Optimal insurance with divergent beliefs about total default risk

John David Cummins and Olivier Mahul
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John David Cummins: The Wharton School - University of Pennsylvania

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Abstract: This paper extends the classic expected utility theory analysis of optimal insurance contracting to the case where the insurer has a positive probability of total default and the buyer and insurer have divergent beliefs about this probability. The optimal marginal indemnity above the deductible is smaller (greater) than one if the buyer's assessment of default risk is more pessimistic (optimistic) than the insurer's. As an application of the model, we consider the market for reinsurance against catastrophic property loss and propose an expected utility theory explanation for the increasing and concave marginal indemnity schedule observed in this market.

Keywords: ASSURANCES; insurance; assurance; risque; sciences économiques (search for similar items in EconPapers)
Date: 2003
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Citations: View citations in EconPapers (27)

Published in Journal of Risk and Uncertainty, 2003, 27 (2), pp.121-138

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01952121

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