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Optimal Insurance Policy Indemnity Schedules With Policyholders’ Limited Liability and Background Risk

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  • Annette Hofmann
  • Ole V. Häfen
  • Martin Nell

Abstract

This article makes two contributions to the insurance literature by studying optimal insurance policy indemnity schedules with policyholders’ limited liability and background risk. First, generalizing a prominent approach by Huberman, Mayers, and Smith (1983), it is shown that a welfare subsidy in the case of a ruinous loss may make the insurance premium “overly fair” for nonbankrupting losses and full insurance for this event becomes optimal. Second, introducing correlated background risk into this limited liability framework relativizes or even turns results by Doherty and Schlesinger (1983) as to the impact of background risk on optimal coverage into its opposite.

Suggested Citation

  • Annette Hofmann & Ole V. Häfen & Martin Nell, 2019. "Optimal Insurance Policy Indemnity Schedules With Policyholders’ Limited Liability and Background Risk," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 86(4), pages 973-988, December.
    • Handle: RePEc:bla:jrinsu:v:86:y:2019:i:4:p:973-988
    DOI: 10.1111/jori.12247
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    Cited by:

    1. Ben‐jiang Ma & Jing‐yu Ye & Geng Liu & Yuan‐ji Huang, 2020. "Adverse selection, limited compensation, and the design of environmental liability insurance contract in the case of enterprise bankruptcy," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 41(7), pages 1327-1337, October.
    2. Qiuqi Wang & Ruodu Wang & Ricardas Zitikis, 2021. "Risk measures induced by efficient insurance contracts," Papers 2109.00314, arXiv.org, revised Sep 2021.
    3. Wang, Qiuqi & Wang, Ruodu & Zitikis, Ričardas, 2022. "Risk measures induced by efficient insurance contracts," Insurance: Mathematics and Economics, Elsevier, vol. 103(C), pages 56-65.

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