption implied that the insured is risk neutral. Consequently, this study extends Wang et al. [2005] and further considers a more realistic situation where the insured is risk averse. The study derives the optimal insurance contract as a single deductible insurance when the VaR constraint is redundant or as a double deductible insurance when the VaR constraint is binding. Finally, this study discusses the optimal coverage level from common forms of insurances, including deductible insurance, upper-limit insurance, and proportional coinsurance. The Geneva Risk and Insurance Review (2006) 31, 91–110. doi:10.1007/s10713-006-0557-5

Date: 2006
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