Personal non-life insurance decisions and the welfare loss from flat deductibles

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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.

Original languageEnglish
JournalASTIN Bulletin
Volume49
Issue number1
Pages (from-to)85-116
Number of pages32
ISSN0515-0361
DOIs
Publication statusPublished - 2019

    Research areas

  • compound Poisson loss process, Exponential utility, HJB equation, insurance pricing, product design

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