This paper studies the design of an optimal insurance contract with background risk from the perspective of an insured with a general mean-variance preference, where admissible insurance policies satisfy an incentive compatible constraint. This constraint ensures that both parties in an...

We analyze optimal insurance design for a risk- and ambiguity-averse policyholder who is uncertain about the distribution of losses and faces linear transaction costs. We use smooth ambiguity preferences, a flexible ambiguity structure, and focus on indemnity schedules that satisfy the principle...