Optimal incentive compatible insurance with background risk
This paper reexamines the design of an optimal insurance contract with background risk from the perspective of an insured, by imposing an incentive compatible constraint on admissible insurance policies.This constraint ensures that both parties in an insurance contract would pay more for a larger realization of loss.As standard in the literature, it is assumed that the insurer is risk-neutral, that is, the insurance premium is calculated based only upon the expected indemnity.When the insured has a general mean-variance preference, a piecewise optimal insurance form is obtained explicitly.It is found that the optimal insurance heavily relies on the conditional expectation function of background risk with respect to the insurable risk and is often significantly different from one that is derived without incentive compatible constraint.This finding suggests that both the incentive compatibility and the stochastic dependence between background risk and the insurable risk play very important roles in the insured”s risk transfer decision.
Background risk Incentive compatibility Mean-variance preference Optimal insurance design Risk-neutral insurer
Yichun Chi
China Institute for Actuarial Science Central University of Finance and Economics, Beijing 100081, China
国内会议
大连
英文
537-566
2015-10-22（万方平台首次上网日期，不代表论文的发表时间）