Mean–variance insurance design under heterogeneous beliefs

Yanhong Chen, Wenjun Jiang and Yiying Zhang

Journal of Risk

Abstract: In this paper we study an optimal insurance problem within the mean–variance framework for the case when the insured and insurer hold heterogeneous beliefs about the loss distribution. The implicit characterization of the optimal ceded loss function is obtained first, and we then parameterize the optimal ceded loss function in an explicit way for a general setup in which the insurer’s belief ℚ either is or is not absolutely continuous with respect to the insured’s belief ℙ. We also show that the stop-loss function is optimal for the insured when the likelihood ratio function of the two parties’ beliefs is decreasing. The connection between our framework and the expected utility framework is discussed. The situation where the insured can reduce both the mean and the variance of its loss through purchasing insurance is also investigated. Some analytical and numerical examples are presented to illustrate our results.

References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.risk.net/journal-of-risk/7958435/mean- ... eterogeneous-beliefs (text/html)

Related works:
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:rsk:journ4:7958435

Access Statistics for this article

More articles in Journal of Risk from Journal of Risk
Bibliographic data for series maintained by Thomas Paine (maintainer@infopro-digital.com).