Optimal insurance design under narrow framing

Jiakun Zheng
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Jiakun Zheng: Renmin University of China = Université Renmin de Chine, China Financial Policy Research Center - Renmin University of China = Université Renmin de Chine

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Abstract: In this paper, we study insurance decisions when the policyholder evaluates insurance with narrow framing. We show that due to aversion to risk on the net insurance payoff, i.e., insurance indemnity minus insurance premium, narrow framing reduces insurance demand. This helps explaining the observed low insurance demand in many insurance markets. We also show that the optimal insurance contract involves a deductible and the coinsurance of losses above the deductible when transaction costs depend on the actuarial value of the policy. Moreover, when the policyholder is loss averse over the net insurance payoff, a fixed indemnity equal to insurance premium should be paid for a range of intermediate losses.

Keywords: Deductible; Hedging; Risk; sharing; Narrow; framing; Loss; aversion (search for similar items in EconPapers)
Date: 2020-12
Note: View the original document on HAL open archive server: https://hal.science/hal-04227370v1
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Citations: View citations in EconPapers (8)

Published in Journal of Economic Behavior and Organization, 2020, 180, pp.596-607. ⟨10.1016/j.jebo.2020.05.020⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04227370

DOI: 10.1016/j.jebo.2020.05.020

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