The optimal pricing strategy for an insurer when risk preferences are stochastically distributed

Annette Hofmann, Martin Nell and Philipp Pohl

No 20, Working Papers on Risk and Insurance from University of Hamburg, Institute for Risk and Insurance

Abstract: The present paper analyzes the demand for insurance when the insurer has incomplete information about types of potential customers. We assume that customers' risk preferences cannot be distinguished by the insurer. Therefore, the standard result in insurance economics that the insurer discriminates perfectly in prices cannot be applied. Instead, the present article examines the optimal pricing rule for an insurer faced with stochastic distribution of risk preferences. Within this general model framework, we show that an optimal strategy always exists. Both fixed and proportionate premium loadings (relative to expected loss) are considered.

Keywords: insurance demand; optimal insurance pricing; stochastically distributed risk preferences (search for similar items in EconPapers)
Date: 2007
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