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PERSONAL NON-LIFE INSURANCE DECISIONS AND THE WELFARE LOSS FROM FLAT DEDUCTIBLES

Published online by Cambridge University Press:  01 March 2019

Mogens Steffensen  and
Julie Thøgersen
Mogens Steffensen
Affiliation:
Department of Mathematical Sciences, Copenhagen University, Universitetsparken 5, 2100 København Ø, Denmark
Julie Thøgersen*
Affiliation:
Department of Mathematics, Aarhus University, Ny Munkegade 118, 8000 Aarhus C, Denmark, E-Mail: juliethoegersen@math.au.dk
*
E-Mail: juliethoegersen@math.au.dk
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Abstract

We view the retail non-life insurance decision from the perspective of the insured. We formalize different consumption–insurance problems depending on the flexibility of the insurance contract. For exponential utility and power utility we find the optimal flexible insurance decision or insurance contract. For exponential utility we also find the optimal position in standard contracts that are less flexible and therefore, for certain nonlinear pricing rules, lead to a welfare loss for the individual insuree compared to the optimal flexible insurance decision. For the exponential loss distribution, we quantify a significant welfare loss. This calls for product development in the retail insurance business.

Keywords

Exponential utilityHJB equationinsurance pricingproduct designcompound Poisson loss process
Type
Research Article
Information
ASTIN Bulletin: The Journal of the IAA , Volume 49 , Issue 1 , January 2019 , pp. 85 - 116
Copyright
Copyright © Astin Bulletin 2019 

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