IDEAS home Printed from https://ideas.repec.org/a/gam/jmathe/v9y2021i24p3284-d705057.html
   My bibliography  Save this article

Optimal Claim Settlement Strategies under Constraint of Cap on Claim Loss

Author

Listed:
  • Hong Mao

    (School of Economics and Management, Shanghai Second Polytechnic University, Shanghai 201209, China)

  • Krzysztof Ostaszewski

    (Department of of Mathematics, Illinois State University, Normal, IL 61790-4520, USA)

Abstract

In this paper, we examine the question of how to devise an optimal insurance claim settlement scheme under the constraint of a cap on the amount of the claim payment. We establish objective functions to maximize the net benefit due to exaggerated claims while at the same time maximizing the total expected wealth of the insured. Then, we establish a dual objective function to minimize the total expected loss, including the perspective of the insurer. Finally, we illustrate applications of our work and provide numerical analysis of it along with an example.

Suggested Citation

  • Hong Mao & Krzysztof Ostaszewski, 2021. "Optimal Claim Settlement Strategies under Constraint of Cap on Claim Loss," Mathematics, MDPI, vol. 9(24), pages 1-12, December.
  • Handle: RePEc:gam:jmathe:v:9:y:2021:i:24:p:3284-:d:705057
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2227-7390/9/24/3284/pdf
    Download Restriction: no

    File URL: https://www.mdpi.com/2227-7390/9/24/3284/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Borch, Karl, 1975. "Optimal Insurance Arrangements," ASTIN Bulletin, Cambridge University Press, vol. 8(3), pages 284-290, September.
    2. Crocker, Keith J & Tennyson, Sharon, 2002. "Insurance Fraud and Optimal Claims Settlement Strategies," Journal of Law and Economics, University of Chicago Press, vol. 45(2), pages 469-507, October.
    3. Klick, Jonathan & MacDonald, John, 2020. "Deterrence and liability for intentional torts," International Review of Law and Economics, Elsevier, vol. 63(C).
    4. J. David Cummins & Olivier Mahul, 2004. "The Demand for Insurance With an Upper Limit on Coverage," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 71(2), pages 253-264, June.
    5. Rachel J. Huang & Larry Y. Tzeng, 2007. "Optimal Tax Deductions for Net Losses Under Private Insurance With an Upper Limit," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 74(4), pages 883-893, December.
    6. J. David Cummins & Olivier Mahul, 2004. "The demand for insurance with an upper limit on coverage," Post-Print hal-01952122, HAL.
    7. Keith J. Crocker & John Morgan, 1998. "Is Honesty the Best Policy? Curtailing Insurance Fraud through Optimal Incentive Contracts," Journal of Political Economy, University of Chicago Press, vol. 106(2), pages 355-375, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Katja Müller & Hato Schmeiser & Joël Wagner, 2016. "The impact of auditing strategies on insurers’ profitability," Journal of Risk Finance, Emerald Group Publishing, vol. 17(1), pages 46-79, January.
    2. Sung, K.C.J. & Yam, S.C.P. & Yung, S.P. & Zhou, J.H., 2011. "Behavioral optimal insurance," Insurance: Mathematics and Economics, Elsevier, vol. 49(3), pages 418-428.
    3. Jean-Marc Bourgeon & Pierre Picard, 2014. "Fraudulent Claims and Nitpicky Insurers," American Economic Review, American Economic Association, vol. 104(9), pages 2900-2917, September.
    4. Birghila, Corina & Pflug, Georg Ch., 2019. "Optimal XL-insurance under Wasserstein-type ambiguity," Insurance: Mathematics and Economics, Elsevier, vol. 88(C), pages 30-43.
    5. Nicola Gennaioli & Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer, 2022. "Trust and Insurance Contracts," The Review of Financial Studies, Society for Financial Studies, vol. 35(12), pages 5287-5333.
    6. Bénédicte Coestier & Nathalie Fombaron, 2003. "L'audit en assurance," THEMA Working Papers 2003-41, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    7. Lu, ZhiYi & Meng, LiLi & Wang, Yujin & Shen, Qingjie, 2016. "Optimal reinsurance under VaR and TVaR risk measures in the presence of reinsurer’s risk limit," Insurance: Mathematics and Economics, Elsevier, vol. 68(C), pages 92-100.
    8. Abe Dunn & Joshua D Gottlieb & Adam Hale Shapiro & Daniel J Sonnenstuhl & Pietro Tebaldi, 2024. "A Denial a Day Keeps the Doctor Away," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 139(1), pages 187-233.
    9. Neil A. Doherty & Christian Laux & Alexander Muermann, 2015. "Insuring Nonverifiable Losses," Review of Finance, European Finance Association, vol. 19(1), pages 283-316.
    10. Chi, Yichun & Zhuang, Sheng Chao, 2022. "Regret-based optimal insurance design," Insurance: Mathematics and Economics, Elsevier, vol. 102(C), pages 22-41.
    11. M. Martin Boyer & Jörg Schiller, 2003. "Merging Automobile Insurance Regulatory Bodies: The Case of Atlantic Canada," CIRANO Working Papers 2003s-70, CIRANO.
    12. Carole Bernard & Weidong Tian, 2010. "Insurance Market Effects of Risk Management Metrics," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 35(1), pages 47-80, June.
    13. Christopher Gaffney & Adi Ben-Israel, 2016. "A simple insurance model: optimal coverage and deductible," Annals of Operations Research, Springer, vol. 237(1), pages 263-279, February.
    14. Fujii, Yoichiro & Okura, Mahito & Osaki, Yusuke, 2021. "Is insurance normal or inferior? -A regret theoretical approach-," The North American Journal of Economics and Finance, Elsevier, vol. 58(C).
    15. Eling, Martin & Wirfs, Jan Hendrik, 2016. "Cyber Risk: Too Big to Insure? Risk Transfer Options for a mercurial risk class," I.VW HSG Schriftenreihe, University of St.Gallen, Institute of Insurance Economics (I.VW-HSG), volume 59, number 59.
    16. Schiller, Jörg, 2004. "Versicherungsbetrug als ökonomisches Problem: Eine vertragstheoretische Analyse," Working Papers on Risk and Insurance 13, University of Hamburg, Institute for Risk and Insurance.
    17. Chen Hua & Mahani Reza S., 2012. "Optimal Demand for Insurance with Consumption Commitments," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 6(2), pages 1-26, June.
    18. Dwight Jaffee & Johan Walden, 2014. "Optimal Insurance With Costly Internal Capital," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 17(2), pages 137-161, September.
    19. Hong Liang, 2020. "On Three Standard Results in the Theory of Insurance Demand," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 14(1), pages 1-10, January.
    20. Rustam Ibragimov & Dwight Jaffee & Johan Walden, 2018. "Equilibrium with Monoline and Multiline Structures [Uncertainty and the welfare economics of medical care]," Review of Finance, European Finance Association, vol. 22(2), pages 595-632.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jmathe:v:9:y:2021:i:24:p:3284-:d:705057. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.