Optimal Insurance to Maximize Exponential Utility when Premium is Computed by a Convex Functional

Jingyi Cao, Dongchen Li, Virginia R. Young and Bin Zou

Papers from arXiv.org

Abstract: We find the optimal indemnity to maximize the expected utility of terminal wealth of a buyer of insurance whose preferences are modeled by an exponential utility. The insurance premium is computed by a convex functional. We obtain a necessary condition for the optimal indemnity; then, because the candidate optimal indemnity is given implicitly, we use that necessary condition to develop a numerical algorithm to compute it. We prove that the numerical algorithm converges to a unique indemnity that, indeed, equals the optimal policy. We also illustrate our results with numerical examples.

Date: 2024-01
New Economics Papers: this item is included in nep-rmg and nep-upt
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