Ambiguity on the insurer's side: the demand for insurance

Massimiliano Amarante, Mario Ghossoub and Edmund Phelps

Cahiers de recherche from Universite de Montreal, Departement de sciences economiques

Abstract: Empirical evidence suggests that ambiguity is prevalent in insurance pricing and underwriting, and that often insurers tend to exhibit more ambiguity than the insured individuals (e.g., [23]). Motivated by these findings, we consider a problem of demand for insurance indemnity schedules, where the insurer has ambiguous beliefs about the realizations of the insurable loss, whereas the insured is an expected-utility maximizer. We show that if the ambiguous beliefs of the insurer satisfy a property of compatibility with the non-ambiguous beliefs of the insured, then there exist optimal monotonic indemnity schedules. By virtue of monotonicity, no ex-post moral hazard issues arise at our solutions (e.g., [25]). In addition, in the case where the insurer is either ambiguity-seeking or ambiguity-averse, we show that the problem of determining the optimal indemnity schedule reduces to that of solving an auxiliary problem that is simpler than the original one in that it does not involve ambiguity. Finally, under additional assumptions, we give an explicit characterization of the optimal indemnity schedule for the insured, and we show how our results naturally extend the classical result of Arrow [5] on the optimality of the deductible indemnity schedule.

Keywords: Optimal insurance; Deductible; Ambiguity; Choquet integral; Distorted probabilities (search for similar items in EconPapers)
JEL-codes: G22 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2015
New Economics Papers: this item is included in nep-ias and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

Downloads: (external link)
http://hdl.handle.net/1866/12275 (application/pdf)

Related works:
Journal Article: Ambiguity on the insurer’s side: The demand for insurance (2015)
Working Paper: Ambiguity on the Insurer’s Side: The Demand for Insurance (2015)
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:mtl:montde:2015-03

Access Statistics for this paper

More papers in Cahiers de recherche from Universite de Montreal, Departement de sciences economiques Contact information at EDIRC.
Bibliographic data for series maintained by Sharon BREWER ().