Optimal Insurance Under Random Auditing
We provide a characterization of an optimal insurance contract (coverage schedule and audit policy) when the monitoring procedure is random. When the policyholder exhibits constant absolute risk aversion, the optimal contract involves a positive indemnity payment with a deductible when the magnitude of damages exceeds a threshold. In such a case, marginal damages are fully covered if the claim is verified. Otherwise, there is an additional deductible that disappears when the damages become infinitely large. Under decreasing absolute risk aversion, providing a positive indemnity payment for small claims with a nonmonotonic coverage schedule may be optimal. The Geneva Papers on Risk and Insurance Theory (1999) 24, 29–54. doi:10.1023/A:1008781131861
Year of publication: |
1999
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Authors: | Fagart, Marie-Cécile ; Picard, Pierre |
Published in: |
The Geneva Risk and Insurance Review. - Palgrave Macmillan, ISSN 1554-964X. - Vol. 24.1999, 1, p. 29-54
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Publisher: |
Palgrave Macmillan |
Saved in:
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